Kicking Car Payments to the Curb
Here are the steps to living payment-free:
- Buy a cheap used car. Listen, you don’t need to drive a BMW or a Jaguar—at least not right now. Get yourself a $2,000 car just to get around for 10 months. Remember, this is temporary. You won’t be driving this hooptie forever!
- Save what you would’ve spent on your car payment. For example, take that $554 (the average car payment) and save it every month to pay for a new car (with cash!) instead of giving it to the bank. After 10 months, you’ll have $5,500 set aside to buy a new ride! Add that to the $1,500–2,000 you can get for your old beater car, and you’ll have well over $6,000 saved up. That’s a major car upgrade in just 10 months—without owing the bank a dime!
- Sell the cheap used car and buy the car you want with cash. Take our example above. If you keep saving for 10 more months, you’ll have another $5,500 to put toward a car. You could probably sell your current $6,000 vehicle for about the same price you paid for it 10 months ago. That’s more than $11,000 you can use to pay for a new-to-you car in less than two years since you began the process.
Another principle to keep in mind when building wealth? Don’t let the cost of all your motorized vehicles (think cars, boats and lawnmowers) total more than half of your annual income.
The Real Cost of a Car Payment
The truth is, your car payment is costing you more than you think—a lot more.
There’s a reason why the average millionaire drives a four-year-old car with 41,000 miles on it and eight out of 10 millionaire car buyers drive it away debt-free without a car payment.1 It’s because they know that tying up hundreds of dollars in payments for a depreciating asset keeps them from using their No. 1 wealth-building tool (their income) from actually building wealth.
Let’s go back to that average monthly car payment of $554 one last time. What would happen if you were able to save that car payment instead, splitting it in half between saving for a future car and retirement savings?
If you did that, you’d have enough saved every four years to buy a reliable $13,000 used car with cash. And, if you just invested the other half of that payment into a Roth IRA with good growth stock mutual funds every month for 40 years, you could have more than $2.8 million in retirement savings.
Let that sink in: If you have an average car payment, half of it could be costing you a chance of becoming a millionaire. We hope you like the car! A financial advisor can help you take advantage of the money you save from not having a car payment.
We can’t say this enough. Millions of Americans are throwing away hundreds of dollars every month to drive a car they can’t afford to impress people they don’t even like—and then they wonder why they don’t have any money saved up for their kids’ college funds or their retirement accounts. Don’t let that be you!
You can break the vicious cycle of never-ending car payments and change your family tree forever. You can drive like no one else now so you can drive like no one else later. It starts with making a decision to only buy cars you can pay for with cash and never take on a car payment again.