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Number One Wealth Killer Spoiler Alert: Not Coffee

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Forge Your Wealth is meant for education and entertainment and should not be used for financial advice.

If you look on the internet to find out what the number one wealth killer is, you will find various results. Alcohol? *Whistle*, on average that eats 1% of America’s income. Eating out? People spend thousands on that annually. Coffee? To everyone of my generation, we spend too much on coffee. I have heard it all from candy to gambling. But these are not the number one killers of wealth.

What Is The Number One Wealth Killer?

The number one wealth killer is auto payments. Lending Tree says that auto loan debt is over $1.2 trillion in 2020. This is comparable to the $1.6 trillion the US currently has in student loan debt.

The average new car loan requires a monthly payment of $550 for new vehicles and $393 for used vehicles. Annually, new cars cost $6,600 each year, even the less expensive used vehicles cost more than $4,700 each year. Eating out can sink your income by as much as over $3,000 a year, but that is still paltry compared to the amount you would have to sink for a vehicle.

The Math

Keep in mind, the median annual income for an individual is $40,100. A new vehicle loan will take up about 16.5% of your income. A used vehicle loan will take up about 12% of your income.

The average American household has 1.88 cars per household. The median annual income of a US household is $63,030. Let’s calculate the average annual payment for cars compared to the median income.

1.88 new car loans ($6,600 * 1.88 cars) = $12,408

$12,408 / $63,030 * 100 = 19.7% of annual income

1.88 used car loans ($4,700 * 1.88 cars) = $8,836

$8,836 / $63,030 * 100 = 14.0% of annual income

It does not matter how you do the math, auto loans are income black holes. Oh wait did I include tax? Eh, they are never consistent, just add another 5-10% for how much of your net annual income goes to an auto loan.

Other Loans Are Better

A vehicle is a depreciating asset. A new car will lose thousands as soon as you drive it off the lot. Furthermore, there are not many opportunities to turn your car into an asset. Student loans and real estate mortgages (despite their flaws) can easily be turned into assets. An auto loan will almost always be a liability.

Loans Are More Expensive Straight Forward

You will not pay just interest and principal for auto loans. There is an origination fee that will normally cost between $450-$700. There are many other additional costs to financing and refinancing a vehicle. However, there is no guarantee that paying for a car with cash will lower the price of the car. I believe people thought these fees are part of the price of the car. Considering the fact that 85% of vehicles are bought off loans, I would not be surprised if even the dealers forgot.

What Should You Do Instead

The obvious answer is to pay for a car with cash instead. But let’s face it, if you are looking for a car loan, you do not have the cash to buy what you want fully. However, there are many ways to find less expensive vehicles. You may not even have to settle on a less expensive vehicle. Look at my previous post on how to set up your savings for large purchases.

What’s The Number One Wealth Killer To You?

Auto loan payments are very costly, but they are also common. There are many other costly payments you could be facing. Leave what your number one wealth killer is in the comments below. I may write a post about that.

Final Thoughts

I remember when people said the American dream was a Ford in every garage. Apparently that dream requires a loan. If you want a car on loan, then the American dream will not likely include a stable retirement nor wealth to pass on to your kin. I know many people see car loans as the only way they can have decent transportation. My Pontiac Grand Am that I had since high school says otherwise. Its engine purs like a kitten and as far as I am concerned I trust my car after 12 years with both me and my wife behind the wheel than most other used cars. At least I know exactly when the oil was changed and that is why the engine still purs like a kitten.

Instead of trying to get an auto loan, try to save up for a car so you can pay for it in cash to help you forge your wealth.

Author: Papa Foxtrot

Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.

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