How to Eliminate Your Car Payment and Save for Retirement

4 Minute Read

If recent retirement studies are true, day-to-day expenses are keeping at least half of all American workers from saving for retirement. It’s easy to believe that statistic when you consider that we owe $866 billion in car loans alone, according to Experian Automotive.

What would happen to America’s retirement outlook if we got rid of our car payments? Is that goal even possible?

Spending More and Paying Longer

More than 8 in 10 new cars are purchased with borrowed money. The average new car loan amount is $28,400 with payments of $482 at 4.56% interest. Long gone are loan terms of three years or less. The average new car loan term is 66 months—that’s five and a half years! And, the number of loans for six and seven years exploded by nearly 24% last year.

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Take a moment and put yourself in the shoes of the average car buyer. In the best-case-scenario, at the end of 66 months, you’ll have paid nearly $32,000 and have a car that’s now worth maybe $12,000. If you opt for the seven-year option, you’re out at least another $1,000 and your car is worth even less.

Human nature being what it is, you’re not as impressed with your ride as you were so many years ago. So you go out and buy another new car and the process starts all over again.

How Your Car Payment Destroys Your Retirement

This never-ending cycle means you’ve permanently dedicated a chunk of your income to car payments. But it’s not just the $500 a month in car payments that’s eating away at you. It’s the fact that you know by sending that money to the bank, you can’t use it to build up any savings for retirement—and you’re right to be concerned.

Simply put, if you didn’t have a car payment and instead invested that $500 a month in your 401(k) or Roth IRA, you could retire with more than $1 million. That would certainly go a long way toward closing the $4 trillion retirement savings gap Americans are currently facing.

The good news is you can stop the car-buying cycle and start saving for retirement. It will take some sacrifice and a lot of discipline, but it’s worth it all to change your future.

Eliminate Your Car Payment Forever

Let’s say the car you’re driving now is worth $12,000. Instead of taking out another loan to buy a new car, stick with this car a little longer. Save your $500 car payment and in less than two years (20 months), you’ll have $10,000 cash plus your trade-in to buy a nicer, new-to-you car without a loan.

At this point, begin investing your $500 car payment in a mutual fund separate from your retirement account and specifically for car replacement. If you keep contributing $500 to that mutual fund for 46 months, in the same amount of time it would have taken you to pay off a new car loan, you could have nearly $22,000 plus your trade-in to buy a new car.

By now, however, you’ve learned how awesome saving money can be. You don’t mind driving your current car a little longer while your car-replacement fund grows. But you do stop contributing to it so you can start building your retirement fund instead. In three years, without any additional money, you could have $29,000 plus your trade-in for a new car.

Of course you don’t have to use all of that to find another great used car, so you leave a sizeable balance in your car-replacement fund to keep growing until your next car purchase.

Questions? Doubts? Talk With a Pro to See if This Plan Can Work for You

By following this plan and staying conservative with your vehicle purchases, you can get rid of car payments forever! Then by investing your $500 car payments in good, growth-stock mutual funds, you can begin working on that million-dollar nest egg for retirement.

But if you’re doubtful that this plan could work for you, talk with an investing professional. An experienced pro can help you examine your budget and help you follow through on your plan to eliminate your car payment.

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