Car Buying: A Way to Save a Fortune

One of my neighbors was telling me about the car he was thinking about buying.  It’s not a flashy car, and he is very happy that he’s making a “frugal choice.”  Because it’s winter, he is concerned about driving in the snow and ice that is all too frequent in the Northeast, so he is buying a Subaru wagon with all wheel drive.  The car is a few years old and has roughly 50,000 miles on it.  The mega-store that has a no-haggling price structure is selling this particular car for ~$20,000.

His most recent car payment will end next month and he is giving that car to his daughter.  His car payment will be about $400/month, which is almost identical to his prior car payment.  The car he had prior to that resulted in a $400/month payment, as was the one before that.  All were 5 year loans.  So, in essence, he’s had a 15 year, $400/month car payment.  This made me wonder about other people I know with car payments, so I made a few calls to friends.  It turns out that several people I know just accept a car payment as a given in their financial life.  And, $350 to $500 seems to be the payment that is accepted.

I’m a bit of a geek (I know, tough to believe, right?) and don’t really care all that much what my car looks like.  I usually buy older cars (~5 yrs old w/60,000-80,000 miles), and try to drive them until they have at least 300,000 miles or completely die, whichever comes first.  Once I get to 300,000 miles, I set a new goal for 400,000 miles.  One of these days, I’m going to get a car to 1,000,000 miles.  Unfortunately, the last 2 cars I’ve gotten close to 300,000 have been hit by another driver and considered a total loss by the insurance company so my goal has not been reached yet.  My friends have laughed at my cars’ appearance a lot, so I hope they read the next paragraph closely.

Back to my neighbor’s example, and I hope this makes you think about the REAL cost of car payments.  At the end of the loan on his new (new to him) car,  he will have been paying $400/month for 20 years.  If he had invested that $400 and earned 6% for 20 years, he would have $185,000 (or $235,000 at 8%;   $303,000 at 10%).  With the cash he saved, he could buy any car he wanted in cash, and still have a sizable account that could be used to fund his retirement.   He may end up working 5–10 years longer than he has to solely because he has bought into the concept that a car payment is just “normal” and “everybody has one.”

When you are ready to buy your next car, ask yourself how much you are willing to truly pay for the new car smell.

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