Why do so many people put off investing, but don’t think twice about taking out a car loan? So many people will delay retirement contributions, yet have two brand new cars parked in the garage of their 3,000-square foot house. The problem is that people tend to be short-term planners. They can afford the monthly payments, but they don’t look past that 5-year loan. If we could shift our focus to becoming long-term planners, we would realize that we really can’t afford that monthly payment. How much is that car payment REALLY costing us?
First, we need to factor in not only the cost of the vehicle, but the interest and opportunity cost of that car. The average car loan is around $30,000 with average auto loan rates around 4.5%. With a 5-year auto loan, the total cost of the vehicle is $33,557. Now let’s assume you invested that $559 per month for 5 years instead of buying that shiny new car. We will assume an average return rate of 7%. At the end of that 5-year period, your $30,000 investment is now worth $41,276. You have made $11, 276 off of your investment! On average, a car loses around 60% of its value after 5 years, so after 5 years your $30,000 shiny new car is now only worth $12,000. You have lost a total of $21, 557. Ask yourself, after 5 years, would you rather have a depreciating asset worth $12,000, or would you rather have a growing investment worth $41,276? Stop investing in shiny new toys, and start investing in yourself. It could be the difference between sitting on a beach and eating delicious seafood, or sitting in a shack and eating a can of fancy feast. Two cans of fish and shrimp feast please?