If you have been listening to any of the headlines recently then you have most likely heard about the “student loan crisis”. I think there is another underlying issue here, and that is a car loan crisis. Keep reading for my theory on how the two are inter-related.
According to Experian Automotive, the average monthly car loan payment is $482 with an interest rate of 4.56% financed over 5.5 years. A whopping 84% of new vehicles are purchased using financing.
Here’s a solution to the student loan crisis. What if you, as a parent, did not have the latest and greatest vehicle with the touch screen navigation and air-conditioned seats? That’s right, I am suggesting that you use what you would have put as a down payment on that new $30,000 car and buy an entire vehicle with the down payment. There are plenty of cars for under $5,000 and they will get you to work and activities just as well as the new car.
Now for some fun math:
Since you now have no money going toward a car payment, you can open up a 529 college savings plan or a Coverdell Education Savings Account (ESA) for your child. These college savings accounts work a lot like a health savings account or a Roth IRA. Let’s assume you do this around the time that they are born, which is an excellent idea. Also, the money in these accounts is tax-free if used for education purposes.
Okay, you are going to take that $482 per month would be car payment and put it into your child’s college savings account.
If you do this for 18 years, instead of having a car payment, assuming an interest rate of 7%, your child would have $196,650 saved for college!
“But 7% is an unrealistic return”, you may say. Okay what about 5%? They would still have $162,717. Plenty of money to go to 4 years of college at a reasonably priced school.
This does not even take into consideration if both parents have a car loan, which most usually do.
Pay for your cars in cash! Start out with something that you can afford and month by month save up so that you can upgrade later, but with CASH. You won’t look back and say “I’m so glad I drove that new car for a few years and now have nothing to show for it”. NOW you could have the opportunity one day to look back and say “I’m so glad I had the knowledge to invest and save so that my child could go to college DEBT FREE!”
Parents, I urge you to think ahead about the future of your child! This could possibly be the greatest gift you can ever give them. Graduating with a college degree, debt free.
So which would you choose, nearly $200,000 to go toward your child’s education or the latest and greatest vehicle that just lost the majority of its value as soon as you drove it off the lot?
As Dave Ramsey would say, “I hope you liked the car!”