She was my pride and joy.
A champagne colored 4 door '98 Chevy Lumina Sedan that was suitable for a grandmother to drive.
In fact, one did – mine. My “Nanny” to be exact.
Before the Lumina I drove a 4 door '96 red Pontiac Grand-Am. (Guess I had some weird obsession for 4 doors, huh?)
I bought the car when I first moved back to Illinois to attend junior college. It was the first car that I was actually responsible for the payment.
Either way, I was ecstatic. I was driving a car and it was my mine.
I was lucky enough to have an awesome grandmother who offered to pay it off as a graduation gift.
Not having a car payment was huge for me.
Although I constantly visioned myself driving something A LOT cooler, it was still nice having extra cash to enjoy life. I was supporting myself all through college (with the help of the National Guard) and shelling out $250 a month for a car payment just didn’t feel right.
A Valuable Life Lesson
That wasn’t always the case.
I had this vision that once I graduated and got a real job I’d be driving something sporty like BMW. If it wasn't a BMW, it was going to be something foreign for sure.
Anything better than my Grand Am.
Then one day the professor of my Finance 361 class changed my outlook on car payments for the rest of my life. During one of his lectures, he asked our class the following question:
How many of you plan on buying a new car every 3-5 years?
He asked the class to raise our hands if this were true.
I recall being one of the first students to immediately raise my hand. “Heck yeah!“, I proudly thought. I'm buying a new BMW every 3-5 years.
I wasn't the only one to raise my hand. Over half of the class raised their hands with me. The professor's next statement has stuck with me ever since:
“Enjoy making your car payments for the rest of your life while I take my family to Europe on vacation whenever I want.”
At that time I wasn’t really familiar with the concept of time value of money and compounding interest. No one took the time to really explain it to me.
Thankfully, he did.
We ran numbers after numbers and it was staggering how much I was really giving up by shelling out for a stupid car payment each and every month. I now felt foolish for raising my hand.
So What About This Lumina and $2 Million Dollars?
A few years into my career as a financial advisor my grandmother passed away. Among the things I inherited was the 1998 Chevy Lumina or “The Lu”- as my wife called it.
At the time, my Grand Am had accumulated some decent mileage and was reaching that time where stuff was starting to happen: engine lights were coming on, new rattles I have never heard before, and a funky scent from having left my windows down during a downpour (think wet rotten cat smell–ewww!).
The Lumina was 2 years older than my Grand Am, BUT it had 70,000 less miles on it. Although the car was 6 years old it was basically brand spanking new.
I could have sold both cars and used the proceeds for a down payment on the car of my dreams.
Remember the one I raised my hand for in class?
Was it tempting? Absolutely.
I thought long and hard about and for a split second almost gave into my previous foreign car cravings. Thankfully, I gave myself a well deserved “biff-slap” to the forehead and smacked myself back to reality.
Instead, I chose to sell my Grand Am and drive the “11,000 miles fully paid for old reliable” that my grandmother bequeathed me. You now know her as “The Lu”.
Taking that class revealed to me the flaws in my logic on buying brand new cars and prevented me from wasting money on a BMW that I really couldn't afford.
By not taking on a car payment, I was able to sock away some serious cash both in my Roth IRA and my 401k. So much in fact I’ve maxed out my Roth IRA every year I started working (after my 1st year) and I was able to put some in my 401k, too.
I figure that conservatively, I was able to invest at least $400 per month (sometimes more) I would not have been able to if I would have had a car payment.
What Does $400 a Month Really Mean?
Quite simply: A LOT.
This is where it gets fun and you can see some really eye popping numbers. Using the Monthly Compound Interest Calculator you you see below I entered in investing $40 per month and averaging 10% a year (optimistic I know but I’m the forever optimist when it comes to the stock market) until my retirement age of 65.
The calculator reveals I will have $2,883,185 . (seen below) For those which think 10% is outrageous, an 8% return would yield $1,527,399.10. Still not too shabby, eh?
Now, let’s say instead of driving my Chevy Lumina I opted to go and splurge on a new car. This would delay me investing until age 27 thus far decreasing the total to $2,081,337.26; a difference of over $800,00o.
In case you missed it: that’s over $800,000 more in your pocket for just 3 years of early savings!
No Car Payment
The concept of not having a car payment is far fetched for many. A good friend of mine once tried to convince me it makes sense to always have a car payment because he'll always have a warranty.
Yeah, because cars ALWAYS break down? Ummm….not quite.
So am I totally against having a car payment? Actually, no.
What am I against? Convincing me you have to buy a brand new car. I wouldn't even go there. If you don't believe, go here.
While it's definitely possible for people to not have a car payment, one easy rule of thumb to follow is this:
You should be investing more per month than you are making car payments.
It literally makes me sick when I talk to a young couple that are wasting $700 per month on car payments (remember, this doesn't include insurance, gas, maintenance, etc) and are only saving around $100 per month.
Hello!? The last time I checked your car doesn't grow in value. It's not like you can enter in your car payment into a future value calculator like the one above and get excited to see how much your money has grown to be.
In this sad scenario, all the money you dump into your car is worth less.
In the spirit of this blog, that does not make “good financial cents“.
A Valid Argument?
The title of this post boasted how my Chevy Lumina made me over $2,000,000 but my numbers show it only netted me $800,000, so what gives?
Here’s the thing I know: having the discipline to start saving at an early age laid the groundwork to be able to save as much as I do now.
Had I bought a new car and not started saving, my gut says I wouldn’t have started investing at 27. Or if I did, it wouldn’t be nearly as much.
What has actually occurred is I was able to save 2-3 times that amount throughout my 20′s all thanks to driving “The Lu”.
What have you sacrificed that you might prosper later on? How long did it take for you to see an impact from your sacrifice?