She was my pride and joy. A champagne colored, 4 door Chevy Lumina Sedan, that was suitable for a grandmother to drive. In fact, one did- mine.
In college, I was driving a ’96 red Pontiac Grand-Am. I bought the car when I first moved back to Illinois to attend junior college. It was my first car that I was responsible for paying for. I didn’t care- it was my mine.
I was lucky enough to have an awesome grandmother who, for my college graduation gift, loving enough to pay it off. Not having a car payment was huge for me. Although I constantly visioned myself driving something cooler-anything; it was still nice having extra cash to enjoy life. See, I was supporting myself all through college (with the help of the National Guard) and shelling out $350 a month for a car payment just didn’t sound or feel right.
A Change of Heart
That wasn’t always the case. I had this vision of once I graduated and got a real job I’d be driving something sporty- BMW or something foreign. Anything better than my Grand Am. Then one day in my Finance 361 class, the professor changed my outlook on car payments. He had asked the class to raise their hands if you have planned on buying a new car every 3-5 years. I, of course, proudly and immediately raised my hand along with over half the class. The next statement has stuck with me ever since:
“Enjoy making your car payments for the rest of your life while I take my family to Europe on vacation whenever I want.”
At that time I wasn’t really familiar with the concept of time value of money and compounding interest. No one had taken the time to really explain it to me. Thankfully, he did. We ran numbers after numbers and it was staggering how much I was really giving up by shelling out to a stupid car payment each and every month. I now felt foolish for raising my hand.
So What About This Lumina and $2 Million Dollars?
A few years into my career my grandmother passed away. Among the things I inherited was the “The Lu”- as my wife called it. At the time, my Grand Am had accumulated some decent mileage and was reaching that time where stuff was starting to happen: engine lights were coming on, new rattles that I have never heard before, and a funky scent from having left my windows down through a downpour. While the Lumina was only 2 years older than my Grand Am, it 70,000 less miles than my car. Although the car was 6 years old it was almost brand new.
Tempting Decisions
I could have sold both and used the proceeds for a down payment on the car of my dreams. Remember the one I raise my hand for in class? Was it tempting? Absolutely. Instead, I chose to sell my Grand Am and drive the “fully paid for with 11,000 miles old reliable” that my grandmother bequeathed me. Had I not taken that class and raised my hand to only find the error in my ways, I’m confident that I would have opted for the BMW. I know myself too well. By not taking on a car payment, I was able to sock away some serious cash both in my Roth IRA and my 401k. So much in fact that I’ve maxed out my Roth IRA every year that I started working and I was able to put some in my 401k, too. I figure that conservatively, I was able to invest at least $400 per month (sometimes more) that I would not have been able to if I would have had a car payment.
What Does $500 a Month Really Mean?
Quite simply: a lot. This is where it gets fun and you can see some really eye popping numbers. Using a Roth IRA future value calculator (you can find the calculator I used here) I plugged in investing $5000 a year and averaging 10% a year (optimistic I know but I’m the forever optimist when it comes to the stock market) until my retirement age of 65. The calculator reveals that I will have $2,683,185 . (seen below)
Starting at Age 24
Now, let’s say that instead of driving my Chevy Lumina I opted to go and splurge on a new car, in turn delaying investing until age 27, the number would have decreased to $2,002,239; a difference of $680,946. That’s almost $700,000 for just three years of savings!
A Valid Argument?
The title of this post boasted how my Chevy Lumina made me over $2,000,000 but my numbers show that it only netted me $700,000, so what gives? Here’s the thing know: having the discipline to start saving at an early age laid the groundwork to be able to save as much as I do now. Had I bought a new car and not started saving, my gut says that I wouldn’t have started investing at 27. Or if I did, it wouldn’t be nearly as much. What has actually occurred is that I was able to save 2-3 times that amount throughout my 20′s all thanks to driving “The Lu”.
What have you sacrificed that you might prosper later on? How long did it take for you to see an impact from your sacrifice?
My name is Jeff Rose and in my life I've trained with the U.S. Army to be an Infantry soldier. In my professional career I've trained to be a financial planner. The recent financial catastrophe brings to light how so many people have become victims of their poor financial management. I combine the discipline of my army training with the rigors of my financial planning experience to help people do something about it. I want to help you become a Soldier of Finance and take control of your life and personal finance today. To read more about me, please check out my