What sounds better to you: Becoming a millionaire before age 60 and never having to work again, or perpetual debt and working for the rest of your life? If you’re a sane, rational person, the first option is obviously the better choice.
But are you actually a sane, rational person? Not if you have a car loan!
Looking at Average America
Over 100 million Americans have car loans. That’s roughly half of all adults in our country.
What do you think the average car loan payment is for a new car? I took a wild guess and thought it was something outrageous (in my mind) like $200 per month. I looked it up and found that it’s actually $551 per month.
My mind was blown. Why would anyone pay $551 per month for a car?!
I know, Jackie. I don’t get it either.
What the Wealthy are Driving
Not everybody is the same, and there are plenty of wealthy people who drive cars worth six or even seven figures. But here’s what three of the richest people in the world drive:
- Jeff Bezos, the founder of Amazon and the richest person in the world, drives a used Honda Accord.
- Mark Zuckerburg, a billionaire and the founder of Facebook, drives an Acura TSX valued around $30,000
- Warren Buffet, another billionaire and considered the greatest investor in the world, drives a Cadillac XTS, valued at $45,000.
In the book, The Millionaire Next Door, the authors Thomas Stanley and William Danko have an entire chapter titled “You Aren’t What You Drive.” They note that only 24% of all millionaires drive new cars, and the majority of millionaires (55%) own a car that is at least 2 years old.
For me, it never made sense to go into debt to buy a new car. If it has four wheels and gets me from Point A to Point B, that’s all I need. Sure, the gizmos and gadgets on the newest cars have their appeal, but is it really worth sacrificing my future over?
I currently have a 2001 Honda CRV with over 200,000 miles on it. I bought it from a friend in 2012 for $4,000 (all cash). Sure, it doesn’t have Bluetooth (or even a CD player), the clock stopped working a few years ago, and the driver side window doesn’t roll down anymore, but my 2001 Honda CRV is like a Lamborghini for my bank account. I’ll explain why in a moment.
Case Study: The Co-Worker
I’m curious what goes on in a person’s mind when considering a new car purchase. Have the majority of us just been brainwashed by car commercials? Or is it seeing friends and family buying new cars and wanting to keep up with the Joneses?
Luckily, the topic came up in conversation while I was chatting with someone at work.
Time to dig and and see what’s really going on here!
My co-worker is a recently graduated engineer and is wanting to buy a new car. Our conversation revealed that she worked hard to get through school and was excited about landing her first job. She said she feels like she “deserves” a new car after all the rigors of getting through school.
Hm…”I deserve it.” That’s the reasoning here.
My co-worker continued to tell me if she buys a new car this year the monthly payment will be $500, but if she saves up more for a down payment and buys the new car next year the monthly payment will only be $350.
After hearing this I just couldn’t contain myself anymore. I said, “Why not just use the $350-$500 per month to buy a mutual fund and become a millionaire before 60?” Which was met back with a blank stare. And now I’ve made things awkward….Good job, Aron.
How to Become a Millionaire
Later in the day, trying to fix the awkward situation I had created earlier, I sent over this snapshot using the app Compound Interest Calculator.
If that $500 per month car payment is, instead, used to purchase a mutual fund like Vanguard’s VTSAX (which has 8% average yearly returns), my co-worker could become a millionaire in 34 years. By choosing to buy a used car and investing her money, my 22 year old co-worker could be a millionaire by 56. Which sounds better to you, a new car or becoming a millionaire before 60?
I recommend the Compound Interest Calculator app for your phone. You can use it to do quick math to see how your savings can impact your wealth over time. It’s a great motivational tool.
Cheap Car Upgrades
Instead of succumbing to an “I deserve it” mindset, you can instead breath some new life into your used car with these cheap upgrades:
Backup Camera
Whenever I’m renting a car, I’m always envious of the backup camera. Well, luckily you can purchase your own back up camera on the cheap and install it on your used car. Now you can have the best of both worlds!
Tire Pressure Monitoring System
Another nice perk of newer cars is tire pressure monitoring systems. This came in especially handy recently when I was renting a car and was notified that one of my tires had a slow leak in it. You can also increase your gas mileage by up to 3% just by having your tires properly inflated. Double win!
This tire pressure sensor is solar powered, easy to install, and even easier to use.
Heated Seats
For us living in colder climates, there’s nothing better than having a nice heated seat for those cold winter days. This heated seat plugs into your cigarette lighter and is easy to use.
Live Differently: Your Bank Accounts Will Thank You Later
So what do you think? Are you a sane, rational person? Do you drive an older car? Is it worth it? Does your used car act as a Lamborghini for your bank account? Share you thoughts in the comments below. I’d love to hear from you!
And check out my path to financial independence, and my fail safe plan on getting there.
How would I find a mutual fund with an annual return rate of 8%?
I recommend Vanguard’s VTSAX mutual fund. You’ll have to open up a Vanguard account and have a minimum of $3,000 to invest. VTSAX has holdings in every company in the U.S. stock market, which has had an average rate of return of 10.35% since 1972, and that doesn’t include dividends. VTSAX has an annual dividend of 1.8%. So you’d actually be getting a 12.15% rate of return. Of course there’s always inflation to consider, which I estimate will be 3-4% per year. That’s where I get the 8% annual rate of return value.
If you’re wanting to invest your 401k, you likely won’t have access to Vanguard’s VTSAX. If that’s the case check out this post: https://nine-thrive.com/portfolio-strategies-for-how-you-should-invest-your-401k/