How A lot is That $70,000 Truck Costing You?

A reader asks:

I work within the building trade and I’m at all times making an attempt to unfold just a little monetary literacy to my coworkers. Every time I see a younger man on the point of drop $70k on a brand new pickup I attempt to present them what that cash might develop into in the event that they invested in index funds as a substitute. I wish to name it “sequence of spending threat”. After all this hardly ever works so I assumed having the consultants remark might assist. Perhaps you may give you a chart or graphic that would clarify how delaying spending might have a huge impact on future wealth.

I used to be born for this query.

I’ve written various posts over time about extreme spending on vehicles and SUVs:

I’m not a fan of spend-shaming…UNLESS you’re spending manner an excessive amount of on one thing AND not saving any cash.

It is best to take pleasure in your self whenever you’re younger however you additionally must develop good financial savings habits as a result of the compounding results are so sturdy.

So how a lot might that $70k truck be costing these younger building employees?

I poked round just a little and located new automobile mortgage charges at round 6% or greater proper now.

Financing a $70,000 truck at 6% over 5 years could be a month-to-month fee of $1,350 (assuming nothing down).

That’s a ridiculously excessive month-to-month fee for most individuals however particularly younger folks due to the chance prices.

Let’s say as a substitute of that Ford F-150 or Dodge Ram you as a substitute obtained your self a fairly priced SUV, possibly one thing like a Ford Explorer or Chevy Trailblazer.

That most likely cuts your value in half to $35,000 or so relying on the facilities.¹

You’d save $675 a month or greater than $8,000 in a yr. Over the course of a five-year mortgage, that’s a complete financial savings of greater than $40,000.

Are you able to think about the expansion of $40,000 over the course of two to a few a long time for a youngster when you invested that cash as a substitute of spending it on a souped-up truck?!

We’ll get to these numbers however let’s say you do want a truck since you work in building and might’t make one other car work.

The Ford Maverick has an MSRP of round $25,000. Now we’re taking a look at a month-to-month fee of extra like $500. I’m not even telling you to get a used automobile. I’m simply saying I don’t get the top-of-the-line, suped-up truck available on the market.

That’s a financial savings of $850 a month. That will offer you greater than ten grand in annual financial savings, sufficient to refill almost half of your annual 401k max restrict. Over 5 years we’re taking a look at $51,000 in financial savings.

And it’s nonetheless a truck!

Right here’s the breakdown:

Now let’s do the non-public finance factor and have a look at how a lot these financial savings could possibly be price over the lengthy haul.

Let’s say you say simply 75% of the month-to-month financial savings so you may blow the remainder of the cash on the rest you’d like.

Right here’s what it seems like when you financial institution these financial savings within the inventory market yearly for 30 years and earn 7% in your investments:

You’re taking a look at someplace within the $600k to $800k vary in complete from simply driving a lower-priced car over time. That’s fairly eye-opening.

However let’s be trustworthy, this instance most likely isn’t all that real looking. When you’re an enormous truck individual you’re going to desire a huge truck ultimately, no matter what the spreadsheets say.

OK tremendous, however what when you simply wait till you’re just a little older to purchase a truck that may pull a 747?

Let’s say you’re a 25-year-old building employee who drives a smaller truck or an SUV for one mortgage cycle. All it’s a must to do is wait till you’re 30 to purchase a tank on wheels.

Right here’s a have a look at what simply 5 years’ price of financial savings would develop into over 30 years in complete:

This assumes you financial institution 75% of the month-to-month financial savings from an SUV or smaller truck into the inventory market after which let it compound from there. Now we’re speaking extra like 1 / 4 of one million {dollars} after 30 years from simply 5 years of driving a lower-priced car.

Perhaps it’s not real looking to imagine you may hold saving that distinction yr after yr for thus lengthy. Ultimately you’re most likely going to need to splurge on that vast truck.

I’m not a type of private finance consultants who likes to do that with each buy. It is best to have the ability to take pleasure in your cash.

However it may be exhausting for younger folks to save lots of. And it’s not appetizers or drinks with pals that may shoot a gap in your finances; it’s the massive fastened bills. For most individuals your largest fastened prices are housing and transportation.

When you lock in excessive housing and transportation prices it doesn’t matter what number of lattes you skip from Starbucks.

I’ve no drawback with spending cash on vehicles or vehicles or boats or jet skis or no matter so long as you’re saving cash. Prioritization is the hallmark of any good monetary plan.

However locking in a four-figure month-to-month fee whenever you’re younger is a poor alternative particularly when you’re not saving a lot for retirement. It is best to spend a few of your hard-earned cash however that doesn’t imply it is best to really feel entitled to a $70k car so early in your profession.

After all, it’s not sufficient to easily purchase a lower-cost car. You even have to save lots of the distinction.

Automate these financial savings identical to you’d for the month-to-month automobile fee and also you’ll be set.

A six-figure Roth IRA account will do extra heavy lifting for you than a Ford F-150.

We coated this query on the most recent version of Ask the Compound:



My very own monetary advisor Invoice Candy joined the present once more this week to assist me sort out questions on school financial savings, the tax implications of investing in bonds, max contribution limits for retirement accounts and what number of 529 plans you want to your youngsters.

¹And let’s be trustworthy — when you’re a youngster you don’t want all of the bells and whistles in the case of facilities. When you get them they’re going to develop into a necessity, not a want.