What if I told you that one decision can be the difference between being able to retire comfortably and having to work for the rest of your life?
Successfully managing your personal finances comes down to consistently making good financial decisions. It doesn’t take a lot of bad decisions to ruin your finances. Just one bad decision done repeatedly can have a devastating result.
I’m a car guy. I have an affinity toward horsepower and the beauty of sculpted metal and glistening chrome. Being a car guy you might assume I spend a lot of money buying new cars, but you’d be wrong. Oh! I use to, but I’ve learned that the cost of doing so comes at a higher cost than I’m willing to pay.
I have a rule when it comes to buying cars. I have to keep a car for at least 4 years after I buy it. I also like to buy cars that are less than $10,000, often much less.
I have a very good reason for this and I'd like to share it with you in hopes that it will help you have a better and more secure financial future.
A general guideline for spending on transportation expenses in a budget is 12%-15% of the net available income. It includes car payments, fuel, insurance, maintenance, repairs, tolls, tags and inspection.
In an average household with a yearly income of $59,000 [$49,688 after taxes], it’s comes to a total between $496 and $621 per month. With the average new car payment at $479 per month, you don’t have to be a math genius to see that a new car payment won’t fit in an average household budget. Yet, I've noticed that a majority of people overspend on this one purchase.
Why You Should Care
Here’s the reality! Everyone has a monthly cost of owning and operating a car. But the cost doesn’t need to be high. In fact, it can be relatively low while still owning a good and reliable car.
Many Americans could retire comfortably if they simply stopped buying cars on payments and instead paid cash for their cars. The difference between a $500 new car payment and a $200 per month cost for a reliable car is the $300 you could be saving toward retirement.
You know you need to invest for retirement. You’ve been making excuses that you just don’t have the money to invest right now. You could have as much as 1 million dollars in retirement saving if you invest just $300 a month starting now. See chart below.
One spending decision can be the difference between retiring comfortably and not being able to retire at all.
Here's how you can pay cash for your cars and free up money to save for retirement.
If you currently have a car payment do the following:
Keep your car for 3 more years after you pay it off. Most cars are dependable enough with routine maintenance to last 8-10 years or more without major repairs.
During those 3 years, take $200 from the original payment and save it into a next car fund. Then invest the difference in a Roth IRA or 401(k).
- At the end of 3 years, you'll have $7,200 saved toward your next car. Sell the car you own and add the amount to the next car fund. You should have around $10,000 to purchase your next car.
- Keep your new used car for 5 years.
- Continue paying yourself the $200 per month toward your next car.
- At the end of 5 years, you'll have $12,000 plus the price of your car, which you’ll sell. With around $15,000 you can purchase your next car.
- Continue saving and buying good reliable cars for cash while investing $300 or more toward your retirement.
The best part is you can always buy less expensive cars or hold on to your cars longer. This will cause your monthly cost of car ownership to go down, freeing up more resources to reach your retirement and financial goals.