I often hear or read similar below comments:

• I have $80,000 in college loans that are killing me.

• I cannot afford to contribute to my 401K.
• I will never be able to retire.
• Life is unfair!
• I just purchased a brand new Porsche!

Wait one minute – did you just say, you owe $80,000 in college loans; contribute $0 to your company’s 401-K plan, forfeiting the three percent match; believe you can never retire; professionally play the world’s smallest pity violin and just purchased a Porsche?  

How many people do you know in a similar boat? Or should I say miniature Titanic! 

 U.S. car loans today average about six years.  Some dealers out of the kindness of their heart are ecstatic to offer up to seven years.  The average monthly car loan payment for a new car is about $560 (that’s not a Luxury car by the way).  And since you have decided to dig your own hole, (your boss is typically happy to do that for free – if not ask your spouse, boyfriend or both) some of you trade in your car with several months or years remaining on the loan.  And the dealer or bank out of the goodness of their hearts (I’m uncertain either actually has a heart) says: No problem – we can just add that to the cost of your NEW car and finance the total amount. Wow- these people really care about you.  

Here is the good news, throw that shovel down you are digging your hole with.  That same generous dealer or banker will let you borrow, at no cost their John Deere (I love their lawnmowers) backhoe to dig even deeper.  

By now you may be assuming I am not a fan of new cars. Wrong- I love new cars. I recently test drove the Tesla Model X SUV – IMPRESSIVE!   However, I prefer to see my HARD EARN MONEY work for me and reproduce.  I am not a fan of paying hundreds of dollars, monthly, for a depreciating the moment I drive off the car lot, WANT.  Especially if ignoring backbreaking debt and doing nothing for retirement. I am not against buying new cars. In fact my brother is buying a new car this month.  I am against people sacrificing their future to keep up with a neighbor. My neighbor by the way, has two luxury cars including a Tesla S, but he can afford both without jeopardizing his future!

WHY I CHOOSE TO DRIVE A USED CAR

I drive a 2002 Mercedes E Class.  I checked recently and it has a trade in value of $500 (I just put four new tires on that car that cost more than $500!). My daughter Amanda, is embarrassed I drive my car.  So what did I give up to drive my 2002 car, that I love?

Let’s assume I really was in to that new car smell.  By the way the harsh chemicals used in the manufacturing and cleaning of your car generate that new car smell.

For this example, let’s assume I just had to have  that new Mercedes E Class.  With a $10,000 down payment, financed over six years my payment is a UGLY $852/month. That is actually more than the mortgage payment on the last rental property I purchased!

LET’S DO THE MATH:

• 2019 Mercedes E Class Average Sticker Price: $55,000 (without a lot of options)
• Sales Tax: 10%
• Fees (taxable): $2,000
• Down Payment: $10,000
• Trade-in Value: $500
• Interest rate: 5.5% per year
• Loan Term: 72 months

MY PAYMENTS

• Monthly Payment: $852.02
• Sales Tax: $5,650.00
• Total Interest: $9,195.50
• Amount Financed: $52,150.00
• Total Payment: $61,345.50

NOW- LETS LOOK AT MY ALTERNATIVE/ACTUAL CHOICE

 I have not had a car payment for many years, so assuming I saved only $650 (not the $852 actual cost) each month for the past 17 years with a 7% ROI (average S&P 500 ETF Fund- VOO.  I end up with a little over a quarter of a million dollars.  

LET’S DO THE MATH – $650 SAVED MONTHLY FOR 17 YEARS:

• Monthly Deposit: $650
• Period (Month): 204 (17 years)
• Annual Interest Rate: 7%
• Compound Method: Monthly

Balance at maturity: 

• Total Principal: $132,600.00
• Interest Earned: $122,462.00
• Maturity Value: $$255,062.00

WHAT I DID WITH A QUARTER OF A MILLION DOLLARS?

• My daughter completed her four-year degree with zero college loans.
• I made a down payment on a four bedroom rental property in NC that generates about $1,000 per month free cash flow.
• Enabled me to:
  • Contribute the maximum to my 401-K account, each of those years.
  • Contribute the maximum to my IRA accounts, each of those years..
  • Dollar cost average purchased of S&P 500 ETF shares.

For those of you who choose new cars, what are you giving up to impress your neighbor, your dates (and you know the last two were awful) and people you do not even know?  Better question, is that new car, really worth it in the long run? It is your decision! 

LESSONS FROM ONE OF MY FAVORITE & BEST MENTORS 

My favorite Uncle, Nathaniel, more like a second Dad, was an excellent investor and life mentor.  He worked as a school teacher in NC (FYI-one of the lowest paying states for teachers) and accumulated over his lifetime:  300 acres of farm and timber land and over 30 single family rental properties (with zero mortgages) generating some serious cash flow.  After investing wisely, continuing to drive his father’s REALLY old truck until it could not move, when he did buy a new car, he selected his car, effectively negotiated, and pulled his check book out and wrote a check for the total amount.  He was also the most generous man I knew and gave to his church and community when others were in need.  He was a man who diligently prepared for a sustainable retirement so he had the flexibility to both help others and do what he desired.  He is a man I loved and miss.

SEE PREVIOUS BLOG – WHO ARE YOUR FINANCIAL MENTORS TO GRASP THEIR IMPORTANCE TO YOUR DEVELOPMENT

WHO ARE YOUR FINANCIAL MENTORS?

My recommendation – unless you can pay cash for that new car smell, buy a used, less expensive car and take care of YOUR business. 

SO WHAT’S WRONG WITH A USED CAR?

When you turn on your 80-inch flat screen TV, (just saw one at Costco!) you are bombarded by new car commercials.  They are doing their best to brainwash you all the way to their showrooms so you have to deal with those icky car sales people (bring hand sanitizer). The US automobile industry spends about $15 BILLION annually on commercials!  Why?  They love the smell of YOUR HARD EARNED MONEY being electronically transferred to their accounts!  Just to pay for the cost of commercials they need to sell Americans about 3,600,000 new cars EVERY YEAR, out of the 16 MILLION they sell.  So those commercials work like a giant vacuum and suck that money out of millions of people’s pockets!

So what’s wrong with a used car in good condition? A car coming off lease is typically in very good condition and tends to have low miles (remember they limit your miles in the lease agreement). Because it is used (without that smell you love), you can buy it for a fraction of what it would cost to buy it new. Because so many people are leasing cars for an average three years, there are millions of used cars on the market.  

Used cars can be reliable, just be careful who you buy it from.  Anyone looking for a 2002 Mercedes E Class?  Research the history of any used car you consider buying, Using the vehicle identification number, located on the driver’s side dashboard, you can check the car’s history with: National Insurance Crime Bureau, CarFax or the National Motor Vehicle Title Information Center. 

You may want to have the car inspected (by a professional mechanic (NOT your brother-in-law) before you buy, to ensure it is in good working condition.

Consider a Certified Pre-Owned (Nice term for USED) car from the dealer, where they conduct extensive automotive tests to ensure you do not buy a lemon. 

I do need to finally buy a car as the annual upkeep/repairs on my car are greatly exceeding the value of the car. I will be looking for a great deal on a used car.  Can I afford to write a check for a new car?  Yes.  But I much prefer to keep my hard earned money working 24 hours per day seven days per week. 

CONCLUSION

Treat yourself like a business. In fact the most important business in your life! “According to economist Milton Friedman, the main purpose of a business is to maximize profits for its owners,” and in the case of your business you and your immediate family are the owners.

Evaluate your purchases to decide is this in my business’ long-term interest?  Or am I trying to keep up with the Jones and impress that good-looking co-worker? By the way, she has a significant other who has a great personal business. 

LET’S WRAP THIS UP TODAY WITH A TEST – WHAT IS YOUR DECISION?

 {PLEASE SELECT A OR B}

1. BUY A NEW CAR EVERY 3-5 YEARS 
2. ADD ~$250,000 OR MORE TO YOUR NET-WORTH OVER 17 YEARS

Be more mindful about how you spend YOUR HARD EARNED MONEY!

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DISCLAIMER

I am a proud nerd (my beautiful wife and daughter told me so) investment and finance blogger, with a NC State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.  

I started my first business at ~13 years of age. 

I am a successful investor in equities and real estate and happy to share my personal finance and investment lessons learned with you. However, I am NOT a licensed financial advisor.  Please do not construe my suggestions on this blog, as recommendations for your personal situation.  For individual finance advice please seek your own licensed CPA or financial advisors.