How a $10k Car Can Fund Your Retirement

Your First Car Is Not Just a Car. It Is a Seven-Figure Decision.

Most people remember their first car as freedom on four wheels. Few realize it may be the largest financial decision they make in their twenties. The choice between a pricey new ride and a reliable used one can swing retirement outcomes by millions!

This is not hype. It is simple math of depreciation versus compounding interest working over time.

Cars are depreciating assets in most cases. From the first day you buy it, they start to lose value. In fact, even faster at the beginning! Your first day will be the most expensive day for your car. Houses, on the other hand, tend to appreciate over long periods. Some collectibles do too. The core principle is simple. Spend small dollars on things that go down in value. Save your big dollars for assets that can grow.

Compounding rewards money that stays invested. Here is a simple example at 10 percent:

• $100 grows to $110.52 after one year

• $122.14 after two years

• $271.79 after ten years

• $5,456.82 after forty years

Tiny choices compound into large gaps. A $100 night out at 25 can become more than $5,400 by 65 if invested instead. Scale that logic to major purchases and the impact gets real.

The first car decision

Consider two paths for a new graduate.

• Path A: Buy a $40,000 car with a $30,000, 4 percent, 4-year loan. Payment about $677 per month for 48 months.

• Path B: Buy a solid used car for $10,000. Invest the same $677 per month instead of making a car payment.

Assumptions for clarity:

• Hold cars for 15 years 

• Use typical depreciation patterns

• Invest at a long-term 10 percent average return

• When replacing a car, trade in for full remaining value and apply it to the next purchase

• Keep all figures in today’s dollars for clean comparisons

By year 15:

• Path A has about $165,000 invested and a high-mileage car worth only a few thousand.

• Path B has about $288,000 invested and a worn car that's value is based on how much gas is in the tank.

• This gap is already six figures.

By year 40:

• Path A reaches about $2.5 million invested

• Path B reaches about $4.45 million invested

• Difference: about $1.9 million

What can $1.9 million do? At a 4 percent withdrawal rate, this would produce roughly $76,000 per year for life.

Unfortunately, many people replace the new car every four years when their loan is up. So lets run this example:

• The $40,000 buyer who trades in every four years invests less along the way

• By year 15 the investment balance is only about $60,000

• By year 40 this path reaches about $1.1 million

• The $10,000 buyer who holds cars 15 years still reaches $4.45 million

• Difference: over $3.3 million

That is the cost of staying on the upgrade treadmill.

This may be a lot to ask, but let's consider if you just do it for your first car and hold that car for 15 years and invest the car payments. Buy that first car for $10,000. Invest the $677 each month for 15 years. You will reach about $288,000. Leave it invested for another 25 years. You approach $3.5 million by retirement. At a 4 percent withdrawal rate that is about $140,000 per year of retirement income generated by one disciplined choice early in life.

Bottom line

It may be awfully enticing to get that shiny new car when you get your first "real" paycheck. But if you instead choose the slightly used, way less flashy car and hold it for a long time, then your first car can be your ticket to lasting wealth. Let compounding do the heavy lifting. And in 40 years you may have $3.5M to show for it while your peers have nothing but memories of an old car. 

To learn more, watch this video: https://youtu.be/HNUNX_yuw8M