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Why Your Car Is Keeping You Poor--Part II

Part II looks at the investment portion of the story. To get the back story, Read Part I here.

Is having that BMW or Mercedes worth you working until you are 70?

There is nothing wrong with owning a nice car, but it has to be within your means. For most Americans their car is the priciest investment they have made and the costliest in terms of Return On Investment (ROI). Can you give up your $25,000+ car for three years so that you can be a millionaire in 30 years? The math is that simple: three years to change your money habits so that 30 years later you can be a millionaire. See the calculations below.

Time to get rid of your car payment. One of Dave Ramsey's pet peeves is for you to get rid of your credit cards. While I agree that they are a hassle, my biggest recommendation to anyone trying to grow wealth is to get rid of the car debt which is likely costing $800 a month. If you have more than two years left on your car, you need to sell that car and get something that is more affordable. The faster you free up that extra $800 or more, the faster you can reach your financial goals.

I believe that every 4 years you spend without a car payment, you are shaving off 1-2 years off of your retirement age, maybe more.

The Math of car payment vs investing

The average new car cost about $40,000, with a monthly payment of about $800, and the average time span is between 60-84 months. If you were to invest that same amount for the same period of time and allow compound interest to do its magic, you could have close to $74,000 after six year; $471,709 after 20 years; and close to $1.2 million after 30 years. Why would most folks who aren’t financially independent or business owners want to have a car payment is beyond me!

Here are the calculations:

3 Steps you can take to get from car poor to building wealth:

1-Buy a car within your means/sale your car. Follow the 1/3 ratio to find the right car. See Part I for examples.

2-Start saving now so that you’re able to purchase a car for cash or within your 1/3 ratio and lower your overall car debt.

3-Invest the difference and watch your wealth grow. To learn more about investing see the value of compound interest or how to grow wealth.

As always, if you need help, feel free to drop us an email.

It’s time to stop acting rich on a poor man's budget


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