If you buy a brand new car when you’re in your early twenties, you’re paying $1,000,000.
How do I come up with that figure? Let’s take that yellow Camaro that has been tormenting you from the dealership as you drive by every day. The sticker on that bad boy is about $26,000.
Of course, you don’t have that kind of cash. But no problem! The salesman, who is only interested in what’s best for you, offers financing. And what a great rate…6% over 72 months.
You’ve got your old beater that the salesman (who is a walking encyclopedia of football stats…what a cool guy) offers you $1000 for trade. Man, no way could you have sold that rustbucket for a grand. This salesman is your best friend EVER.
After some taxes, titles, transportation fees, and little inconsequentials like that, your payment comes out to about $446 per month. What a deal. Joe salesman shows you the amorti-something schedule, but you’re staring at your new baby out in the lot, so you just nod and cast a quick glance at his computer screen.
Had you bothered to look, you would have seen that your new toy will cost you a total of $31,945. But hey, that’s the cost of living. Everybody does it.
How many payments left?
Fast forward 4 years. Your baby is getting a little long in the tooth. She’s got over 100,000 miles on her now. Maybe it’s time to trade her in. And Joe–what a guy–has just sent you a letter telling you he NEEDS a used Camaro just like yours and will give you a hell of deal on a trade. Of course, you still 24 months in payments. No biggie, we’ll just roll that into the new loan.
Investing and the million dollar equation
“But Ron, that’s still not a million bucks,” you say.
Oh yeah…that. Well, let’s not even worry about the $32,000 you just dropped. Let’s just go with that initial $26,000. You’re maybe 24 years old. 40 years from traditional retirement age. So we’ll take this two ways.
Let’s invest $25,000 into a mutual fund that returns a rate of 10%, which is below the long term Dow average. In 40 years, with no other investments, you’re Camaro is now $1.4million. You’ll retire in luxury.
Oh wait, you don’t have $25,000. But you’ve got $446 per month. That’s easy. Let’s just invest that every month for the next 40 years. Well now you’ve got $2.8million. Whoa…you could buy the dealership for that.
Or, if you’d rather retire early with only $1,000,000, you could pull that off in 30 years. You’d be in your early fifties. Still young and strong and with plenty of good years ahead of you.
Wealth or Debt
Get the picture? You’ve got two choices: buy the Camaro and start an endless cycle of debt piling on top of debt, or buy a decent used car (like some other sucker’s 4 year-old Camaro) for $5,000 cash, which you’ll save for a couple years. Then invest a regular amount every month to ensure you’re quite comfortable when you won’t be able to work as hard as you can now.
But, if you really need that yellow Camaro, don’t let me stop you. I hope that new car smell is worth $1,000,000.