Shifting Priorities: Opportunities Over Cars

Reflecting on my journey to financial freedom, the decision to minimize car purchases played a significant role in my financial outcome. I was lucky to have realized early that buying cars was like shackling weights to your ankles running a marathon. Building wealth is a long journey so the less weights you have tied to you the further you’re likely to achieve.

In the United States, cars represent one of the largest expenditures for individuals, and unfortunately, they are also among the quickest depreciating assets one can acquire. Let me try to help you imagine the possibilities based on real outcomes in my M1 Growth portfolio project depositing $100-$200 per month compared to purchasing that shiny new car.

Scenario 1: The True Cost of a New Car

You purchase a new 2020 Toyota Camry LE Sedan at the listed MSRP of $26,370. You make a $5,000 down payment and finance the remainder at a 4.5% interest rate over 84 months. This results in a monthly obligation of $326. By the end of the loan term, the total interest paid amounts to $3,935. Fast forward three years, and the car’s value has plummeted to $16,000, while you still owe $14,312.54 on it, having already forked over $11,736.

Scenario 2: The Path Less Traveled, But Far More Rewarding

Or, you initiate a new investment portfolio with an initial deposit of $1,000 and subsequent monthly contributions of between $100 and $200.

By March 1, 2024, that investment strategy would have bolstered the portfolio to an impressive $18,454, given the total investment sum of $9,300, thanks in part to the market’s rebound after a pandemic and the explosive growth of AI stocks. Such an opportunity could easily be missed by those saddled with hefty car payments.

Preparation Meets Opportunity

The M1 Portfolio not only surpasses the depreciated value of the new car but also outpaces the remaining loan balance after the same 3 year period, boasting a return rate of about 98%. While such returns are extraordinary and not typical, they are within the realm of possibility. Redirecting an average car payment of $326 into the stock market during this period may have amassed an amount equivalent to the original price of the car, roughly $25,272.

Keeping Disciplined with the 5% Car Affordability Rule

To navigate the financial waters wisely, I advocate for a simple, effective strategy: the 5% Car Affordability Rule. This rule suggests that you should only spend a maximum of 5% of your net worth on a car purchase. For instance, if your net worth stands at $50,000, your budget is $2,500.

This rule simply serves as a reminder to live within one’s means and understand that you are still at the early beginning of the marathon. The rule encourages individuals to grow into their expenses proportionally to their net worth, ensuring that lifestyle inflation doesn’t outpace financial growth.

Conclusion

It’s important to prioritize investing into appreciating assets over depreciating liabilities especially in the early stages of wealth building. In the early years your savings carry the burden of wealth creation as overtime your assets do the heavy lifting.

Till you get to that point, its crucial not to make the journey more difficult than it has to be.