Originally Posted By: BTW
Lol, NET 12% a year in a mutual fund for 6 years?
Also, the video leaves out maintenance costs of the used vehicle...
There are good points but the video takes only the best case scenario
Exactly, it ignores; the transaction costs of a car purchase, the increased maintenance on an older vehicle, and the lower insurance cost of the older vehicle.
The 12% return assumption is also specious - that's not an historical average for stocks, which are closer to 10%, and you should never, ever put money you need in the short term in the market. Those funds belong in cash. Consider where you would be if you had out your car funds in the S&P and needed to buy a car right now...
Those criticisms aside, this point is excellent: pay yourself first, avoid paying interest in a rapidly depreciating asset.
If you drive your old car while paying yourself, you can follow Dave's plan and keep upgrading while avoiding getting crushed by interest.
I bought the two Volvos below in 2007. I paid $12,500, cash, for the T5 wagon, for example. It "stickered" at $41,200. So, some person paid $28,000 in depreciation alone (more actually, because they traded it in) to drive it for five years. I paid less than half of that to drive it for eight years. I paid more in maintenance than the original owner, but much less in property tax and insurance and ended up well ahead.
So, the video's principles work, although the precise numbers are inaccurate.
But here's the most important point: that car payment, if applied to a retirement account, is enough to enable a comfortable retirement.
His math is off on that one too, but while 10% returns are more the norm than the 12% he claims, he fails to take into account the effect of taxes. By contributing $475/month in a 401(k), you lower your taxable income and lower your tax burden, so your net change in income is less than $475/month...making the retirement contribution more affordable.
Further, if your company matches, as 3/4 of them do, then you're picking up that money as well, meaning that your $475 contribution costs you less than $475 (because of taxes) and adds much more than $475 to,your account (because of matching) on day one of that contribution.
Now, debt used as leverage in business is a whole different animal.
This thread is about the pitfall, the trap, of consumer debt. Folks think "the system is rigged against the little guy"...but it's only rigged if you don't understand the consequences of your actions. Consequences that you could easily discover, without cost, by spending a little time educating yourself at your local library...so, yeah, the system is rigged against the lazy, who don't want to learn...or think...or plan...or budget....