DISQUS

Matt · 1 year ago

Did he have any good recommendations for mutual funds that consistently returned 12%? ;)

It's a great idea though.

Money Matters · 1 year ago

Yeah, i haven't gotten that information quite yet. Like I mentioned, it does
depend upon certain assumptions, that being one of the major ones. When i
find that fund, I'll let you know ;)

Momma @ Tales From The Road... · 1 year ago

That's definitely food for thought. I've heard the suggestion before that you should put the amount of your car payment into savings for another car when you've paid off the first one. We've just been putting all that extra money toward the bills though.

Money Matters · 1 year ago

Yeah, we own both our cars with no payment right now and we just ended up
putting the extra money towards other bills like you say. Now all we really
have left is the mortgage so maybe we'll start on down this road of saving
in advance for our cars.

FFB · 1 year ago

Is that really the average car payment or just what Ramsey assumes? That seems like a lot.

Nice idea though! When we finished our car payments we kept putting the amount in our ING.

Money Matters · 1 year ago

Ramsey got that figure from a study that found that 1/3 of car buyers have a
6 year loan for a $26,000 car with 9.6% interest - which gives you a payment
of $475. I know I would never personally pay that much, but apparently a
lot of people do. My most expensive car ever was $7,000.

Aaron Stroud · 1 year ago

Finding a fund that returns 12% isn't the only problem with the assumptions. Next you have to subtract 3-4% for inflation and another half a percent (at least) to account for the mutual fund's expense ratio. That drops the return to the 8% range, which will not happen every year.

I'd prefer to estimate with a more reasonable return, say 5%. When you deal with more realistic numbers, the compounding isn't nearly as impressive.

Steward · 1 year ago

Aaron, you forgot to mention capital gains taxes as well!

I still agree with the idea of saving up to buy a car though. Minimizing the amount of interest you have to pay other people is really the (second) best thing you can do when buying stuff that you need. I just don't think that realizing a 12% return after taxes, inflation, and expense ratios every year is even close to being realistic. But it sure would be nice ...

Aaron Stroud · 1 year ago

Thanks for catching that Steward. There are few mistakes worse than forgetting to pay them.

There are some ways you can legally avoid taxes. For instance, you could put your car savings into a Roth IRA, letting your contributions grow until it's time to buy your next vehicle. Then you could take the contributions back out, taking care to leave the earnings behind. That way your interest can at least keep working for you over the years.

Of course, this strategy presupposes you're not using your roth to save for retirement.

Llama Money · 1 year ago

Then there's also the not small problem of selling a car a year later, for the same price you paid for it. If you get a great deal on the car, maybe. You'll also need to have some serious car knowledge, as well as some good selling shoes.

I think this is one of those ideas that sounds great in a magazine. When you crunch the numbers and try to apply it in real life, meh not so much.

Saph-Walk With Me · 1 year ago

Numbers may not be realistic but I like the principle behind it. Definitely something I need to implement.

Funny about Money · 1 year ago

Exactly! That's precisely what I figured out after I paid off my first Camry, whose payment was about $300 a month. The thinking was along these lines: "Uhmmm.... If I can afford a $300 car payment every month, I can afford to put the $300 into a mutual fund. Why don't I put it into short-term corporate bonds (a relatively safe, conservative investment), drive this car until it does a one-hoss shay, and see what I can buy with that many years' worth of car payments?"

Next car was a new Sienna, paid in full, in cash. :-)))

Money Matters · 1 year ago

awesome story - it can work!

Phil · 1 year ago

I totally agree. The point of the whole thing is to get out of the car payment mentality and get into the "pay for it" mentality. If you save up and pay for it, instead of paying payments on it, then you're going to be way ahead. Even if your savings only yields you 6%, that's still better than paying 8%, especially on a depreciating item.

It also changes the way you go about buying a car... you'll buy less car when you have to save up and pay for it than if you just sign your name and drive off.

Money Matters · 1 year ago

very good point. Before this class I've always bought used cars anyway, and
never got a loan for more than 3 years. I think now we'll do our best to
save up instead.

pixie43 · 1 year ago

There is something very liberating about walking into a used car lot and asking the best price they will give you on something you like for cold, hard cash.
I love the way the saleman's jaw drops open when you say we don't need finance, nor do we need our finance approved.
This is exactly how much we want to spend and by the way are you still interested?