Who doesn’t love that new car smell? You know the smell I’m talking about. The smell that they’ve perfected and packaged into a little tree ornament that graces all non-new cars to give them back their former glory. Interestingly, Mr. MMM and I have rejected new car ownership. I have never owned a new car and don’t ever plan on it. Mr. MMM, on the other hand, did make the mistake of buying one brand new car in his life. He bought it for himself after graduating college because…wait for it..he deserved it! Ha! Isn’t that always the case? Why do people reward themselves for hard work with debt? Since then, he’s become much more practical and buys his cars cash and effectively drives them into the ground. As do I. But, just for fun, let’s look at how we got here and examine what other people do.
The Average Car Payment
According to Edmunds.com, the average car payment in the U.S. is $479/mo. That is not a misprint. As if that wasn’t bad enough, let me point out that that is the average. That means there are plenty of people out there with car payments much higher than that.
Although, I have never purchased a brand new ride, I did make a ridiculous purchase after getting my first full-time job after high school. I was making about $9/hour and thought I’d spend $14,000 on a used sports car – A Mitsubishi Eclipse, to be exact. In my defense, it was loaded with leather, a spoiler, turbo, and a pretty slick blue pinstripe. Everything an 18-year old needed! Not only did I finance a car that was equal to almost an entire year’s salary, I also forgot to factor in the cost of insurance. It turned out, I was paying $330/mo for the car and an additional $130/mo for insurance. That obviously doesn’t account for maintenance or repairs, either. I also had a cell phone at the time. Between the car and the cell phone, I was working two weeks each month to pay for my expenses. Thankfully, I was using the other half of my income to pay for college – at least I was doing something right :)
A Lifetime Of Used Cars
Now I must say, even though I spent way too much money on that Eclipse, I paid it off and drove it until the wheels fell off. I had it for almost 10 years and it had 200,000 miles on it when I sold it for $1,200! All in all, not too bad. After the Eclipse, I ended up with two cars for a period of about 9 years. After dumping the Eclipse, I wanted a car that could move in the snow. And, since I didn’t have far to drive to work, I bought a SUV – A Jeep Grand Cherokee, V8. Oh, yes. What I didn’t anticipate was being terminated from my job because the company was closing our plant. I immediately got a job in my field, but it was 55 miles away. Instead of selling my SUV and buying something more reasonable for the commute, I kept it and bought a second commuter car with my severance money. I paid $4,000 cash for my second car – A Chevy Malibu. And for the next 9 years, I mostly drove the Malibu while the Jeep was used for transporting my mountain bike and occasionally driving in snow.
Three years ago, I finally dumped the two cars and bought a reasonable used car. It doesn’t have 4-wheel drive, but who really needs that in Lancaster, PA? This is the last payment we have before we start aggressively going after the mortgage on our rental property. If we stay on course, it should be annihilated within a few months!
After having made the mistake of purchasing the new Honda after college graduation, Mr. MMM got his butt into high-gear. He has since sworn off new cars and we have both been brainstorming for over a year over the possibility of reducing down to a one-car family. We just can’t figure out how to make it happen with a 7-year old and two careers, even though he works mostly from home. We’re all ears if anyone has any suggestions!
Invest The Difference
“Yeah, yeah, yeah, that’s all fine and good, knowing the history of your vehicles, but how does this relate to personal finance and saving millions?” I’m glad you asked! Let’s go back to that average car payment. Do you realize that over a lifetime (let’s say 50 years), that average car payment, assuming you always have a car payment, will cost $287,400! And that’s just cash. Let’s say, you didn’t have a car payment AND you didn’t just squirrel the difference away under your mattress. Let’s say, instead, you invested that $479/mo in index funds with an average return of 7%/year. Do you know how much you would have at the end of 50 years?
Get ready. Take a deep breath. You might want to sit down for this. The answer = $2,500,000.
Yep. You’d have 2.5M dollars! And that’s just for ONE car. Imagine if you did it for two cars? Granted, you likely can’t go completely vehicle free, unless you live in a major metropolis. However, aside from living in a big city, you certainly can minimize the financial impact a lifetime of car purchases/payments can have on your bottom line. This alone, can make you a millionaire!
How do you roll? Do you have multiple cars in your family? Do you finance, lease, or pay cash? What’s your family’s formula for getting around? We’d love to hear all about it in the comments.
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