The Harsh Reality 

The topic we’re diving into today is a sensitive one—one that could change your financial future if you’re willing to pause, reflect, and take action.

Your car payments, along with the new cars you’ll inevitably finance in the future, quietly rob you of financial security.

This isn’t an exaggeration. Wealth managers and financial experts have long recognized car payments as the #1 wealth killer in America.

The reality is that most people buy cars they can’t afford. When buying a car, most people focus solely on the monthly payment. However, it's crucial to consider what percentage of your monthly take-home pay should go toward transportation costs (car payments/gas). Ideally, this should be between 8-10%. If your payments exceed that, you CANNOT afford the car!

Many people assume that financial stability will naturally happen as they age—that someday they’ll own a home, travel freely, retire comfortably, and live without money worries. But what most don’t realize is that achieving that future requires intentional financial decisions today.

Sinking hundreds or thousands into car payments over your lifetime may seem like a small decision, but those who have achieved financial security understand the importance of freeing up income and putting that money to work building wealth.

Investing just a typical car payment in index funds, real estate, or even a high-yield savings account could help you build financial security and even achieve financial freedom faster than you ever imagined.

In this letter, we’ll break down:

 ✅ The true cost of car debt over time
 ✅ How much wealth you could build by redirecting car payments
 ✅ Smart alternatives to financing a car

The Truth is in the Numbers

The average monthly car payment now exceeds $700 for new cars and $500 for used cars.

Let’s assume Rick is 26 years old, has $10,000 in savings and is considering purchasing a new car. Here’s what he’s looking at:

• Monthly payment = $770 (not including insurance)

• Contract length = 5 years

Follow along as we break down Rick’s options and their year on year consequences.

Option 1: Finance a New Car

Rick decides to finance a new car with a $770 monthly payment for 5 years.

• Total spent over 5 years: $46,200

• Car’s value after 5 years : $18,480

• Total loss: $27,720 (60% Depreciation)

Instead of building wealth, Rick spent 5 years  trapped in years of high-interest payments on a rapidly depreciating item.

Rick now realizes that cars are a liability. 

Option 2: Buy a Reliable Used Car & Save the Rest

Instead of financing a new car, Rick uses his savings and buys a $8,000 used car and saves the $770 monthly payment in cash. 

After 5 years, Rick now has $46,200 —enough to upgrade to a $20,000 car in cash and still have over $26,000 left.

Before we review Rick’s last 2 options, let’s talk about how interest.

Understanding Interest

Interest is the extra money you pay when you borrow OR the extra money you earn when you save/ invest.  

•  If you borrow money (like a loan or credit card), you pay interest (a percentage)  to the lender.  

• If you save or invest money (like in a bank account or Index funds), you earn interest on your money.  

It’s like a fee for using someone else’s money or a reward for letting someone use yours!

Option 3: Buy a Reliable Used Car & Save in a High-Yield Savings Account (4.5% APY)

Instead of putting in a piggy bank, where it earns zero Interest, Rick puts the car payments money in a high-yield savings account earning 4.5% annual interest compounding. 

After five years, Rick's cash has grown to $52,732.70, with $6,532.77 earned in interest simply by keeping his money in a high-yield account.

He also has enough to upgrade to a $20,000 car in cash and still have over $32,000 left.

Option 4: Buy a Reliable Used Car & Invest in Index Funds (7% Annual Return)

If Rick opts to invests the  $770 at the beginning of every month in an index fund earning 7% annually, here’s how his wealth grows:

After 5 years, Rick has $56,210.74 with $10,010.74 earned in interest simply by making his money work for him in the stock market.

Rick now has enough to upgrade to a $20,000 car in cash and still have over $36,000 left.

The Miracle that is Compounding Interest 

Wanting the most bang for his buck, Rick opts for option 4 and takes the money intended for car payments and invests in index funds returning 7% - 10% percent of his money yearly. 

After 5 years Rick stops 🛑 his monthly contribution and lets his money compound without adding another penny, here’s how his investment grows over the next 25 years:

That is an additional $258,880.01 that Rick's $46,200 has earned without lifting a finger!

If Rick had kept financing new cars, after 30 years he would have owned multiple cars (worth nothing after 20 years) and missed out on the benefits of compounding interest.

The average American purchases 8-10 new cars in their lifetime. If Rick made one time purchases of  used reliable cars as needed and  invested $770 monthly for 30 years at 7%, here’s what he would have:

Since Rick bought a reliable $8-10K used cars 🚗 in cash, he freed up hundreds per month for investments and wealth-building. 

By 56, Rick would have an extra $911,000 to enjoy life on his terms. And that could mean purchasing a $120,000 car cash. Rick would still have over $790,000 in investments.

 He can now afford it!

Imagine being 50 years with an additional million 💰💰💰 in the bank because you chose to not continue to spend money on new cars. 

And that is just one lifestyle change!

If he applied the same financial discipline to other areas—cutting back on dining out, avoiding expensive clothes and credit card debt, and prioritizing investments—he could amass multiple millions by his mid-50s, gaining true financial freedom without trading his time for money.

These small decisions are the key to ensuring a future free from financial stress. 

The harsh reality is that if you expect financial security later in life but aren’t taking the right steps now, you are VERY likely to face money struggles down the road. 

Many people wake up one day realizing they’ve earned a fortune yet have nothing to show for it. With endless opportunities to spend, it’s easy to let money slip away. 

But true financial freedom comes from taking control, making intentional choices, and directing your finances toward helping you achieve your Philosophy of Living.

Key Takeaways: What the Reader Should Do

1. Avoid Car Financing: Understand that car payments are a major obstacle to wealth-building. Buy a reliable used car in cash to free up money for investments.

2. Redirect Car Payments into Investments: Instead of spending hundreds per month on a depreciating asset,Redirect what you’d spend on a car loan into  investments such as Index/mutual funds, Real Estate, Roth/401K.

3. Take Advantage of Compound Interest: Even modest investments made early can grow into substantial wealth over decades. Avoiding unnecessary debt allows you to benefit from long-term financial growth.

4. Be Intentional with Financial Decisions: Wealth doesn't happen by accident. Every financial choice—big or small—affects your future. Prioritize saving and investing over unnecessary spending.

5. Commit to Financial Freedom: The path to wealth starts with small, smart decisions today. Break free from the cycle of car debt and impulse spending, and take control of your financial future.

The road to wealth starts with smarter financial choices. 

Stay smart, stay wealthy!

Interested in learning more about finances? Check out these resources:

Sources

Investment Calculator : https://www.calculator.net/investment-calculator.html

Renown Financial Adviser : https://youtu.be/HxWftf1F1Q8?si=e24rrxIJ0MJdeCp8

How much car can I afford? [free calculator] https://www.thezebra.com/resources/driving/how-much-car-can-i-afford/

What’s the Average Car Payment Per Month? https://www.nerdwallet.com/article/loans/auto-loans/average-monthly-car-payment

Image URL:
https://www.goautocity.com/used-cars-depreciation