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Ask Dave

What's So Special About $1 Million?

Angela asks what is special about a $1 million net worth in order to buy a new car. Dave explains his reasoning.

QUESTION: Angela on Twitter asks what is special about a $1 million net worth in order to buy a new car. Dave explains his reasoning.

ANSWER: Nothing. Nothing special about a million dollars.

The point, Angela, is that you actually have a bunch of money to the point that if you buy a $30,000 car and in four years it’s worth $11,000, which is about what it’ll do—it’ll lose about 70% of its value in the first four years according to Kiplinger’s Personal Finance magazine—and all the car rating services that value cars. Look at any four-year-old car versus what it sold for new, and you’ve lost about 70% of your value. Some of them lose 80%, some of them lose 60%. The average is 70%. That’s why they call it an average.

So if you’re going to turn $30,000 into $11,000, you need to be able to absorb that blow. And you need to have a lot of money to be throwing $20,000 out the window of a car. Now you can do it. I’ve got a car that’s that nice and that’s lost that kind of value. It doesn’t bother me. It’s not a big deal, but if your entire net worth is $100,000 and you put $30,000 of it in a car that’s going to lose 70% of its value, you’re just mathematically stupid. You’re buying things that are going the wrong way. We’re trying to build wealth here, not lose wealth.

So there’s really nothing special about $1 million, and I could’ve said $2 million. I could’ve said $900,000. It’s just easy to remember $1 million. What’s special about $1 million is it’s a lot. When you lose a lot and it’s a small percentage of a lot a lot, then you don’t have to worry about it. That’s the whole thing. That’s how it works.

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