Tuesday, 10 December 2019

How Much Is Your Car Payment Really Costing You?

America is the richest country that the world has ever known and yet nearly half of its citizens are living paycheck to paycheck and according to recent studies, 61% of Americans don't have enough savings to last 6 months without a paycheck. 

Why is that the case?

It's been almost a decade since the great recession and yet almost half of Americans are still living paycheck to paycheck. And I think a large part of it is because of our money habits. Financial education in this country is lacking, to say the least. It's not something that's taught in schools, and unfortunately for most of us, it's not something that we can learn at home either. Because what are our parents going to teach us? If half of them are living paycheck to paycheck and 61% don't have enough money to last 6 months without a job, are the lesson that they're teaching us actually going to benefit us? And the unfortunate answer in most cases is no. We're going to learn the same lessons that our parents learned about money. The same lessons that most of society has learned about money. And those lessons are backward.

Things such as you're always going to have a car payment is something that's just accepted in society today as fact. And I'm here to tell you today that it's not, and I can say that from personal experience I do not come from wealth, my parents never had a lot of money when I was growing up. In fact a trip once a year was considered a treat. However, I was lucky enough to have a father that studied finance religiously, and while he did pass away before he was able to put his ideas into practice long enough to gain wealth he did have enough time to pass those lessons on to me. As a result, I've never had a car payment. I don't have student loans. I've never owned a credit card. In fact, I do not owe a single penny to anybody. And that's one of the greatest feelings in the world.

You don't know how much stress your debt is putting on your shoulders until it's gone. And I've been able to experience it because my dad made me realize just how impactful those payments are in the long run. Today I want to pass that knowledge on to you so that you too can experience the relief of being debt-free. Today we are going to be talking about debt. Most specifically we're going to be talking about just how much that car payment is really costing you.

Average Car Payment: $500 Per Month

  • Average Length Of Loan: 68 Months
  • Average Time Between
  • New Car Purchases: 71 Months.

According to a study done Experian the average car payment today in American is about $500, $503 to be exact and what's worse is the car loan on average lasts about 68 months or a little over 5½ years. And what's more according to AutoTrader the average person only keeps a new car for 71 months, or just to shade under 6 years. This basically means that as soon as we're getting ready to make that last payment on a car loan we're also almost simultaneously getting ready to sign a new one. And again this is normal in America. So that answers the title question of the article, how much is that car payment really costing you? And I think the best way to illustrate this is with an example.

Let's say that John financed his first car at 18, he had a car loan that cost $500 a month. He like most Americans will have a car loan for the rest of his life. But how much is this going to cost them in the long run? Well, according to what I found out, on average at least over the last 40-years the market has returned about 8.6% per year. $500 at 8.6% per year for 40-years is $1,906,776.89. Now that's what the typical financial Guru will tell you and it's great because that kind of money is a very effective tool into getting you to rethink the value of a car loan.

However it is a little bit too simplistic for me, so let's see the other side of the coin.

Let's assume that in the previous example even after paying his car loan John still had about $500 a month to invest meaning after 40 years he would have a nest egg of about 1.9 million dollars.

  • $5,000 For First Car.
  • $20,000 For Each New Car Purchase.

On the other side, we have Jane who buys her first car with cash and does the same for every new car that she gets. In other words, she will never have a car payment. Now she's also getting her first car at 18 it's probably not a brand new one, we'll assume that she saved her money from her part-time job after school and bought a used car for say $5,000. Once she has a full-time job I'm going to assume that every new car she gets will be a $20,000 purchase. Assuming she makes the same amount of money as john, will Jane end up with more money in her nest egg by buying her $20,000 cars with cash every 7 years but then investing the extra money she has in her pocket by not having a car payment over the course of 40 years? The answer is as it turns out absolutely yes. She will have way more than John, in fact, her ending net worth after 40 years will be $3,229,066.54! That's almost 70% more than John. 

Even if you were to say that in the years that Jane bought the car she didn't invest anything because she used all her spare cash to pay for the new car, she would still end with a 40-year net worth of 2,835,972.02! Still nearly a million dollars higher than John. Even if you were to say that she bought more expensive cars, say instead of a $20,000 car every 7 years she bought a $40,000 car every 7 years. She would still end up with a net worth of $2,232,696.20! Still over $300,000 more than John. And that is the power of being debt-free.

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