Used Cars are the Road to Riches


Ask SmallIvy

Today we reach the last item on the list provided in 10 Dirt Simple Rules of Money Management.   (Note, as always, you can find all of the posts in this series by choosing Dirt Simple from the category list in the sidebar or searching for Dirt Simple in the site.) Today we cover the tenth rule:

10.  Don’t buy new cars unless you have a new worth of at least million dollars.  Otherwise, buy quality used cars that you can afford with cash. 

As I explain in Would You Drive a Used Car for A Million Dollars,  you can have a million dollars by the time you are in your fifties if you just buy a used car (four years-old) for cash instead of a new one on payments due to the savings on the depreciation and the interest payments.   By the time you are 69, you can have $4 M – enough to cover your retirement – just by buying used cars and investing the savings.  And that is just for one car.  If your family has two cars, as many do, you could have $8 M at retirement.

The reason is that cars depreciate, on average, about half of their value in a four year period.  This means that if you buy a $20,000 car when it is new and trade in every four years, you’ll be spending $2500 per year on just depreciation.  If you buy a four year-old car instead, you’ll only be paying $1250 per year.  Keep that same car from years eight through twelve and then trade-in, and you’ll only pay $625 per year for those years.   By buying used cars, you’ll have over a thousand dollars a year to invest.  This doesn’t even include savings from not paying interest if you buy the used car for cash instead of taking out a loan.

One of the big reasons that people give for not buying used cars is that they need reliability.  Perhaps they remember a neighbor with an old car that would start about half of the time.  Well, in reality, todays cars are a lot more reliable than curs in the past.  Many cars routinely go more than a quarter million miles with few problems.  Most breakdowns can also be avoided simply by making sure routine maintenance is performed on schedule.  Really, if you have the hoses checked about once per year, make sure your oil level is good each time you stop for gas, and check your transmission fluid level every month or so, your chances of having a breakdown are very low.  You can also have a mechanic check over the car before you buy it for issues.  A car with a clean bill-of-health will probably give you many carefree miles.

So stop paying the high price of used cars.  In four years, your car will be a four-year old car and you’ll have paid a lot more for it.  That new car smell might be enticing, but it really isn’t worth the price.  Once you’re a millionaire, you can buy a new car if you would like.  But even then you may decide it isn’t worth the cost.

Got an investing question?  Write to me at VTSIoriginal@yahoo.com or leave a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

3 thoughts on “Used Cars are the Road to Riches

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  1. That’s definitely a good strategy. The newest I’ve ever bought is 3 years old. However, that strategy only works if a) you actually invest your savings, b) you’re patient about holding your investments for the very-long term, and c) you don’t end up buying way more house than you can afford and lose the savings in mortgage interest. However, most people prudent enough to own used cars are also less likely to want a monster-sized mortgage, so if they practice a) and b), they should be on their way to healthy retirement savings.

    My only question is, how would a $1,000 per year savings multiply into $4 million for retirement? I (finally) understand the power of compounding, but I’m wondering what sort of time frame this involves? Guys like me only have about 20 years left to work with!

    1. Thanks for the comment. The time frame for the million dollars in 45-50 years (starting when you’re twenty and saving/investing/working until you’re 69). It also assumes something like a 14% return and a yearly investment of $1200 (100 per month). You can use an investment calculator and do some of your own what-if calculations:

      http://www.daveramsey.com/blog/investing-calculator/#/entry_form

      Unfortunately, most of the money is made in the last years (that’s the way compounding works), so you need to start early to get those sorts of results. With $1200 invested per year for 20 years at 14%, you’ll end up with only $141,000. In order to reach a million dollars in 20 years, you would need to invest something like $8000 per year. Still doable, but not as easy as when you’re starting at age 20. Actually, if you could invest $2000 when your child was born and have it grow tax deferred until they retired, they’d be set.

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