(PBS Digital Studios jingle) - Ah, don't you just love that new car smell?

It smells like power and freedom.

- Actually, it smells more like petroleum-based solvents evaporating off vinyl and plastic.

- Wow, buzzkill.

- Let's see if you still like that smell when you find out what it's really costing you.

- I'm locking the windows.

(soft music) Since the auto boom of the 1950s, cars have become an integral part of American society.

Car companies spent $14.2 billion in advertising alone in 2014 and that number is only rising.

- [Julia] They convince us that once we're behind the wheel, our family's gonna love us more, our neighbors will envy us, and our freedom to go anywhere is secure.

- Unfortunately, they're more likely to take away your freedom and security.

New cars are a financial triple threat.

We borrow money at interest to buy an asset that we have to pay to maintain, and here's the big kicker, that drastically depreciates in value.

- Wait, what is depreciation anyway?

- Hey Julia, would you like to buy some ice cream?

- Uh, sure, I guess.

- That'll be $4.

- I wouldn't pay you a nickel for that.

- But I just paid $4 for it 20 minutes ago.

- That's depreciation.

Go wash your hands.

Cars retain their value about as well as ice cream on a hot day.

A new car will depreciate 63% in the first five years, 10% of that in the moment that you drive it off a lot.

- Whoa!

- Calling cars a bad investment is like calling a honey badger a bad heart surgeon.

- What?

- I mean, they're not an investment at all.

- Oh, exactly.

I mean, can you think of anything else that you would spend that much money on that loses value on that quickly?

- I don't know, how about a garage full of beanie babies?

(record skips) (dramatic music) - (laughs) I told you, the '90s are coming back.

- Sure, hun.

And don't think that you can get out of this by leasing, either.

Leasing companies set their prices so that you pay for the depreciation of their vehicle, and when it's over, they still have an asset that they can resell.

- So let's set a few simple ground rules that will put you in the driver seat instead of being taking for a ride.

- Number one, buy a car that's at least five years old.

Right away, you're skipping the majority of its depreciation.

- Number two, save up to buy a car in cash.

Paying interest on something that loses value is like gaining weight from exercise.

All pain, no gain.

- Number three, if you can comfortably afford to save an equal amount to your car payment, you can't afford it.

So if you're not saving $300 a month, you shouldn't take on a $300 car payment.

- So how much money is actually at stake?

I think it's time to (drum roll) - Run the numbers!

- Run the numbers!

(horn music) - Let's say I buy a new car for $20,000.

I put 4,000 down and I finance the rest over 60 months at 4.25%.

My monthly payment will be?

- 295.42!

That sounds pretty normal.

- But check this out.

What if you bought the same car, but a five-year-old model which costs you 63% less or 7,400?

But your same 4,000 down and with the same loan arrangement, you're looking at a payment of just 62.78 a month.

That's a monthly savings of?

- $232 and 65 cents.

I could get a massage every other week with that.

- You could, or you could take those monthly savings and put them into a growing asset like a home or a mutual fund, and if you continue to do that every time you paid off the car, even in a very conservative 7% per year return, in 35 years, you would have over?

- $420,000?

- Really?

Wow.

- Now is that enough to retire on?

Probably not, but that's just one payment you can start doing now to prepare for your future, and there are many, many more.

- You know, as much as I like that new car smell, I don't think I'd spend half-a-mil on it.

- No, let's try this instead.

- Ooh, what's that?

- Early retirement, baby.

Bam!

(imitates explosion) - And that's our two cents.

- And that's our two cents.

(soft music)