Your Car Payment Is Costing You $1 Million

How would you like to have an extra $1-$2 million dollars when you retire?  It’s easy (or is it?).  Don’t fall for the trap of having a car payment your whole adult life.  I’ll show you how having a payment on my car almost cost me $1.1 million!

When it comes to cars, most of us in today’s culture have accepted one of two things. 

• We have a “nice and reliable” car with a car payment (using debt)
• We have a "beat-up old clunker" car that gets us from point A to point B (sometimes) but we’re not sure just how long it will stay on the road. 

I propose there is another option:

• We can have a decent car without the debt payment and have $1 million extra in our retirement account.  Let me tell you how my car payment almost cost me $1.1 million.

When I was 25 years old, I got my first “big boy” job working full time and making decent money.  I decided with my new raise, I’d be able to afford a good car for myself so I went out and bought a vehicle with a car payment (because now I could “afford it”).  It was a dark blue Mitsubishi Eclipse GT.  Of course, like most people, I financed the car but since I was a “responsible adult” at the ripe age of 25, my payment was a reasonable $250/mo.  Then, 7 years later, I did the same thing again.  I sold that vehicle and purchased another one with a $250/mo. payment.  Considering the average payment on a vehicle is double that in 2020, this is a conservative model.

The national average for a new car loan in 2020 was $550 and almost $400 for a used vehicle.  Let’s just take my example for a minute though.  If I kept my $250/mo. car payment, I’d be paying $3000 per year right? ($250 x 12 months).  If I kept that car for 6 years, then replaced it (with debt) increasing the payment to just $50 more per month because of inflation or getting a nicer car, and did that every 6 years from age 25 to age 65, I would have paid a total of $195,000 for 7 vehicles in that span.  I know this is a lot of math but stay with me here.  If I invested that same payment into my retirement account averaging a conservative 8%, that $195,000 would be valued at $1,164,679!  

What if I didn’t start at $250/mo. but had the average national monthly payment around $500?  My payments over those 30 years would be $390,000 for 7 cars and the total investment would have been $2,329,357!

Knowing that…here is a question to ask ourselves:  Do I like my cars enough to keep the payments and sacrifice the $1-$2 million in retirement?  If the answer is “Yes”, then go on about your business just like you’ve always done it.  If the answer is “No”, I would ask another question:  How do I get rid of the car payments and still have a nice car to drive?  This is where some planning and being intentional come into play.  I took the route of stopping the cycle and I sold the car, got rid of the payment, and started getting my finances under control.

I’ll be upfront with you.  It’s going to take some sacrifice because unless you have a pile of money sitting around, you’ll have to drive a clunker car until you can save up the money to pay cash for your next vehicle.  I drove clunker cars for 4 years while I got my financial act together, but now I have no debt and am saving and investing properly.  You might be thinking this is a great idea if you were 25, but what if you are 45 or 55 or 65 years old?  This is where we need to do even more detailed and specific planning, but I guarantee you, you’ll be in a better financial position than you’d be in if you didn’t take this step.

Once you pay cash for your first car, you are ready to start paying yourself that monthly amount for your next upgrade and/or invest it in retirement to net that $1-$2 million we were talking about earlier.  The choice is yours.  This is just one small piece of your overall financial plan that will determine whether you are in a solid financial place or stuck in the vicious cycle of payments for the rest of your life.