17 Jul Are You Driving a Million Dollar Car???
With all the talk in the news about the Big Three automakers in distress, you may be thinking it’s a good time to buy a new car. Car dealers are in trouble and looking to make a deal to stay afloat. Financing incentives abound and the sellers are motivated. But before you spend a lot of money on something that will drop in value like a rock the minute you bring it home, here’s some information you may want to consider.
You’ve heard it before: Car payments are a way of life. You just can’t pay cash for a car. You should take advantage of low interest rates and finance your car. If you keep trading up, your car payment stays the same and you can keep driving a new car. Depending on the source, most reports list the average car payment today at around $400 over sixty months. Most people own five or six cars in their lifetime. Many trade up for another car at the end of the loan or before the loan is paid off. If you continually do that, you effectively have a car payment for life.
A Fact of Life
Is this really just a fact of life? Let’s take a look at what that car payment is really doing for you. If you own six cars during your lifetime, and you finance each for sixty months, you will have 30 years of car payments. Let’s take that $400 per month car payment and invest it in a good mutual fund that averages 12% return, which is the stock market average over the last 70 years. We’ll invest it for the thirty years that you would be making payments, say from age 25 to 55. After 30 years that car payment invested in your mutual fund would be worth $1,411,966.17. That must be one heck of a car to be worth over a million dollars!
And don’t forget the hidden costs of the new car(s) you bought during that 30 years. There’s the interest rate you’ve been paying. Then there’s the cost of the loss in value of the car. The average car loses 50% to 70% of its value in the first four years. That’s a pretty huge loss of buying power just for the “privilege” of owning something new.”But wait,” you say. You can’t drive the same car for 30 years! It will never last that long.
A Free Car?
What if I told you it’s possible to have a free car for life? What if you took that $400 per month and saved it for twelve months. Without having paid any interest, you have just saved $4,800. Without looking too hard, you can find a reasonable car to suit your needs for $4,800. If you keep saving the same payment of $400 per month for another 48 months, you will have $19,200. Now, had you invested that money in a good mutual fund (again, assuming a 12% return), you would have over $31,000. All in the same amount of time your friends took to pay off their new car.
Now what if you bought a $21,000 used car that has already suffered the mass depreciation of its first three years of life? You’d still have $10,000 in your mutual fund. Leave it alone and after five more years you have over $18,000. Your eight year old car is now worth somewhere around $13,000. Sell it or trade it in with $8,000 out of your mutual fund and, well, you get the picture. You now have a self-sustaining car buying fund. And you only made “payments” for sixty months. And, if you continue investing the $400 per month for the rest of the 30 year period, you’ll have the newer car every five years plus $669,000 in the bank. Give it a few more years and you’re up over the million dollar mark, as I mentioned earlier. I’d say that’s a pretty good deal, and well worth driving a used car for a few years!
Yes, I know the stock market is unpredictable, and yes, I know that many of you don’t have 30 years left to invest a car payment’s worth of money. Keep in mind that these are average numbers and average returns. Your situation may be different. But the lesson here is clear. Buying a new car doesn’t make a lot of sense, despite what common knowledge may dictate. And buying a car with payments is definitely dumb. Be content with a vehicle that meets your needs instead of your wants. Resolve to pay only cash for a vehicle. Be disciplined in your budgeting and saving. Be patient and you will be richly rewarded.