This blog first posted on April 19, 2010
Do you remember your first car? The experience of saving up for it, of picking it out, of driving it home for the first time, of showing it to all of your friends? I remember my first car. It was a 1994 Saturn SL2. It was a cute car. I made one mistake; I purchased it on payments, 48 months worth. Now I know this seems fairly normal, but over the years I have come to realize that normal is broke. So I have been on a journey to be weird. And my journey has led me to subscribe to the notion that you can have a car without a car payment.
How is this possible, you might ask? Saving up and paying cash. The problem that we have is a severe allergy to delayed gratification. OKAY, so maybe not everyone, but most do. Think for a moment how much you pay per month on your car. Now think about how much money you could save if you did not have a car payment. Why you could be a millionaire!
Here’s the 411 on car payments, per Dave Ramsey:
Recent statistics show that one-third of car buyers sign up for a six-year loan at an average interest rate of 9.6%. Among these buyers, the average price of the car is just over $26,000. This means that one-third of the cars you see on the road are dragging a $475 payment behind them.
The car dealer won’t tell you that your awesome new car loses about 25% of its value the instant you drive it off the lot. After four years, your car has lost about 70% of its value! What does that mean? After six years, you’ve paid almost $33,000 for a $26,000 car, which is now worth maybe $6,000. Not a good deal.
Here’s a new plan. What if you bought a cheap $2,000 car just to get around for 10 months? Then you take that $475—the average car payment—save it every month, and pay for a new car (with cash!), instead of giving it to the bank.
After 10 months of doing that, you’ll have $4,750 to use for that newer ride. Add that to the $1,500–2,000 you can get for your old beater, and you have well over $6,000. That’s a major upgrade in car in just 10 months—without owing the bank a dime!
But the fun doesn’t end there. If you keep consistently putting the same amount of money away, 10 months later you would have another $4,750 to put toward a car. You could probably sell that $6,000 vehicle for about the same price you paid 10 months before—meaning you now have $11,000 to pay for a car, just 20 months after this whole process started.
The bottom line with this exercise is simply this—what could you do with that $475 if you weren’t paying for the car every month? Anything you wanted!
Think about it this way: If you were to invest that $475 (remember, this is the average car payment in the U.S.) into a good mutual fund with a 12% rate of return, you would have over $100,000 in 10 years! At 20 years, you would have made $470,000. And at 30 years? That mutual fund would be worth $1.6 million!
The numbers will make your head spin, but it really just comes down to simple math. The less money you are spending on your car every month, the more money you have to put into other more important things: your kids’ college fund, your retirement, and paying off any other debt you might have.
If you’ll just follow this simple plan, your life could be dramatically different 10 years from now.
You can live without a car payment!
Peace & Blessings
Sharon
I will have more for you on Monday, July 26th! Until then keep working your plan for financial peace and freedom.
Tuesday's Blog: The Kitchen Table has some exciting news, so please stop by!
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