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Many Americans who live paycheck to paycheck find it difficult to regularly set aside money to save and invest for retirement.
Personal finance author and radio host Dave Ramsey has identified the main cause of this predicament shared by a large number of people: car payments.
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Ramsey believes one of the main reasons Americans struggle to pay off their car loans is because they buy new cars instead of used ones.
The personal finance coach cites data from Experian Automotive showing that 8 out of 10 new cars are purchased on a lease, while the average new car loan is more than $40,000 with monthly payments of $738. The data also indicates that new car loans have an average term of 68 months, or more than five and a half years.
By then, Ramsay says, owners are already thinking about buying a new car and starting the process over. All this money is spent on new cars that lose 60% of their value after five years.
So Ramsay did some math and looked at how that money could be better spent by purchasing a used car with cash. Money that would have gone toward car payments can be used to save and invest in retirement.
Dave Ramsey says car payments are ruining your retirement
Ramsey suggests that not having a $725 monthly car payment would allow Americans to invest that money in a 401(k) or Roth IRA. He says that based on an average annual rate of return of 12%, one could retire with more than $8.5 million after 40 years.
Spending that money on car loans instead destroys a person’s ability to take advantage of that important opportunity for a financially healthy retirement.
With some sacrifice and discipline, Ramsey says it’s possible, and he stresses that dramatically changing your financial future is worth it in the end.
More about Dave Ramsey
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Ramsey imagines a scenario where the car a person drives is worth $15,000. Instead of buying another new car with a new car loan, a person can keep the car longer and put $725 a month into a money market account.
Within two years, that person would have over $17,000 plus the car’s trade-in value to buy a good used car without owing a dime to the bank.
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Dave Ramsey offers other suggestions for money not spent on car payments
Ramsay says that once a person begins to understand how great life can be without a car payment, they might drive their current car for a little longer than two years.
“What if you really got into the saving spirit and added $725 a month to your fund for five years?” symbolic Requested. “Then — in less time than it would take to pay off a new car loan — you could have $43,500 plus your trade-in to buy a new Ride with cash.”
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Of course, Ramsay doesn’t recommend spending all your saved money on a new car. Once you’ve saved enough money to buy your next car, it would be wise to put $725 a month toward your retirement savings.
“Eliminating car payments is not a fairy tale,” Ramsey wrote. “It just takes planning and patience. Isn’t your future worth it?”
“No car — no matter how luxurious — can give you peace of mind in retirement. That kind of security comes from having a plan and following through with it.”
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