Recent Posts

Monday, January 21, 2013

How to Make One Million Dollars by Driving a Used Car and Investing the Car Payments


You can make $1 Million by driving a used car instead of making car payments

The concept is that you can accumulate $1 million with the following process:
  1. Drive a used car (or no car).  Therefore, you are not making car payments each month.
  2. Instead of making car payments, invest the amount of the car payment each month
  3. The investment grows over time and you continue to invest the amount of a car payment each month until the value of your investment reaches $1 million

Sounds simple enough.  But would it work?  How long would it take to reach $1 million by investing money rather than making car payments?

Part 1.  The Car Payment

We need to pick out a car in order to determine the amount of the car payment to use for the analysis.  Why not the new Lincoln MKZ with retractable roof?

New car in showroom
Lincoln MKZ
Image courtesy of Mariordo - Mario Roberto DurĂ¡n Ortiz CC-BY-SA via Wikimedia Commons 

Let’s use Lincoln’s build and price tool to figure out the sale price and then the car payments.  Here are the options we'll include:
  • Hybrid (same price as conventional motor)
  • Add Nav system package for $3000
  • Retractable roof option for $3000


Net Price: $42,965
Car payment: $811 per month.  
This is the car payment for the MKZ with 60 month financing at 5% APR.

Part 2. Invest the Car Payment

But rather than buying a new Lincoln MKZ and making car payments of $811 per month, we'll invest the money instead.  

Further assume that we will not make car payments in the future either and continue to invest this amount of money.  This would be like someone buying a new car every 5 years and getting a new car loan each time rather than using any of the residual value of the 5 year old vehicle toward purchasing the next new vehicle.  Not an unreasonable assumption- the person may keep driving the 5 year old vehicle and not trade it in, or could sell the 5 year old vehicle and pay off higher interest bills instead of putting that value toward the purchase of the next new car.  So we'll assume these $811 per month payments go on indefinitely
.
How much return will we get on our investment?  No one can answer this with certainty, so let's use the long-term historical return of the stock market since 1929, including the crash, to present.  Using a large set of data that represents the modern economy seems like the best we can do to estimate long-term future rate of return.  The stock market return over this period was 8.8% (4.6%, price appreciation  plus 4.2% dividends).  So we'll assume we'll get 8.8% return on investment over the long haul.

Part 3. Reach $1 Million Over Time

Since we know how much money we are investing and the rate of return, we have all of the information we need to figure out how quickly we can get rich by driving a used car and investing the car payment.  The answer:  27 years.


Shows $1 million in value is reached in 27 years
Investing Car Payments:  Reach $1 Million in 27 Years
Image source: Dr. Penny Pincher


What about Inflation?

The purchasing power of money generally tends to decrease over time.  For example, when I was a kid you could buy any candy bar in the store for 25 cents.  Now, candy bars typically cost 69 cents of more.  This is an example of how purchasing power of a money has decreased due to inflation.  Inflation doesn’t effect all prices equally, but if you want in the future to be able to purchase $1 million worth of goods, you’ll need an amount of money greater than $1 million in the future.

Note for this analysis, the cost of the car does not change over the years.  We could ratchet up the amount of the car loan every 5 years to include the effect of vehicle prices going up over time, but this detail was not included in the analysis.

The long term inflation rate is about 3% per year.  The effect of inflation accumulates  over time.  Let’s run the same analysis, this time adjusting the future value of your investment for inflation.


Shows $1 million in value is reached at 35 years
Car payment investment reaches $1 Million of buying power after 35 years, adjusted for inflation
Image source: Dr. Penny Pincher


This answer: in order to accumulate $1 Million of buying power in the future, you would need to invest your car payment for 35 years.

Conclusion

  • Driving a used car, or going without a car, is definitely less expensive than making payments on a new car
  • Investing car payments is not a get rich quick scheme:   it would take 27 years of investing car payments to reach $1 million, 35 years if you account for the effect of inflation on the value of money
  • If you started this scheme at age 18, you’d be a millionaire at age 45

Recommended reading:

Copyright © 2013 Dr. Penny Pincher.  All Rights Reserved.  Privacy Policy

No comments:

Post a Comment