Want to free up some money to begin investing? Look no further than your monthly car payment. This simple thought experiment could provide the roadmap you need to get behind the wheel of a million-dollar portfolio.

A seven-figure reason to take control of your car payment.

Owning a car can get you to the office every day, however, choosing an expensive car might keep you driving there forever. When we refer to the “Million Dollar Mercedes” we don’t mean the 1955 Mercedes-Benz SLR coupe. We’re not even referring to an actual sticker price. The Million Dollar Mercedes is rather a thought experiment on lifestyle inflation, budgeting, and opportunity cost.

Lifestyle Inflation

Though a car is simply transportation for some people, others see the make, model, and color as a reflection of their personality and financial success. It’s no surprise that many tend to continuously trade in their vehicles as soon as their income can accommodate a more luxurious upgrade.
When it comes to leather seats, elevated trim levels, or a more luxurious brand name, consumers tend to be very effective at coming up with the money they need to keep up appearances and satisfy their wants. Unfortunately, these same individuals may struggle to save any money month to month let alone make recurring deposits into their investment account.

Budgeting

Discipline is one of the most important tenants of a good investment plan and it begins with your monthly budget. They say, “those who fail to plan, plan to fail” so create a budget that includes savings and investments and be sure to select your car thoughtfully. Why? It may represent one of the most expensive purchases in your lifetime and if unaffordable, could be potentially damaging to your long-term financial health and wealth. Let’s take a look at an example to see just how expensive that purchase really is.

Opportunity Cost

Figure 1: (Assumes 5% interest rate on a 60-month loan).

In this example, even if you can afford your “dream car”, it’s important to look beyond the sticker price and consider the opportunity cost of choosing it over a more practical option. The opportunity cost of a decision or activity is the benefit you give up by engaging in that activity. Here, the opportunity cost of buying an expensive car instead of a cheaper option, is not just the $660 difference in car payment per month, but what you could have done with those $660 (x60 months)! Let’s take a look at the potential gains you may have experienced if you had invested the difference into the stock market.

Figure 2: This projection assumes an investment of $660 per month for 5 years, earning an annual rate of return of 8%.*

Over the 5-year loan, you could have added over $39,000 to your portfolio and realized gains of roughly $9,000 (assuming an 8% annual rate of return). Hypothetically, you would have already saved enough money to buy your next car outright!

But get this…

Without adding a single dollar to this account after paying off the car in 5 years, look at the potential gains this portfolio could experience if it kept growing at an 8% rate of return! 40 more years of doing nothing more could mean a nest egg of over a million dollars. That’s the magic of compounding and what’s more, this is just using the money saved over a single 60-month auto loan. Think about the number of cars you might purchase in your lifetime. Think about the number of times you could repeat this behavior. Think about where else you could cut down on your expenses and instead, grow your wealth.

Figure 3: This projection illustrates the growth of a $48,812.02 portfolio ($39,600 investment with $9,218.02 in gains from Figure 2) over 40 years, assuming an annual rate of return of 8%.*

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* Compounded each year and assuming the funds stay invested throughout the investment period. Returns are hypothetical annualized returns, assuming a properly diversified investment portfolio. Performance is provided for illustrative purposes, and it is not indicative of past performance or any Beanstox portfolio or any client’s experience using the Beanstox App. As such, the chart does not reflect fees, or the cost associated with investing. Content is meant for education purposes on the power of compound interest over time, and it is not intended to be taken as advice or a recommendation for any specific investment product or strategy.