Many Americans living paycheck to paycheck find it difficult to set aside money regularly to save and invest for retirement.
Personal finance author and radio host Dave Ramsey has identified a major cause of this situation common to a large number of people: car payments.
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And Ramsey believes that one of the main reasons Americans are having trouble paying their auto loans is that they are buying new cars instead of used ones.
The personal finance advisor cites data from Experian Automotive showing that 8 in 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 says that new car loans have an average duration of 68 months, or more than five and a half years.
By then, Ramsey says, owners are already thinking about buying a new car and starting the process over. And all this money is spent on new cars that lose 60% of their value after five years.
So Ramsey did some math and looked at how that money could be better spent buying a used car for cash. And money that would otherwise go toward car payments could be used to save and invest in retirement.
Dave Ramsey says car payments are destroying his retirement
Ramsey suggests that not having a $725 per month car payment would allow Americans to invest that money in a 401(k) or Roth IRA. With an average annual rate of return of 12%, he says, one could retire with more than $8.5 million after 40 years.
Instead, spending that money on auto loans destroys a person's ability to take advantage of that important opportunity for a financially healthy retirement.
With some sacrifice and discipline, Ramsey says achieving it is possible and emphasizes that dramatically changing your financial future is worth it in the end.
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Ramsey imagines a scenario in which the car a person drives is worth $15,000. Instead of purchasing another new car with a new car loan, the person could keep the car longer and deposit the $725 per month into a money market account.
In two years, that person would have more than $17,000 plus the trade-in value of the car to buy a gently used car without owing the bank a dime.
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Dave Ramsey Offers Other Tips for Money Not Spent on Car Payments
Once a person begins to understand how good life is without a car payment, Ramsey says, they may even drive their current car for a little more than two years.
“What happens if you really get into saving and add $725 a month to your fund for five years?” ramsey asked. “So, in less time than it would have taken you to pay off a new car loan, you could have $43,500 plus your trade-in to purchase a new vehicle in cash.”
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Of course, Ramsey doesn't recommend spending all the money you save on a new car. Once he has saved enough money for his next car, it would be wise to put that $725 per month toward his retirement savings.
“Getting rid of car payments is no fairy tale,” Ramsey wrote. “It just takes planning and patience. And isn't your future worth it?”
“No car, no matter how fancy, can give you peace of mind in retirement. That kind of security comes from having a plan and following it.”
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