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How to Turn Your Car Payment Into a Million-Dollar Retirement

Do you ever feel like you’re out of cash before your paycheck even clears the bank? If so, you’re not alone.

Over three-quarters of Americans are living paycheck to paycheck—and that money crunch affects their ability to build a bright future.1 According to Ramsey Solutions research, the cost of living is a top reason people don’t save more for retirement.

So, what’s one of the biggest costs holding people back? Car payments. Americans now owe more than $1.33 trillion in car loans.2 That’s a problem!

What would happen to your retirement outlook if you got rid of your car payment? Is that goal even possible? Absolutely! We'll show you how.

Americans Spend More and Pay Longer for New Cars

Each quarter, Experian Automotive releases data on the latest car financing trends. Their latest reports show just how much car loans are crippling people:

  • Nearly nine in 10 new cars are purchased with borrowed money.
  • The average new car loan totals $32,797 with monthly payments of $554 at 5.76% interest.
  • The average new car loan term is 69 months—that’s more than five-and-a-half years!3

Now, take a second and let that sink in. Research shows that new cars lose around 60% of their value after five years.4 So if you’re the average car buyer, you’ll spend the next five-and-a-half years paying more than $38,000 for a car that will probably be worth less than $13,000 when it’s paid off—if you’re lucky. 


How much will you need for retirement? Find out with this free tool!

Chances are, you won’t be as happy with your car once it’s paid off as you were when you first started paying for it. So, you go out and buy another new car, and the process starts all over again. If this sounds like your situation, you’re spinning your wheels without ever gaining traction.

How Your Car Payment Destroys Your Retirement

This never-ending cycle means you’ve permanently dedicated a chunk of your income to car payments—and you won’t have anything to show for it but a car that’s losing value every year you have it. That hard-earned money could be working for you if you’d invest it instead.

Simply put, if you didn’t have a car payment and instead worked with a pro to invest that $554 a month in your 401(k) or Roth IRA, you could retire with more than $6.5 million after 40 years, based on a 12% average annual rate of return. That would certainly go a long way toward closing the retirement savings gap that grows by $3 trillion a year.5

The good news is, you can stop the car-buying cycle and start saving for retirement. It’ll take some sacrifice and a lot of discipline, but it’s worth it all to change your future. Here’s how.

Eliminate Your Car Payment Forever

Let’s say the paid-for car you’re driving now is worth $12,000. Instead of taking out another loan to buy a new car, stick with your set of wheels a little longer. In the meantime, put your $554 car payment in a good money market account specifically to save for a car replacement—and, in less than two years, you’ll have $12,000 cash plus your trade-in to buy a nicer, new-to-you car without owing the bank a single penny.

Once you’ve learned how awesome saving money can be, you won’t mind driving your current car a little longer while your car-replacement fund grows. So, let’s say you get really into the spirit of saving and add $554 a month to your fund for five years, then—in less time than it would have taken you to pay off a new car loan—you could have $33,200 plus your trade-in to buy a new ride.

Of course, you don’t have to use all that cash to buy another great used car. What you could do is leave enough in your car-replacement fund to keep growing until your next car purchase. At this point, you can stop contributing to your car-replacement fund and put that $554 toward retirement instead. Now, that’s something worth working toward!

Want to find out how to get the best deal on a car you love? Download our free Ramsey Car Guide today!

Can This Plan Work for You?

Getting rid of car payments isn’t a fairy tale. It just takes planning and patience. And isn’t your future worth it? No car—no matter how fancy—can give you peace of mind in retirement. That kind of security comes from having a plan and following through with it.

Looking to put your retirement vision into a practical plan? We can connect you with an investing professional who’s committed to educating and empowering you about your retirement goals. Find a SmartVestor Pro in your area today!

Want to learn more? Dave's new book, Baby Steps Millionaires, will show you the proven path that millions of Americans have taken to become millionaires--and how you can become one too! Pre-order your copy today to learn how to bust through the barriers preventing you from becoming a millionaire.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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Invest With a Pro Who Gets This Stuff

Your future is too important for guesswork. Get help from a SmartVestor Pro today.
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