How we finance our cars may be costing us our retirement.
Most Canadians will buy new a car every few years and will do so for the rest of their lives. But more likely than not, more money will be LOST in opportunity costs than will be accumulated in their retirement savings.
The real problem with paying cash.
Recovering Lost Wealth - Financing Cars
Not very many of us realize the real impact paying cash for our cars has on our financial future. We understand that financing anything and paying non-deductible interest is not a winning combination either.
But what if we tried to get ahead of the game and paid cash instead of financing. Is that a winning combination?
This is not best option either. When all this all adds up, the interest we lose when paying cash may be one of the biggest wealth losses we face. Buying cars is a necessary part of our lives. But how you do it can have a major impact on your personal wealth economics.
This is an ongoing problem so let’s address it!
Nelson Nash, author of the best-selling book ‘Becoming Your Own Banker’, says:
You finance everything you buy. When you borrow you pay interest to someone else. When you pay cash, you give up the interest you could have earned otherwise. Pay up or give up. There are no exceptions.
Picture this: you’re 40 years old and you purchase a new vehicle every four years. The average cost let’s say is $40,000. You can finally put enough money away every year to pay cash for the car every four years.
Pay cash? Sounds like a good idea.
If you expect to keep driving until your 80 you will have over 40 years of buying new cars totaling 10 new cars. (If you’re a typical family with more than one car you can multiply this number by the number of cars you have in your driveway).
| Annual Savings to Pay Cash for Autos every 4 years
| Net Rate of Return on Savings
| Cumulative Auto Costs after 40 years
| Value of $10,000 Savings after 40 years WITHOUT Autos
| Value of $10,000 Savings after 40 years WITH Auto Costs
|True Cost of Automobiles
As you can see from these numbers the total cash outlay for 10 cars is $400,000.
But the true cost is $1,177,133!
If the $10,000 annual savings you put away for cars STAYED INVESTED at 5% you would have $1,268,398.
BUT the opportunity cost of exchanging the money for the cars leaves you with only $91,265.
What’s missing is the principal and (the magic of) compound interest it cost you for the cars if the money could have stayed invested!
As Nelson Nash says in his book, Becoming Your Own Banker, “You finance everything you buy. When you borrow you pay interest to someone else. When you pay cash you give up the interest you could have earned otherwise.”
Conventional financial advice never seems to address the overlooked issue of lost opportunity costs when buying cars. Pay cash is best, they say! The talking heads in the media reinforce this as well. Think media mogul Dave Ramsey: who dismissively directs everyone to pay cash in this instance. But aren’t you giving up the interest your cash could have earned?
Learning how to overcome this dilemma is simple and easy. You must create an account where you are benefiting from the ability to leverage in a way that is better than simply paying cash, where you can have your money earning at all times and constantly growing uninterrupted, tax-free on 100% of its value, thus avoiding lost opportunity costs. Dave Ramsey doesn’t address this.
We could call it a SmartFund, but it’s another aspect of the Infinite Banking Strategy.
The difference it can make may mean the difference of either spending your retirement winters on the beaches and hot spots of the world, or having to regularly clear the snow from your driveway during the long winter months.
Click here to learn more about your own Personal Wealth Economics Strategy now!