For most of us, having a million dollars liquid — that is, available for our use at any time, and easily convertible into cash — is the stuff of pure fantasy. But after talking to a few of my friends about decisions they were making, I was able to easily articulate one way we can all have $1 million in cash — liquid, available cash — in our lifetimes.
No, this isn’t some “get rich quick” scheme, and it doesn’t require anything illegal or immoral. It’s actually quite simple. The one catch is that it’s easier to do earlier in your life. But it’s something anyone can do, and is easily within the range of most Americans. You have to follow some rules to make this work. But once you do, you’ll be a millionaire.
What is the decision?
Buy a cheaper car, and invest the difference.
Yep, that’s it. Let’s break this down: how does buying a cheaper car make you into a millionaire?
For this exercise, I am going to assume you are 30 years old, and you want a million dollars by the time you are 70. Let’s also assume for the sake of argument that you are interested in a car that costs $35,000 new, and you have little or no down payment. This seems fairly accurate given the data I found from Edmunds in 2004 that states that the average new motor vehicle MSRP was $30,841 in December 2003. We can safely assume that number has gone up since then. Factoring in taxes and licensing, $35,000 seems a reasonable estimate of what the average new car costs.
$35,000 over 6 years, at an interest rate of 8%, is $613.66 per month. Whew, that’s quite the car payment! But it’s similar to what many 30-year-olds have.
Where does the million dollars come in? Spend $24,000 on that car instead of $35,000, which you can easily do by getting a used car or a slightly cheaper car. Your car payment over the same term is $420.80 per month, or a savings of $192.86. Round that up to $200 per month, and put that $200 per month into a mutual fund earning 10% per year. Here’s the catch: You have to invest the extra $200. You can’t blow it on food, TV, music, etc. I strongly recommend you find an investment service that will take the money directly out of your paycheck so you won’t be tempted to spend it.
Once you’ve done that, find a mutual fund that will give you high returns on your money. This shouldn’t be too hard. If you’re unsure, the S&P 500 index has returned an average of 10.30% over the past 30 years (1976-2006.) Pick a S&P index fund, put $200 in it every month, and leave it alone!!! for the next 40 years. Let the compound interest magic work for you.
Invest $200 a month at 10% for 40 years, and you will have a cool $1,168,444.35 saved up for retirement. If you are still having trouble deciding what you want to do, I recommend you visualize a pile of $1.1 million dollars in cash and a used car on one side, and a brand-new car on the other. Which would you rather have?
Here, I’ll help you out:
2003 BMW 3-series (approximately $24,000 used) and ONE MILLION DOLLARS IN CASH!!!
2007 BMW 3-series (approximately $35,000 MSRP) and what you will be stuck with
I’d pick the $1.1 MILLION DOLLARS IN CASH any day.
I am sure some of you are saying, “But Erica, spending $35,000 on a car is ridiculous! I would never do that.” Well, good for you! Seriously. Now go invest that $200 anyway. Which is more interesting, a couple pairs of shoes or $1.1 million? 10 DVDs, 5 of which you’ll never watch again anyway, or $1.1 million? You get the idea!
Go set up that investment fund, and go set up your paycheck to deduct into it. If you’re self-employed, set it up to withdraw from whenever you pay yourself. In 40 years, when you’re living the high life, you can toast me from the helm of your beautiful boat that you bought with your spoils. 😉