Sunday, May 26, 2013

How to get better mileage and more performance.

A strange thing started happening on my commute to work this week.

Without so much as lifting the hood, my little red corolla was suddenly getting better gas mileage.  It even seemed to have better performance.  I was passing Porches and careening past Cadillacs.

The secret is actually pretty simple.

I wasn't towing a car loan anymore.

That's right folks, my car is paid off.  To celebrate, let's look at some statistics and do a little math.  (I promise not to make this a complete math geek post)

According to, the average car payment in the US today is around $479/month.  (and I thought ($375 was bad).

Let's consider what you're losing out on if you're sinking $479 every month into something that is going down in value.  What else could you do with that money?  How about save it?

Let's say you're incredibly lazy, and just dump it in a savings account from age 30 to age 65.

35 years x 12 months/year x $479/month x who cares about the interest because a savings account doesn't pay enough to matter = $201,180

Drive a beater now, pay cash for a Lamborghini when you retire.  You could do worse.

You could also do MUCH better.

Broke people will often insist that earning 6-8% in a mutual fund is respectable.  I'd say those people are idiots, but we'll come back to that.

Stick $479 in a 7% mutual fund through your 401k or  Roth IRA, and then stick another $479 in there every month for 35 years, and you'll have over $824,000 at retirement.

Some may worry about the ups and downs in the stock market, and that's reasonable if you're going to be touching the money any time soon.  However, if you're going to be leaving the money alone for a long time (10 or more years) mutual funds are an extremely save place to put your money.  The horrible stock market crash of '08 was bad, but if you simply left your money in your mutual funds, almost all of them had regained 100% of their value by the end of the year, and this year we've set new record highs for the stock market.

As Dave Ramsey often says, the only people who get hurt on a roller coaster are the ones who jump off.  (and this guy)

I mentioned that thinking 6-8% on a mutual fund was respectable was for idiots (and to be fair, it's reasonable for those who are close enough to retirement that their risk tolerance is much lower).

Why do I say that?

Simple.  I currently own 4 different mutual funds in my 401k.  The crappiest fund I own earned over 16% this year, and has 10 year track record with an annual average of 11.4%.  My best mutual fund has a 10 year average of about 15%.  I'm not talking about this month, or this year.  I'm talking about a 10 year track record here.  That means that it averaged 15% including the crash in '08.  Yes, every one of them lost money in '08, but every one of them has earned so much before and since then, that the average is still 12-15%.  Let's be conservative and pretend that the best you can do is 12.5%

Would you like to know what $479 per month for 35 years works out to?


By all means, please feel free to check my math.  It's okay.  I'll wait.  Here, I'll even help you out.  Click here.

I can hear the objections already.

But, Stephen, I have to own a car.  I need transportation.

Thanks for that, Captain Obvious.  You're right, unless you live in a major metropolitan area, you probably do need a car, and you may need one even then.  However, you Don't Need™ a new car.

But, Stephen, my car payment is only $250, and I'd have to spend $1000 a year on repairs if I didn't have a relatively new car.

That's fine.  Spend your $1000 a year on repairs and replacements, and we're still talking about $567,436.57.

Save a little money

Pay cash for a car

Retire a millionaire