Buying a New Car Can Cost You Millions

Any man who can drive safely while kissing a pretty girl is simply not giving the kiss the attention it deserves. ~Albert Einstein

This article is one part of a series of 3 articles. After reading this, you may also wish to consider reading the “How to Buy Used & How Used to Buy” or the “Myths About New Cars” articles.

How Buying New Can Cost You Millions

I have a good friend who moved to Canada from Europe. Once he was settled and had a good job, he decided that he needed to own a new vehicle. After looking for some time, he deciced to buy a brand new red sports car. I’ll admit I was pretty jealous when I saw his car! It smelled new, it drove perfectly, and it had every feature  he wanted.  It even came with sporty alloy rims! His brand new sports car made my old ’94 Saturn with 2/4 cracked plastic rims and a painted side mirror look it was salvaged from a gnome infested farm yard.

About a year later he decided that the $400 per month was just too much money, and because he still owed money on it, the insurance company required him to carry full coverage at about 8 times more a month than I was paying. (He was also new to the country, so he didn’t have a driving record built up). There was just one problem. He owed more than his car was worth. His car took a 25% depreciation loss in less than a year from the time he bought it, and in that first year his payments had scarcely covered more than the interest. The short of it… if he sold his car, he would owe the bank thousands of dollars. He was stuck.

I tell you this story to help illustrate why buying a new car isn’t the right option for most people. Sure, when you’re rich, go buy that new car, but until then stick with something used.

The Difference Between Buying a Used Car Versus Buying New Can Be Worth well Over a Million dollars!

Don’t believe me? The difference between losing $156,000 and gaining $1,000,000 by retirement is a matter of a $325 per month car payment. Considering most vehicle payments are over $300/month, it isn’t far fetched to say that you too could make hundreds of thousands of dollars (if not millions) by the time you retire.

Below are three sets of tables to help illustrate this point. The first table shows how much a 25 year old can expect to make by the time he retires at 65. The second table shows how much a 35 year old can make, and the third table shows what a 45 year old might expect to make. Each table also includes a column to show how much money would have been spent in car payments.

Investment vs Car Payments over 40 Years (Age 25-65)

Investment vs Car Payments over 30 Years (Age 35-65)

Investment vs Car Payments over 20 Years (Age 45-65)

Understanding Car Payment Charts

For example, looking at table one, a 25 year old with a $325 car payment will pay $156,000 to drive new cars. That $325 could also be invested at 8% interest to yield $1,010,320 by retirement. One the other hand, a 45 year old who starts investing the same amount at the same interest rate could only expect $178,472. It just goes to show you how quickly car payments can take over your retirement!

I owned my first car at age 16. It was paid for in cash and cost about $500. Actually, it was given to me of my loving parents. If I had had the wisdom to invest what I would have been paying as a car payment, I would now be rich! If a 25 year old has an easy time getting a million dollars by the time he retires, how much more would a 16 year old have!!!

Live like no one else so that later… you can live like no one else. – Dave Ramsey

My point here isn’t to teach you how to get interest on your money (that information is found in The Financial University and other articles), but to illustrate the huge advantages of buying a car without debt and investing the difference.

Doesn’t this method assume that one can get high interest rates?

Most years, even government bonds give around 5%, and these are guaranteed. Except when the economy is in a recessions, the market tends to gain around 10% each year.  Mutual funds have averaged 12% in the past, and of course, The Financial University can teach you how to get even higher returns

By using older vehicles without debt and investing what you would have spent on payments, you can retire a millionaire. At that point, I approve of buying a fine, brand new sports car. Check out < How to buy used, and how used to buy >  or  <Myths on new vs used>

Leave a Reply