A NEW Plan

by | Jul 29, 2009

He who works his land will have abundant food, but the one who chases fantasies will have his fill of poverty. Proverbs 28:19

Dave Ramsey had a curious thought worth repeating on a recent radio broadcast regarding this “recession.”  He says the recession didn’t destroy people’s retirements.  He says it revealed how pathetic our retirement savings was.  That is, if your retirement is so devastated by this economy that you can’t retire and have to keep working, then this economy has done you a favor and shown you that you need to get your financial act together, that you really didn’t have a plan.

Our whole society was living on fumes, or as our verse for the day above says, chasing “fantasies.”  In many ways we still are.  I had a lady tell me once that she and her husband took the $4000 they owed on their car and refinanced their house and put the $4000 on their house mortgage.  Ah, how is paying off a $4000 car loan over 30 years helpful?  Over and over again I hear from clients of two car payments reaching $1000 a month and this on things that go down in value.  It’s not unusual for them to also have second mortgages, student loans and credit card bills in addition to first mortgages and car payments.  YIKES!  Then all that has to happen is to have one spouse get sick for awhile or one spouse lose her job or even his overtime and “BOOM” the whole financial stability of the family goes out the window.  If that’s happened to you, count your blessings: the recession has revealed to you that your financial plan was seriously flawed and in need of a major overhaul.  In some ways we can all be grateful: the recession is telling us to live within our means, get out of debt, start saving up the yangwho and get rid of crap.  Start eating at home and bring your lunch to work and quit stopping at the convenience store and limit your trips to Target.

Here’s a thought that will save you several million dollars over your lifetime:  pay cash for your cars.  How do you do that?  Dave Ramsey’s website has a cute little video about what happens if people pay cash for cars instead of borrowing money.  The numbers are sobering and very motivating to give you the kick in the pants you need to start saving that car payment now instead of sending it to the bank.   In a nutshell, here’s a totally plagiarized summary of his video:

Let’s say your car is worth $1500 after you finally pay it off.  If you keep making the average car payment of $475 to your savings account for 10 months, while you drive your old beater, in 10 months you will have $4750 to add to the value of your $1500 car. Trade in your beater with your $4750 and you can get a $6250 car for cash.  You continue to make your $475 car savings every month and in 10 months you again take your saved $4750 and add that to your $6250 car, which after 10 months would still be worth about that, and pay cash for an excellent $11,000 car.  That’s only 20 months from TODAY!  Now the average car loan is for 6 years (72 months!) at $475 a month.  Using our example, you bought your last car for $11,000 after 20 months.  Let’s keep saving $475 a month for the next 52 months (that’s 72 months minus 20 months) and save it for yourself instead of giving it to the bank, all the while driving your $11,000 car.   If you invest those monthly payments in a mutual fund earning 12% that would be worth over $32,000 by the time your 52 months are up.  You’ve been driving your $11,000 car over 5 years and it’s time for an upgrade.  Now you go out and pay cash for a car worth $12,000 from the $32,000.  You’d still have $20000 in your mutual fund earning 12% a year.  From now on, every five years you can buy a 14 to 18 thousand dollar car (with your trade in) for free just by leaving the $20,000 in your mutual fund.  The interest on your mutual fund will pay for your cars the rest of your life.

So, you can quit putting $475 in your car fund and every 5 years you can buy about a $15,000 car with NO car payments.  Meanwhile, lets keep saving that $475 a month.  In 10 years at 12% it’d be worth over $100,000!  In 20 years over $470,000!  And in 30 years 1.6 million!  And in 40 years it’d be worth 5.5 million!  YIKES!

Or…you can make your $475 car payments to the bank for a car loan and after 6 years you can take your $1500 car and trade it on another $26,000 car and you can do this again over and over and in the end have a $1500 car to show for it and NOTHING in savings!  Your bank will be in a nice new building, though.

LORD, save me from car payments!

Dr. Bing Wall

Dr. Bing Wall

Dr. Bing Wall is a marriage therapist with a practice in Ames and Urbandale, Iowa. To set up a time to see Dr. Wall click here or call 888-233-8473.

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