The average monthly payment on a car loan in America exceeds $400 per month. Invest your car payment and become a millionaire!
So you just graduated college and got your first big kid job. You better treat yourself and get a nice new car, right? Wrong! Please stop doing this America. It sickens me to see the amount of people who waste their money on new cars. Don't get me wrong, I love nice cars and I will have them someday. I've got my eyes set on the new Tesla Roadster as a matter of fact. But purchasing an expensive car or a new car when your young is simply a mistake.
“A car salesmen tried selling me a 3 year warranty on my used car and said this is one of the biggest investments I'll ever make so I'd better protect it with a warranty. I almost laughed in his face”
In my opinion, a paid off car is the best car. Dave Ramsey would agree, as he suggests that you always purchase a car in cash. Now, I think that's a great idea, but I'm also a little more conservative. I'm okay with a financed car, but you need to do your homework and it needs to be a good deal. I currently have a car loan and my payment is $187 per month. That literally pains me to pay that each month, but I could pay it off in cash if I so choose. The reason I'm financing the car is because interest rates are so low currently and I believe I can earn better returns by keeping that cash invested in stocks and real estate. I will not carry the car loan the length of the term, though. I plan on starting off by making one extra payment per year. This strategy will save you thousands of dollars of interest expense over a several year period. Also, with your help, I plan on using some of the money I make on this blog to also help pay the car down sooner.
Now, you're probably wondering how driving a used car will make you a millionaire. Let's go back to the average car payment in America, which is $400 per month. If you chose to drive a nice used car that you owned outright instead of purchasing that flashy new car that nobody cares about other than you, then you could invest that same $400 in a simple S&P 500 index fund with Vanguard. Over the last 100 years or so, the S&P 500 index has returned around 10-11% per year on average. So, if we invest that $400 per month at 10% per year for 40 years our money will grow to $2,336,888! And that's just with $400 per month! I know several individuals with car payments that exceed $1,000 per month. Let's just use that number for another example. Investing $1,000 per month at 10% per year for 40 years turns into $5,842,221! Is your freaking car worth that much money? No, just say no.
I can hear you all moaning and groaning now. "Nick - I don't want to wait 40 years to enjoy my money." I get it, but it's more about your mindset than anything. When you have $1,000,000 sitting in your stock funds, you can easily earn a 4% dividend return per year investing in basic index funds all day long. You're smart and I don't have to tell you that 4% on $1,000,000 is $40,000 per year in passive dividend income. That's greater than the average American's annual income from working the entire year and you're not even touching the principle.
Be disciplined now and invest diligently and your passive income will buy you all the cars you want someday.
Your Car is a Liability
Everything we have discussed so far doesn't even include how much your car depreciates over its useful life. Everyone has heard "you're car depreciates the moment you drive it off the lot" and that statement is true. So why wouldn't you let someone else take that initial depreciation hit? There is not much difference between a brand new car and a used car with 30,000 miles, other than a huge value difference due to depreciation. A strategy my dad has used for many years is to find a quality used car and buy it out of Florida (we were located in snowy NY). Then he would fly down to pick it up and drive it home. That always ensured the car had not taken a lot of abuse from the snowy North Eastern winters.
Turn Your Car into an Asset
There are all sorts of ways to make passive income these days. See my article on 15 ways to create passive income! Now, there are ways you can do so with your car, too. Try becoming an Uber or a Lyft driver for starters. There are also some up and coming variations of this with Amazon Flex and UberEATS where you deliver food to people. However, since they are such new ideas, they are only available in select major cities at this point.
Another way you can turn your car into an asset is renting your vehicle out on turo.com. This is like airbnb, only for cars. Be sure to check with your insurance agent before you engage in any of these car businesses as your standard auto policy will not cover you for these activities. You could also offer to wrap your car to a company looking to advertise. Check out this website on wrapping your vehicle. Some companies will pay great money for this exposure.
A great used car can be reliable for 10-20 years after you purchase it. I had a 2014 Volkswagen TDI (diesel car) that I planned to drive for 300,000 plus miles. But then the Volkswagen scandal occurred and they offered me a deal I couldn't refuse! Stay tuned for another article on that story. Now I drive a 2015 Chevy Cruze that I purchased with 30,000 miles on it. I'm extremely happy with this purchase and I plan to drive it for 200,000+ miles while I continue to build wealth (while I smile and think about how my passive income will purchase my Tesla Roadster someday!)
So, to all of you out there who can't wait to get a new vehicle, suck it up! Drive a reliable used car and invest in your future. The enjoyment you get from a new car will only last a few weeks and then it will be right back to only caring about getting from point a to point b. Don't drive a vehicle to impress people you don't know, it's simply not worth it. Take control of your financial future and cut the excuses.
Thanks for reading. Please take a moment to connect with me on social media and share this article with your friends. I'm determined to help millions achieve their financial dreams. Until next time, I'm Nick with Coin Stack Financial, cashin' out.