Five Cars before 40 (Frugal 'til 40, Living Large Later)


by Jeff C. Johnson

Cars parked in a row

Statistically, most middle-income individuals trade cars about every three or four years, on average. And cars can be a great expense. Sure, it’s fun to have a new car, and it’s also fun to have a great car! But it’s really expensive, especially if you haven’t started building your net worth (see my previous post on getting the financial wind at your back).

The average college graduate or 20-something could, statistically, buy five cars before age 40. This is the time when a young person or young couple should be building wealth, saving money, and getting financial assets compounding for future growth. And high-priced cars, big payments or lease commitments, costly service, and insurance premiums can interfere with wealth building.

Consider how you and your family could benefit if, each time you went car shopping, you purchased a car $5,000 less than you can afford and put that money to work for your future. Instead of buying a $30,000 car, you take home a $25,000 car and bank the rest. If you buy five cars before age 40, you would be investing an additional $25,000. Doesn’t seem like that much, does it?

To me, it looks like more than $1 million in future assets if you include certain return assumptions! Let’s look at the math behind this claim:

10% × 40 years = 45×

Money that grows for 40 years at 10 percent multiplies 45 times in value. It’s amazing, but do the math yourself if you doubt! And 10 percent may seem like a high return today, but I think if you took the time to review historical returns for stock market investments as represented by major indices, such as the Dow Jones Industrial Average or the S&P 500, for 40-year periods of time or greater, you might believe that a 10 percent average gain and a 45-fold increase could be justified in our hypothetical example (reasonable, but not guaranteed; past results don’t predict future outcomes, and this is not based on the performance of any specific account).

Back to our example. Let’s assume you trade for a new (or different) car at ages 25, 28, 31, 34, and 37, and each time you purchased a lower-priced car and held back $5,000 in cash and invested it for the long term. The car you buy will have lost most of its value in a few years, but the $5,000 you save could have grown to $225,000 in 40 years (i.e., $5,000 × 45 = $225,000).

This means, in our hypothetical example, that if you followed this approach for the five cars you bought before age 40, you could have an additional $225,000 available at ages 65, 68, 71, 74, and 77, a total of $1,125,000!

Early on in your working and earning life, if you desire to build wealth and if you want to have a comfortable, lower-stress life and marriage, these are the kinds of actions you have to take to build your financial foundation. Cutting back and getting a slightly less extravagant or exciting car seems like a pretty good trade-off if you look at the big picture.

You can always buy that luxury car, and pay cash for it, after you have created wealth and the financial wind is at your back. I call this “frugal ’til 40, living large later.”