Rethink the need for a new car

The NADA (auto dealers association) estimates that the average car payment in the US is around $400 per month. With over 16 million NEW cars sold in the US every year, a great deal of the average number is spent on new cars.

Let me propose some alternate thinking that you should keep in mind the next time you go out to purchase a new car:

To make a $400 car payment (and I'm purposely excluding any down payments), an average worker would would need to have gross income of $670 per month, minus around $270 in federal, state, Social Security, and Medicare taxes.

What else could be done with that money? A large percentage of US citizens do not contribute the maximum to their 401k plans even when their employer offers them a pay raise in the form of a matching contribution. Remember that the same $670 in gross income is temporarily tax free and deductible in the current year. If an employer matches 50% of the employee contribution, the total is just over $1,000 per month.

Assuming simple stock index fund returns of around 10% on average, the individual who takes the 401k option will have around $75,000 in a retirement savings account. The person who bought the new car will be looking for another new car in five or six years and will repeat the pattern.

Saving $1,000 per month at just over 10% will generate a 401K of nearly one million dollars in twenty years due to the magic of compounding interest. New cars become used cars which become junk in very short order. Choose your 401K plan instead.

In case you are wondering, I have three cars: one is 18 years old and collectible, one is eight, and one is five -- used cars are just fine.