One of the biggest purchases someone will make in their life is a car. If you do it wrong, that car can keep you from building wealth.

“My first big boy job! I had to treat myself!!!” is something I see on Facebook all the time. People graduate college (probably already in debt), then they go out & drop tens of thousands on a brand new car because they “deserve it”. Little do they know, spending $40,000 on a car with a $55,000 salary is NOT adulting. You don’t deserve that. You don’t deserve that debt. You don’t deserve $660 monthly payments for 5+ years. Let me explain…

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I want to say this:

I know I am very opinionated on the car topic. At the end of the day, if you want to buy a $40,000 car on a $55,000 salary, go for it. It doesn’t affect my life. But, before you sign on that loan, at least understand what you are getting yourself into. Understand the 5+ year commitment you are making with your money.

First thing first:

A car depreciates in value. This means, the minute you drive it off the lot, it loses value. Every mile you drive on it, it loses value.

Based on these numbers, a $40,000 car after one year of ownership will be worth ~$32,000. Then lose another 15% every year for the next 3-4 years. I know the last few years we have seen cars go UP in value, but that is an exception, not the norm.

Staying with that $40,000 car, if you were to buy it today, put $5,000 down & borrow the rest. At a 5% rate, you would pay $660 a month…. for 60 months. Or for the next 5 years of your life, you owe someone $660 every month. All while the actual thing you are paying for is losing value. Not good.

I know what you are going to say…

“But DI, I NEED a car!”… sure, I am not saying walk everywhere. Heck, I am not even saying buy a $1,000 car that breaks down every week. What I am saying is to think about the opportunity cost of spending $660 every month for 5 years. Let’s say you get a 3 year old car that has 30,000 miles on it. You end up getting it for $22,000. Still a good car, just not brand new.

Putting $5,000 down, at a 5% rate, you would pay $320 a month…. for 60 months. Or a savings of $340 a month compared to the $40,000 car.

Now, let’s say you invested that $340 savings a month, every month, for the 60 months. Assuming an 8% annual rate of return, your investment account would be sitting at $24,982.

So the $40,000 car leads you to have $0 invested & a car worth WAY less than you bought it for.

The $22,000 car leads you to have $24,982 invested & a car worth less than you bought it for.

In both outcomes, the car is worth less. But in outcome #2, you have nearly $25,000 invested after 60 months.

So what is my take…

When it comes to cars, the big purchases can really hinder you from building wealth. In the example above, the person who bought the $40,000 car ends up not having any money invested. The second person has nearly $25,000 invested. While we all (probably) need a car to live, we don’t need to strain our finances to get one. Buy what you can afford, make sure it is safe & invest the money you saved. Your future self will thank you.

Think of it like this… most people end up going with the more expensive car because they are trying to keep up with the Joneses. Why would you buy the $22k car that is 3 years old when everyone else around you buys the brand new $40k car? That is what keeps people broke. They try to play the game & end up like most people… broke.

So to wrap this all up, the amount of money you should spend on a car is enough that you feel safe driving it BUT one that does not take all your investable money each month. If you are spending MORE each month on your car payment than you do your investment account, you are working backwards.

My Buys This Week:

I read a tweet by a Twitter friend of mine who trades stocks. He said to always take profits & buy long term holds with it. So… that is what I am going to start doing. Notice the bump in SCHD buys!

ETFs: $250 in VOO + $781 in SCHD (from options income) +

Individual Stocks: I finally had a day (first time ever) where my dividends were over $25 & so they were auto reinvested for me on M1 on a Tuesday! That is why I have 4 buys this week.

Tweet of the Week:

In spirit of being a car payment post, just wanted to remind you😉

Thank you so much for reading & I will see you next week! Until then, keep buying assets & stacking those dividends. 🙂 

- Decade Investor