Car payments are something almost all of us have these days. Everywhere you turn someone is buying a new ride. It seems like the adult thing to do. To invest in safe, reliable transportation. I’ve been there, actually I’m still there now. My car isn’t new, but we do have a payment, at least until May anyways (fingers crossed!).
But what if we chose to be different. What if we chose to pay cash for a car. What would that sacrifice look like?
Let’s say Dave is 21, he just graduated college, and his friends are making fun of his ride. He has been driving a 99 model Honda Civic for 5 years. It makes funny noises, and one door is a different color. Dave has 2 options:
Option 1– Dave goes out and purchase a brand new Chevy Silverado. I mean this thing is nice! It has heated seats, leather, and a nice sound system. Dave is feeling like a million bucks. Until the $657.00 truck payment is due. Suddenly the truck is not so fun, because Dave just got a new job with entry-level pay and now he has student loans due and a big fat truck payment. Dave also has to get insurance now. Dave feels overwhelmed and when he goes to put his truck up for sale, he realizes that it is no longer worth what he paid for it.
Option 2-Dave keeps driving his beater, he saves as much as he can of the next year’s pay, he doesn’t eat at fancy restaurants or go out much. But he manages to save a total of $1,000.00 per month. Then he sells his Honda Civic for $1,200.00 dollars. He now has $13,200.00 to buy a fairly nice used car.
Sounds ok. But what’s the point? Well this is where the story gets really good. While the Dave in option 1 is paying his truck payment for the remaining 6 years, Dave in option 2 decides he will invest. He decides to keep up his saving intensity and throws that $1000.00 per month into some long-term investments. His savings really add up because of a glorious thing called compound interest. By the time he is 65, averaging 8% interest, those measly 6 years of investments are worth a whopping $1,770,772.60.
Did you read that?? 1.7 MILLION dollars. Wow. So the take home, drive a beater people, drive a beater.
I know what you’re thinking, if I buy an older car, I will have tons of repair work, and I may as well have a car payment. But think about it this way, even if Dave needed to replace his motor during those 6 years, costing him $2,500.00. He would still have $1,708,795.43 at 65.
So say we are really smart, like Dave in option 2, and now we are 65 with this amazing savings. If you lived off a conservative 4% interest, you would earn $68,351.00 per year. And still have 1.7 million in the bank.
I just wish I would have known this when I was 21! It isn’t too late for me or you. We can still be smart with money. Make your money work for you, instead of you working for it!