Yup, you in the Palisade. Definitely you in the luxury pickup truck. If you have a $700/month car payment, it is costing you so much more than you realized.
We all know that a car loan costs money in interest payments. But car salesmen love to break down “affordability” by monthly payment. So here’s a little table to show the true cost of a car with a ~$700 monthly payment. Have a barf bag nearby.
Let’s look at the “normal” way of doing things using very “normal” numbers.
Your $40k car costs over $50k.
You will pay almost $10k to the bank. Your car depreciates at a 10-20% rate losing $6-8k of value in the first year.
Let’s go with an alternative route that might mean you put off getting the upgrade for a few years. Let’s put just $500 in a regular index fund like VOO.
If you can put away just $500 at the beginning of every month, you’ll be able to get that $40,000 car in just over 5 years. You’ll only be using $31k of your own money and using $9k of gains.
Option 1: Pay $49, 725.82 for a $40,000 car in 6 years
Option 2: Pay $30,868.95 for a $40,000 car in 5 years.
Option 1 costs you almost $19k more than option 2. See what I mean? Barf.
*market rates do vary, but 10% is a safe estimated average. There will be up years and down, and maybe you won’t be able to buy in exactly 5 years. Maybe a little longer. Maybe a little shorter depending on the year. But it’s worth the patience to have the peace.
Just for fun let’s see what happens to your retirement account if you paid in that extra $200 per month starting at 25 years old (probably about the age you got a big car payment).
Holy moly that’s a lot of money you could have in retirement in 40 years. That’s not including anything you’re already investing in a Roth or 401k. Feel free to plug in those numbers using this calculator from Ramsey Solutions.
Okay, so what if you already have that big fat payment and you feel like a car rolls over your shoulders every time it auto-drafts?
Option 1: Just keep paying it as scheduled and re-evaluate when it’s time for a new car.
Option 2: Work like a crazy person to pay it off with double and triple payments. Try plugging in the numbers with this calculator. The more you pay on principle, the less interest you pay.
Option 3: Sell the vehicle and pay cash for a beater until you can save for the car you want.
I’ll post later about what to do when you want to get rid of your car payment. Keep an eye out. The good news is that when you know the facts, you can make decisions based on information and not feelings. And I realllllly wish someone had show me how compound interest worked when I was 16 and spending all my money at the mall.
Cheers!