Changing your car ownership thinking can make you a millionaire. The average monthly car payment is about $450. Most people never pay off their car loans. They simply roll that loan into the next when doing a trade-in for a newer model. It is hard to resist the new car smell and the ease of changing cars. Very few people need or benefit from having a newer car. The first question is to have an honest assessment of your transportation needs. It is usually better to have an inexpensive reliable car that is paid for. Setting aside a little money each month for the inevitable repairs will help cushion the expense.
Let’s take an example and break it down. Suzy has a wonderful car that costs her $450 per month. She owes about what she could sell it for. Suzy has had a car payment for 10 years and expects it to be this way until she retires at 65 (30 years away). Her auto insurance is $80 per month more than it would be for a modest car. Suzy sells her car and pays off the loan. She then purchases a $4,000 used car (older Honda Accord). It gets 30mpg and is cheap to insure. Her $530 monthly savings will breakeven with the car purchase in 7 ½ months. From that point forward, the money is put into her employer’s 401k. She gets an immediate tax deduction (20% tax bracket) that is used to increase her savings contribution. Her $530 contribution at cost is $662.50 ($530/.8) per month toward her 401k. Suzy’s retirement plan will be worth $1,212,867 in 30 years. This assumes the same monthly contribution of $662.50 and an earnings rate of 9%.
Suzy knows that she will get a raise every year and she sets some of that money aside to replace her car with another affordable car. While her friends may tease her about her car buying decision, she has peace and pride within from knowing that she is in charge of her retirement. As an added benefit, Suzy doesn’t worry too much about dings in the door at the parking lot.