Most people in America can’t even imagine life without a car payment. Many of us even begin our car payment lives while still in high school! It’s just such a part of our lives. But what does that monthly car payment really COST you?
I’m going to let one of my favorite financial gurus answer this question. Here is what Dave Ramsey has to say in his book “The Total Money Make-over” on page 32.
“Taking on a car payment is one of the dumbest things people do to destroy their chances of building wealth. The car payment is most folks’ largest payment except for their home mortgage, so it steals more money from the income than virtually anything else. USA Today notes that the average car payment is $464 over sixty-four months. Most people get a car payment and keep it throughout their lives. As soon as a car is paid off, they get another payment because they “need” a new car. If you keep a $464 car payment throughout your life, which is “normal,” you miss the opportunity to save that money. If you invested $464 per month from age 25 to 65, a normal working lifetime, in the average mutual fund averaging 12 percent (the seventy-year stock market average), you would have $5,458,854.45 at age sixty-five. Hope you like the car!”
$5.5 million dollars! That is what your car payment could cost you. So what is the alternative? Pay cash.
How is that even possible?
Buy whatever level of car you can actually afford for cash right now, then save aside a typical monthly car payment for the next 12 months. You will now have nearly $6,000 to add to the money you will earn from selling your current paid-for car to buy a nicer car for CASH. Do this step again for another 12 months and you’ll have enough to buy an even nicer used car for cash. Imagine buying a $15,000 car for cash! You can keep doing this until you get a car you’re satisfied with. But pretty soon, you’ll want to start investing that money instead of just saving for the next car. Investing that money is the goal, remember? You’ll never get rich just buying cars.
According to the experts, a 3 or 4-year-old car purchased from an individual (especially if he or she is a motivated seller), will get you the most car for your money. You’ll also have incredible purchasing leverage when you show up in their driveway with cold hard cash in your hand.
Plan on keeping this car for around five years. Keep yourself out of other consumer debt and you’ll find that when it’s time to buy your next car, you’ll already have the money saved (probably in a mutual fund someplace, because you're smart like that!) to buy a great car for cash the first time. Your money accumulates like magic when it isn’t being mailed to the Ford Motor Company or VISA every month.
Ask yourself, is missing out on several million dollars in retirement really worth that new car smell??