You may have heard that there is a crisis on the retirement front in the United States. With the threat of social security running out, it’s more important than ever to save for retirement and prepare for your future. But many Americans are strapped down with expenses and debt from other sources, and have nothing leftover to put toward their retirement funds. Consider the following plan for shifting your finances around to allow for more savings for retirement.
The Car Loan Problem
By replacing your car payments with retirement fund payments, you could potentially build a million-dollar retirement fund, all by becoming a little bit more complacent with your paid-off car. But most Americans have a hard time with complacency. In fact, Experian Automotive found that Americans owe $987 BILLION in car loans. The breakdown is even scarier: the average consumer borrows about $29,550 for a new car, paying $493 monthly with a 4.63 percent interest rate for an average of 67 months, and the number of consumers opting to lease cars are increasing as well.
Unfortunately as time goes on, the interest adds up on these payments while the value of your not-so-new anymore car goes down. So by the time that shiny new car is paid off, it’s worth much less than what you paid for it, and you paid thousands more than the price tag, as well. Now your eye is wandering towards newer cars, and the cycle starts over again.
But what if it didn’t?
Breaking the Cycle
Instead of jumping back into a car payment once you pay off your car, what if you used that freed-up money for retirement? With a little patience, you can take than nearly $500 and put it into a Roth-IRA account or 401(K), and after 30 years you could save more than $1 million for retirement.
Thirty years is a long time to drive the same car, of course, but you can still split that $500 and put half of it into a savings account with a good interest rate and the other half into your retirement fund. After only four years of making these contributions, you will have saved $12,000 for a car upgrade, in addition to the trade-in value of your current car, and still contributed to your retirement fund. With this plan, you can still upgrade your car while avoiding a car payment and debt, and still continue to build a substantial retirement fund. As long as you keep perspective and maintain your car well, there is no reason you can’t have the financial freedom of having no car payment now, and also having a comfortable living when it’s time to retire.
How to Start
If this plan seems far-fetched for your current situation, set some goals to first work toward paying off your car now. Consider trading in your car for a more affordable one that won’t require a payment or will decrease your payment and term substantially. Set a deadline for when you want to pay your car off and try to pay it down faster. Once you reach your goal, be disciplined about putting away that freed up money to the right places.