One of the things that strongly impact a life but is rarely discussed is buying a car.
We are bombarded with car commercials, and it seems so important to regularly buy a new car. So, as I think personal finance is a step above and more important than actual stock picking, today I’ll share with you my strategy regarding cars which has been extremely helpful during my life and has enabled me to do so many wonderful things.
Let me show you how anyone can save a million by buying 5-year old cars instead of new cars.
Buying New Cars Every 5 Years
The average new car price is $30k, and the average depreciation rates are 20% for the first year and 15% for every subsequent year. This means that the value of the $30k car is $24k after 12 months, and $12.5k after 5 years which means a new car owner loses $3.5k per year.
If you always buy 5-year old cars, which are usually good cars, you pay $12.5k and after 5 years, you have $5.5k left in value. Thus, you lose just $1.4k per year.
The difference in buying new and second hand is $2.1k per year. I’m not going to calculate maintenance costs or gas because those are minor and you can save on 5 year old cars just by not being forced to pay dealership rates and for warranties when you buy new.
So, you are left with $17k in savings from not buying a new car, and have $2.1k to add on the savings on a yearly basis. Let’s say that over 45 years, you manage to get nominal returns of 10%—which has been the case for the S&P 500 over the past 139 years when the dividends were reinvested—you get to $1.07 million after 35 years.
If you keep doing that for 45 years, you get to $2.8 million. Need I say more?
We are so focused on finding the best investments, getting the best diversification, and watching stock prices on a daily basis, that we often forget to put our focus on our personal finances. Buying a car, choosing where to live, how often you eat out, having someone wash the windows, buying luxuries that we won’t even remember, or finding a side income by monetizing a hobby can really add up to huge differences over time.
$2k per year really isn’t much, but if invested intelligently over time, we can see how it can quickly turn into a million over just 35 years. A million dollars extra from something trivial like a new or 5 year old car, or any other way of saving $175 per month, can really change your life.
My message for today is to take a day off from the stock market and think about your personal finances. If people paid as much attention to their personal finances as they do with stocks, I think the average retirement age would be around 50 and 65 and above as it is now.