Assuming you didn’t end up with a lemon, your vehicle is most likely capable of lasting many years. But maybe the more probing question is can you live with your vehicle for 10 years? Do you maintain it properly and take good care of it so it gives you years of service. Do you gaze lustfully at other newer cars dreaming of how it would be to drive one instead of yours?
I brought up in the previous cost savings post that you might likely purchase 10-12 vehicles in your life. But what if you only purchased 9 vehicles and kept each one for close to 10 years? For starters that would be 1-3 less vehicles you would have to pay for which can easily be $10,000 to $50,000 depending on the type and cost of your vehicles. This way, instead of paying interest to someone for a car loan you would have saved that money and be earning (and compounding) the interest for yourself.
One lie that I believe the auto sales and finance folks will tell us is that a particular car will be the same or lower payments then the one we have or want to trade-in. They know that you’ve gotten used to paying the monthly note and that if they can get you into a brand new vehicle while trading in yours and either keep the note the same or get it lower each month, then they have a great chance of making the sale. Plus if they have you paying a monthly car note, they (or your bank) are making money on the interest. But, what if you kept that car until you paid it off after 5 years? Would you start spending the money you previously spent on other purchases (electronics, clothing, etc.) or would you start to put aside that money for the next 5 years so at the that time, you have the funds saved to pay cash for your next car?
Let’s say you buy a nice gently used or certified pre-owned (they generally have great warranties by the way) and you take out a loan for $20,000 for 5 years at a rate of 2.9%. At the end of the term you would have paid $1,509 in interest. That’s not all bad but let’s make it so you don’t have to pay that interest on your next vehicle purchase. It’s safe to assume that you would have become used to the monthly note of $359.49 for this example. When you pay it off, if you saved the same amount as your monthly payment and compound the interest, after 5 years you would have about $23,800 to purchase your next car. And if you keep the next car for 10 years, you’ll have over $54,000 saved after compounding at the same 5% for 10 years. Presumably you won’t need that much for your next car purchase so you could save the rest for another major purchase or put it into a long-term investment option like your IRA. Now you’ll be paying cash for cars and stashing some away for your other savings goals! That’s a win-win to me.
All that great compounding just by keeping your vehicle for 10 years instead of 5 or less. This is why I love compound interest.