Sunday, September 20, 2009

The $1,258,221.27 first car

Driving home from Church this morning, more than a little irate at the retired priest's sermon, of which I quote "you have a right to a job, home, and health care. Please call your senators,"* I tried to focus on something else, anything else... and this is what came to mind.

I'm a huge fan of "live like no-one else so you can live like no-one else" financial advisor Dave Ramsey. My favorite Dave-ism is, "Unless you're a millionaire, you can't buy a new car." This is so profound on so many levels, I thought I'd expand upon one of those levels... that rite (or is it a right? *snicker*) of American passage, up there with being dumped at the prom or barfing after too much beer, your first new car.

What's a decent car cost these days? Not a Mercedes mind you, but a decent first car? Something cool like a Mazda 3 or a Mustang? 20k-25k for something a little better than entry level? That sounds about right. Gotta have that nav-system and the satellite radio!

Anyway, for the sake of argument, let's say you graduated from college at age 21** and, as the story goes, trade in your cap and gown for a new Mustang the next week. Assuming it cost 23k or so, your monthly payment is roughly $588.76. Figure insurance on a new car (for a hot-blooded, fun-luvin, all American male under the age of twenty-five), plus registrations, plus plus...

Okay, let's start looking at the Kia.*** Okay, we found a stripper with both power windows and AC (but no nav system or blue tooth. Bummer.) for 16,000. Bringing us payments of $399 a month for four years. And then it's yours, baby! Yours to... trade in for another payment, or a mini-van, because by now that Kia has impressed the ladies enough to get you a steady, whom you've married, and with whom you look forward to a bright future together with Junior in the car seat in the back. A lot can happen between 21 and 25, can't it? Anyway, you've spent $399 a month for 48 months at a reasonable 6% interest. And when you're done, you've got a car or a trade in.


You can invest that money for four years into a good mutual fund, and average 10% a year growth, which is a little worse than the historical average, but then again, I'm just a little conservative in my estimations. After your four years you'll have $23,430.27; which is an extra $7,430.27 for your pains. You could skim those earnings and buy a nice reliable ten year old Toyota with 90k miles on the clock from a little old lady in Topeka. Those Toyotas last forever, don't they? That's what the commercials say.

But let's say you're truly wise. Let's say you leave that money alone, in the mutual fund, for, oh, another 40 years until age 65 when you retire, without adding another penny too it. That's 40 years at a (below) average 10% growth. Waiting for you on the other side of that retirement is...


I don't know about you, but I'm wondering if that new Kia was really worth $1,258,221.27.

Now what if you invested the money you were thinking of using for college? Hmm..? What is the ROI on an $80,000 college education?

* I know! Can you believe it? A Catholic priest, even. How very, very wrong. I asked him to call me so we could further discuss. He was a bit surprised. I hope he calls.
** "What about the high-schoolers, Toady," you ask? "It's awfully snobby of you to assume everyone can go to college and graduate and buy a car. Not everyone is so priveledged!" Oh, but there you are most often wrong. High School grads get a four year jump start on this and, if you're taking the American way through college, the student loans, the High Schoolers have even more of an advantage... they don't have loan payments for the next fifteen-twenty years.
*** What is the plural of Kia? Kium? Kii? Kias?

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