The # 1 Payment Preventing You From Building Wealth
When we think about what is preventing us from getting ahead financially our thoughts tend to land on big things that seem out of our control, like the housing market, student loans, or maybe just the high cost of everyday living. But when we take a close look at what is draining funds on a monthly basis, one of the biggest ticket items on the list may actually be our car payment. In fact, the average monthly payment for a new car has reached $523 per month with an average term of 68 months!
A new car is often one of the first big ‘adult’ purchases we make, and we have come to accept this payment as an ordinary monthly expense. But it is actually this large monthly fee that prevents you from building wealth and making investments that will make you money. For some, owning a car is a necessity, and a monthly payment is unavoidable. But an expensive car payment is almost always a choice.
A car loan has become a cyclical thing for many people: we buy a car, pay it off or trade it in, only to upgrade and enter into a new loan. But if you were to buy a car at the age of 20 and make payments of $500 a month for ten years, you will have spent $60,000 on car payments alone, not including the extra insurance premiums you pay for owning a new vehicle.
Imagine if you buy an older car for $10,000, pay for it in full and drive it for those same ten years. Instead of spending $60,000 on car payments, you will have only spent $10,000 during that time and could invest the remaining $50,000. Over the course of 10 years, if you invest $5,000 each year at a 4% annual return, you will have almost $63,000 you could put towards a down payment on a house.
When it comes to car payments, people tend to look at the monthly cost and not the long-term loss. Yes, purchasing a new car offers instant gratification, but wouldn't it be more satisfying knowing that your investment is making you money, rather than investing in something that depreciates the second you drive off the lot?
To get financially ahead and focus on investments that will make you money, rethinking large unnecessary monthly expenses has to be front of mind. The feeling you get from these types of purchases is fun but temporary and actually undermines your long-term wealth. So, before you head to the dealership to sign on the dotted line, take the time to ask yourself, is the new car smell really worth the cost?