I love new cars but what I’ve learned is these glittering pieces of steel – if you cannot afford to pay with cash – can be detrimental to your future financial well-being. I’m not saying you can’t own a new car. I’ve owned a number of new cars myself and love the thrill of being one of the first to own the latest engineering marvel on four wheels.
I’m suggesting a way to have financial security and own a new car.
Years ago, before I married my lovely wife, I bought new cars, which usually had a hefty car payment to go with them. I owned (well, really the bank owned) a new 2003 Honda Accord. I loved driving it! Two years later Honda came out with a better design for the Honda Accord and I started to not like my new car as much, but I still had car payments of $350 per month. Although it was still nice to drive, the thrill of owning my 2003 Accord was starting to fade.
If you add up the payments for my 2003 Honda Accord over a 6 year period, the total comes to $21,000 not including interest payments. If I had purchased a pre-owned Honda for $5,000 in 2003 and another one for $7,000 in 2010, and invested the $350 per month in a mutual or segregated fund earning 6%, I would have almost $94,000 now.*
New car purchase strategy
Do you still want a new car? If the answer is yes, that’s ok. Let me show you a smart way to get there. Save up to purchase a used vehicle with cash, then take the amount you would have paid in car payments and save it in an investment account.
If you are able to save the $94,000 and put it in an investment account that earns on the average 6% per year – that would amount to an extra $470 per month in earnings you could put towards a new car payment. Consider paying a larger down payment on your new car, as it lowers your monthly car payments.
How your car payments can add up
Now let's say you started at age 25, but instead of making car payments, you put $350 per month away that earns 6% per year on average, and you increase your yearly contributions by 2% to keep up with inflation. By the time you reach age 55, you would have close to $420,000 and by age 65, you would have close to $1,000,000.
If you managed to save $500 per month (earning 6% and increasing contributions by 2% per year) and your spouse did the same, by age 55 you would both have accumulated $1,350,000 and by age 65 more than $2,750,000!
Now, do you see how your monthly car payment can have a dramatic impact to your financial future?
There are a lot of strategies to buying a new car without going into debt. I presented one that you could use if you have your money working for you. If you would like to learn more about strategies to accumulate wealth and live a more stress-free life I would be happy to share them with you. Contact me today for a 20 minute meeting and I’ll show you how I help my clients live a more financially free life.
This example is for illustrative purposes only. Situations will vary according to specific circumstances. These example values are before tax.