I don’t know about you, but I’ve always wanted to drive a foreign sports car.
Imagine the moonroof open, accelerating like there’s no tomorrow and the breeze blowing through your hair — it’s a dream worthy of pursuit. Or, so I thought.
My first car was a 1996 red Pontiac Grand Am. I bought the car back in college — it was the first car that was fully my responsibility. I made the payments that I believed were just part of owning a car. Looking back, I laugh.
Now, I don’t know about you, but I had an awesome grandmother. You know, the kind of grandmother that you wish was your grandmother, too. How did she display her awesomeness? I’ll tell you.
My grandmother offered to pay off my Pontiac Grand Am as a gift for my graduation. This was amazing. Upon graduation, I no longer had a car payment. Most drivers today can’t say they have a car they own outright — having no payments whatsoever! I felt as if I had hit the lottery. Later I would learn that I practically did.
The sad day eventually came when my grandmother passed away. Kindly, she bequeathed her car — a 1998 Chevy Lumina — to my care. I nicknamed it “The Lu” and had some decisions to make. Should I keep the car or sell it?
While I was driving The Lu, I learned a few valuable lessons — at least they became more cemented in my mind. Today I’d like to share with you the lessons I learned. If you learn these lessons too, who knows, you just might end up with more wealth than you ever thought possible.
1. Car payments stink. When I was driving The Lu, an important lesson pierced my soul: car payments stink. Sure, The Lu had a wet cat smell at times, but it smelled better than having a car payment when I was first starting out as a financial advisor.
Back in college, I took a finance class in which the professor asked a question:
“How many of you plan on buying a new car every three to five years?”
I raised my hand along with many of my classmates. Then my professor said:
“Enjoy making your car payments for the rest of your life while I take my family to Europe on vacation whenever I want.”
At first, I was confused. Later, I discovered he had a point. But his point didn’t fully sink in until I had a few years of experience driving cars like The Lu which had no car payment. When you don’t have a car payment, you save a whole lot of money.
Imagine saving $400 a month because you don’t have a car payment. That’s $4,800 a year. Imagine doing that for three years straight — you would have $14,400. That will get you a pretty decent vehicle if you ask me!
2. Saving for retirement trumps having a car with a car payment.What if you took the money you’re saving on car payments and put it toward your retirement? Let’s say you have 30 years until you retire and you’re expecting an 8 percent annual return on your investment. If you invest $400 a month, guess how much you’ll have in your portfolio when you retire?
I’ll give you a moment to guess.
If you just put it into a savings account that yields no interest, you’ll have $144,000 at retirement. Not bad!
But how about that investment account? If you put it in there, you’ll have $587,260.29 at retirement. Now, this isn’t figuring in inflation or the effects of volatility, but it should give you a good idea of what you’re giving up by driving a car with a payment.
When I was driving The Lu, especially when I became a financial adviser, I kept in mind my professor’s advice and fully realized that saving for retirement is more important than a car payment.
Now, am I saying that you should never have a car payment? Not at all. But I am saying that there are more important financial goals than having a car payment, and saving for retirement is certainly one of them.
3. Learn early. I’m convinced that driving The Lu without a car payment enabled me to put what I would have been spending on car payments to better use. But I’m also convinced that learning this lesson early in life has and will have unforeseen benefits into the future.
By learning these valuable lessons early in life, the rest of my life will naturally be easier than if I hadn’t learned the lessons. In a way, lessons learned early have similarities to the concept of compounding.
How many more times will a young person be able to put into good use the lessons they learned earlier than those who are older? How many ripple effects will make their way through time and space to make that young person’s life so much more productive and satisfying?
Now, you might be saying: “Okay, Jeff, I understand I need to learn early, but you’re missing something — I’m not so young anymore. Is there hope for me?”
Of course there’s hope for you. But there’s going to be less hope if you take action later instead of now.
When I was driving The Lu, I realized that I was going to benefit from learning a few financial lessons about vehicles early in life. If I had shrugged off my professor’s advice, I probably would have been driving a BMW with a big fat car payment that I really couldn’t afford. That might have led to me buying other things I couldn’t afford.
It’s almost as if small decisions — like the decision to keep The Lu for a few years — can put people on a course that changes the rest of their lives. One little change now may result in a very different future.
What Should You Do?
Perhaps you have a few decisions you need to make regarding your vehicles. Maybe you have car payments and you’d like to experience the freedom that I found. It could be that there are a few other financial changes you need to make, too.
Whatever it is that’s on your mind, think about your future. Are you doing yourself a favor over-consuming instead of saving and investing? Of course not. While nobody can predict the future, there are some things you can do to slightly change your course to — in all likelihood — discover a better financial future.
You should do the right thing. Sell the expensive car you can’t afford. Pay off your debt. Learn about investing. Make long-term goals an immediate concern along with your short-term goals. I promise you, those are decisions you’ll never regret.