In an earlier post I discussed a plan for paying for vehicles with cash. The plan advocated paying the average new car payment ($554 per month according to Experion) into a savings fund for 5 years. The built up savings, around $35,000 (assumes a 2% APR), is then used to purchase a near new vehicle a couple of model years old. Then in the following 5 years the $554 dollars per month is diverted into an investment such as a mutual fund. After the first 10 years, the process would start over. The vehicle purchase timing with the level of savings is shown in the graph below.
Now, you may be wondering about the diverted investment into a mutual fund. The graph below shows how that investment will grow over time. You can see that if you divert your monthly vehicle savings to a mutual fund using this approach that the fund would have a value of $225,000 assuming a modest 6% return on investment. Over 30 years most mutual funds will have a better return than 6%, I’m just being conservative here.
Now, assume you are more like the average American family with 2 new vehicle payments totaling $1,108 per month. Assume you followed this same approach, but instead saved $1,108 per month. Not only would you have roughly $70,000 every 10 years to pay cash for vehicles, but as you can see in the graph below your mutual fund would be roughly $450,000 after 30 years! If instead you purchase a new car every 5 years, you would miss out on $450,000. It is plain to see the benefits of funding vehicles in this manner. Who wouldn’t want an extra $450,000 at retirement! I hope this illustrates how your attitudes and actions toward vehicle purchases can impact your ability to build wealth.
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