In today’s post I’m going to tell a little story about two fictional people. Each of them buy cars at the same time. One of them buys a new car and the other buys a used car. I’ll call them Bob and Mike.
Bob decided he wanted a new car and the car he wanted cost $25,000. He got a $25,000 loan at his credit car at an interest rate of 4.99%. Bob’s monthly payment is $402.51 for 6 years (72 months). At the end of the 6 years when he finally gets the loan paid off Bob will have sent the credit union $28,980.72 ($3980.72 of that is interest). And let’s not forget that new cars loose 70% of their value in the first 4 years. That means that at the end of the 6 years Bob will have paid over $28,000 for a car that is now worth less than $7,500.
At the same time Mike decides to save the same amount that Bob is paying out each month. Mike saves $402.51 a month for 12 months. At the end of the 12 months he has saved $4,830.12. Mike buys himself a good used car for $4,000 and uses the rest for insurance, tax, tags, and big fuzzy dice to hand from the mirror. Now mike continues to save the $402.51 each month for the remaining 5 years. He puts this into a good growth stock mutual fund each month. Averaging a 10% return Mike would have $31,428.94 in the mutual fund at the end of the 5 years. Mike can now, if he chooses, take part of that $31,000 and pay cash for a new car and paying with cash will most likely get him a great discount on that car. So for an example he might be able to get a $25,000 car for $20,000 and still have over $10,000 in his pocket.
So both Bob and Mike paid out just over $400 a month fro 6 years. Bob ended up paying out $28,000 and he has a $7,500 car and nothing in his pocket. Mike paid also paid out $28,000 but has a car and over $31,000 in his pocket. So not only did buying a new car cost Bob $28,000 but it also cost him the opportunity to make the 10% interest that Mike made.
New cars are nice, I’ve had a few, and I’m not saying never buy a new car. What I’m saying is before you buy one look at the opportunity cost. Once you see what the new care will ultimately end up costing you, you might decide a new care is not for you. And if you decide the new car is worth it then at least you are prepared and have made a well thought out decision.
If you have any questions or comments please feel free to comment on this post or E-mail me HERE. Now get out there and Whip Your Money Into Shape.