In Defense of the Clunker


Alas, the Cash for Clunkers program has ended -- sad news for any driver who’d love a government subsidy for trading an aging gas guzzler for something spiffy and new.

But there’s another way to see things: Clunkers are good.

Well, not real clunkers. A car that won’t start half the time, leaves you stranded beside the road or isn’t safe is ready for the scrap heap.

But the idea of hanging on to a vehicle longer has lots of merit. Over a driving lifetime, keeping vehicles running longer is a good way to keep a budget in balance and perhaps build a nest egg that will let you retire years earlier.

Imagine that during 40 years you buy four vehicles instead of eight. If each cost $25,000 in today’s money, the difference would be $100,000 spread over four decades, or $2,500 a year.

Now plug the numbers into the BankingMyWay Retirement Income Calculator assuming a starting balance of zero, a $2,500 annual contribution that increases at a 3% inflation rate (because vehicles get more expensive over time) and a 7% investment return.

After 40 years, you’d have a whopping nest egg of $783,000. Inflation would whittle its real value, but the nest egg would produce a monthly income of $1,415 in today’s dollars.

Assume your car-owning life lasts for 50 years, and that monthly income would jump to $2,254. At 60 years it would be $3,482.

The investment gains could double for a two-car family. And you could make the gains even bigger if you bought cheaper vehicles as well as keeping them longer. The cheaper vehicle might also cost less to insure. Pick smaller vehicles and you’d also save on gas.

No savings projection can be absolutely accurate, because we don’t know what vehicles and fuel will cost in the future and can only guess at investment returns, inflation and many other factors. But there’s no question that savings that look modest on a monthly basis can produce big sums over the decades.

While car buyers tend to focus on sales prices, many other factors affect the cost of ownership: insurance, maintenance costs and depreciation, for instance.

Small savings from smart loan shopping can pay off over time. The survey shows that 60-month new-car loans average 6.636%. But with the shopping tool, you can find better deals. Bank of America (Stock Quote: BAC) has some new-car loans as low as 4.2%, for example. Some credit unions offer inviting deals too., the car-data service, has a calculator called True Cost to Own that can provide some insight into the savings that can be realized by choosing one vehicle over another.

A well-equipped 2009 four-door Ford (Stock Quote: F) F-150 pickup, for example, would cost about $24,000 to buy. But with fuel, insurance, maintenance and other ownership costs taken into consideration, it would cost more than $48,000 over five years.

Meanwhile, a new Toyota (Stock Quote: TM) Prius, which also costs about $24,000 to buy, would cost just $34,200 over five years. That’s a $230-per-month that could go into savings. Of course, the savings would be substantially larger if you considered keeping the Prius for 10 years versus changing your F-150 every five.

Really want to save money? Get a used car. A five-year-old Prius sells for about $12,800. Its cost of ownership during the next five years would be $25,650. Buy that instead of the new F-150 and you’d save $373 a month.

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