Let’s face it, almost everyone loves a new car. For you it could be the new SUV, the fast sports car, or the toughest truck, we all have our preference… The car may be the ultimate crowd pleaser and the quickest way to make an impression when arriving just about anywhere. The car says a lot about who about you before you ever even open the door and pop out to say hello. Whether arriving at the in laws for a get together, or visiting a new client, an underlying statement about you is made.
The car is also the quintessential material item in relation to the old adage, keeping up with the Jones’. Despite this, the interesting thing about the modern auto is that is has very little direct correlation to your financial status. For example, let’s take two identical, Sixty thousand-dollar BMW owners. One could be a person of great financial wealth and success, the other, may simply have a negative net worth. It is impossible to differentiate the two at first glance, despite the car shouting the same brand image for each of its owners.
Due to clever financial instruments, 7 year loans, Or low to 0 down lease options, car purchases transactions that would have been out of reach are now able to be manipulated in a way that you can drive it right off the lot. The crucial question is…just because you can… should you?
The answer, as with all things in the world of personal finance is… it depends. Where you are in your overall quest to financial freedom, how much assets you have accumulated, what type of income you receive and the duration of the income, are just of a few factors to consider. To those of you who are in the accumulation phase of your life however, this decision can be catastrophic! When I reference “the accumulation phase’ I simply mean you are not in a place in life to live off your assets, and you are still required to exchange your time for a paycheck.
For the sake of conversation, let’s say you just have to have it, and you go down to the dealership to buy a brand-new vehicle. If you do not buy it, you won’t be able to impress your coworkers, guy or girl crush, family members, friends, or maybe you will just feel left out of the new car party. Lets face it, most American’s are doing it. Buy buy buy! Lets also assume however, you are a little bit more modest (of course you are, you are reading this article!) , and instead of the BMW, you buy something more practical. How about an Acura RDX SUV. This is a nice mid-sized SUV, MSRP on the Acura starts at 37k. But who would go with the base model, lets assume you buy the middle of the road model and pay 45k. Then of course there is taxes and fees…. But we will forget about those for now. While 45k is a chunk of change, the sales staff, and the nicely dressed and polished finance managers will continually remind you that it’s not 45k, its simply X dollars per month. No Mr. customer, that additional warranty is not 3,000 dollars, its only x per month. Oh of course the upgraded wheel package says its 2,000…. But its only X per month. Well maybe it just isn’t X dollars per month, maybe it is more…. let’s put some actual numbers too it.
An average auto loan is around 60 months, with 72 being very common as well. A reasonable interest rate can be assumed in the realm of 3%. So if you decide to drive off in the shiny new car without a down payment, , you will then exchange 683 of our future hard earned dollars per month, for the next 6 years. . That does not sound terrible…. I guess. The dealership loves to remind you of the monthly payment options. They will do anything they can to manipulate the monthly payment to be as low as possible, to divert you from the realization of the 45,000 dollars you are spending…. plus interest of course. Try to imagine you have 45k dollars in your savings account. You worked through blood sweat and tears to accumulate this. And after all this hard work would you really be willing to part with this money in exchange for the shiny new Acura? Think on it for a second…
Your total cost of the car after interest is $49,227.84 (again not including taxes and fees, registrations, ect) . Realistically, not bad at all, you only had to pay an extra 4200 to get to drive a car that the bank owns for 6 years. Thank you to historically low interest rates!
What if instead though, we used your 45k another way…. If we took that same 45k, and invested it, where would be after 6 years? Well nowhere far away obviously, because we did not have a shiny new Acura to take us anywhere… Kidding of course! We will use simple investments, nothing fancy, let’s just buy the SP 500, the largest 500 companies in the U.S. With the 45k invested, earning an average rate of return of 9%, after 6 years of patience, discipline, and driving a rust bucket, our 45k would now be worth $77,067.87! Wow! So instead of parting ways with our 45k, and then having a left-over asset (the Acura) that has substantially depreciated, we have seen a very nice increase in our wealth. Well since we are so pleased with our decision to let our money appreciate, how about we continue our good habit? Pretend we decided to drive our existing rust bucket and postpone the shiny new car indulgence for another 6 years after. The result? Now we would have 132k! But wait, it can get even better! What if we took our 45k, drove the rust bucket, then pretended we were making payments to the bank, but instead made them to ourselves?? Crazy concept of course, using our money for something to benefit us! If we started with 45k, added the 683 dollar payment amount to our investments, and then waited the 12 years, how much would we have?... well about 309 THOUSAND DOLLARS! Ok so now we are at 12 years, are existing car is barely running, we NEED a new one! Well, what if we just wait another 6 years. So 18 years, in a rust bucket, starting with 45k, paying ourselves 683 a month, and investing. Well welcome to the over half a million in assets club, hello 595k!
I love cars, motorcycles, trucks, you name it, anything with a motor! But before you give into the appeal of one upping the neighbor or your office mate, remember what paying yourself instead of the auto lender can do. I would sure as hell trade owning three Acura’s in 18 years for about 600k , how about you?
Disclosure: Bridge The Gap Retirement Planners LLC (BTGRP) is an Investment Advisor registered with the States of CA/AZ. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy, or the completeness of, any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on our website, btgretirementplanners.com. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis