Imagine: You don't owe a dime for your car.
Follow this plan and you never will.
Here at Advancing to Greater we focus on providing the insights that will allow the curious internet wanderer to find nuggets of wisdom. This one may be among the finest.
70% of Americans have less than $1,000 in savings, according to a recent nationwide survey.
This forces people to borrow for their cars. Half of all car sales are financed at the dealer.
The average car payment is now $500 per month! The average loan is over $26,000!
This is still too much for many people, so the lenders have to extend the loan term in order to be able to afford the monthly payments.
The average car loan was for 69 months in 2016!
Now one-third of loans are for 73-84 months. That means those borrowers are paying for a long time on a rapidly depreciating asset and they'll be underwater on their car loan until year 6 or 7!
That's crazy.
Here's how to do this right.
Let's say you want a new Toyota Corolla with all the goodies. It's a great car, reliable, and fun, but not too fancy. Those go for about $24,000 now. That's a $400 per month car payment.
A basic 2005 Toyota Corolla in good condition in my area goes for about $2,300 now. So, instead of going into debt to buy a car, you save up and buy that for cash. Then, you take the monthly car payment that you would have had with the new car and you set it aside in your savings account that you have for your next car. In ten months, you take that $4,000 you have saved up, you sell your 2005 Corolla and get back probably every penny of your $2,300 that you paid for it, add that to your $4,000 and you take your $6,300 shopping and you buy a much nicer, newer Toyota Corolla.
You keep paying yourself, and not the bank, that $400 per month payment that you were ready to sign up for, and in another ten months, you sell your $6,300 car for about $6,000 and you add to that your $4,000 in savings and you go buy a much newer, nicer $10,000 Corolla.
In just twenty months you have majorly upgraded your ride - and you've done it while never owing the bank a penny.
You keep doing this until you have as nice and as new a Corolla as you want - or whatever other car you want!
Once you have that car, you keep doing this, keep paying yourself a car payment - heck, go crazy and start setting that money aside in an investment account, earning the market's rate of return and in 10 years, you'll have over $68,000 at 7% per year, average!
If you get 10% per year, average, you'll have over $79,000!
That means that you can buy a nice new car, and still have money left over earning interest for you!
If you took out $40,000 and bought yourself a new car with that and you left $28,000 in the account and you kept contributing to it at the same rate, you'd have about $68,000 in the account again in 5 years!
If you wait a few more years, you have over $120,000!
At that point, you can have new cars, essentially for free, because the gains alone will be paying for your next car each time! Free cars forever!
Then you can start using that extra cash for your retirement - because your car purchases are paid for, forever, by your patience and smarts.
Here's a tool that you can use to play around with these numbers yourselves. The power of compounding is incredible!
Here's Dave Ramsey's version of this idea.
**Advancing to Greater Pro Tip:
Never buy a new car. Always buy used. They can be nearly new, but they cannot be new. This will save you so much in the long run! Cars depreciate at a spectacular rate!
