How Bad Do You Want That New Car?

You made the last payment on your car and you want to buy a new car. You also want to start getting serious about saving for retirement. The truth is this: you don’t have the money for both. You must decide on which you want more … a new car or start saving money for your retirement. Let’s take a look at the numbers.

Buying the new car

Sale price of the new car: $34,000
Trade-in value of your old car: $8,000
Loan amount: $26,000
Monthly car payment on a 5-year loan: $503
Sales tax at 5%: $1,300
Total interest at 4.6% on a 5-year loan: $4,159 (National U.S average February 2020)
Total Cost of new car: $39,859
>>> Value of new car in 5 years: $12,939 based on average depreciation

Start retirement savings (investment) in a S&P 500 Index Mutual Fund

Monthly investment: $503 (Match auto payment)
Investment period: 5 years
Annual rate of return: 14.8% The S&P 500 annual average rate of return, last 10 years
>>> Value of retirement savings in 5 years: $43,717

5-Year Analysis

Your monthly out-of-pocket money is the same for each … $503. The total expense for the 5-year period is the same. Yet, the value of each is substantially different at the end of 5 years.

Car value = $12,939
Retirement account value = $43,717