The Great Car Payment Scam

Please, once you find out what this particular blog is about, read it until the end!
Let's find out what a car really costs, if you make car payments. The car in this example has no make or model, but it does have a price. You paid $30,000 for the car of your dreams. Your payments are $500. a month. Of course the car is brand new! Let's take a look at how much your new car will depreciate over the next seven years. On average in 3 years your car will depreciate $12,576 to a value of $17,424. Remember you have a five year payment plan, so you still have to pay on this vehicle for 2 more years. In five years it will have depreciated $17,263 to a value of $12,737 on average. So, after you have made car payments for five years on a $30,000 car, it is worth $12,737, that hurts! What about the value in seven years: it has now depreciated $20,797 to a value of $9,203. That is truly a depreciating asset! Oh, sure we all know that cars cost of lot of money to own and operate, but it is good to put it into actual numbers just to get a feel for the actual dollar output. I am not going to list the costs for gasoline, oil changes, timing belts, tires and unexpected maintenance. Of course there are license fees, registration, and auto insurance. And the newer the car, the more it costs!
OK, let's see what the money would be worth if we could earn 8% compounded over the long term. First, how well would the $500 per month do if you put it into a no-load mutual fund and earned 8% during the five years, and your starting amount was $0.00. In five years it would be worth 35,853--not too bad, what if we take the end amount, $35,853. and compound it for 20 years by just leaving it in the same great no-load fund it has been in. The value after 20 years of compounding is $167,109. To me, that sure beats a new car. Obviously the market does not go up 8% per year every year, it is up and down. Still the Vanguard S&P 500 fund has earned 8.51% for the ten year period and 12.10% since inception in 1976 (these numbers are as of 10-03-2006). {I am not advocating this mutual fund--this is just an example} So the proof is there!
So, the next time you want that really nice car put a pencil and paper to it and run the numbers. Do you really want to lose that much money for a new car smell and a fancy ride? If you have your wealth built and all the assets you need to retire, and your obligations are nil or very low, then, why not treat yourself! But, if you want to help pay for some of your children's college, or your retirement plan contributions are anemic, consider the alternative and how the money could help you in the long term. Don't worry about your best friend, brother-in-law, or neighbor, they may be driving something fancy, be thrilled knowing your are building money for long term needs--appreciating assets that make you money are much more fun. It is kind of crazy how you can brag about a new car---but most people are offendend if you say you are maxing out your 401k and Roth IRA's, and that you have an emergency fund to cover expenses that arise. Take the financial stress out---build assets instead of big expensive adult toys! Clark