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Money

Why it’s Time to Give Up Your Car Payment

I recently read a Facebook post that asked this question: “If you had $5,000 to spend on a used car, what’s the maximum amount of miles you’d be comfortable with the car having?”

I thought the answers were shocking. Almost everyone answered that they would be comfortable purchasing a car with over 100,000 miles on it. Many of the responses even said they would be willing to purchase a car with 150,000 miles.

One answer particularly stood out to me. An individual said that they purchased a car with 100,000 miles on it for $2,300. They drove the car for six years, and sold it for $2,000.

Hold on. What?

According to NerdWallet.com, in 2018 the average new car payment was $530 per month. The average used car payment was $381. So you’re telling me that you can drive a car for SIX YEARS and your out of pocket cost for the car (after reselling) is less than a single car payment on a new or used car? Yup!

Why should you care?

If you read my blog post Three Simple Steps to Financial Success, you learned about the 4% rule.

The 4% rule states that if your annual living expenses are equal to or less than 4% of your investments, chances are extremely high that you can live solely off the proceeds from your investment portfolio and never have to work again.

With that being said, by eliminating a $530 monthly car payment, the amount of money that you’ll need to have invested in order to retire decreases by $159,000.

Similarly, if you had purchased a used car with a $381 monthly payment, you would need $114,000 less to retire by not having a car payment.

A question you should ask yourself.

How many years of working would you save by needing $159,000 or $114,000 less for retirement? Are you saving and investing $50,000 per year? How about $25,000? $10,000? I’ll leave the math to you.

How many years of your freedom is that new car worth to you? Keep in mind, $530 and $381 are only the average car payments. Is yours higher?

By simply realizing that cars can last 200,000 or even 300,000 miles these days, we open ourselves up to the idea of never having a car payment again.

Are you willing to be different and drive an older car in exchange for several extra years of freedom?

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