What is keeping you from the American Dream – Part 1 – The elephant in your driveway

If I ask a hundred people what the American Dream meant for them, the likelihood of financial success being the top criteria for most of them is pretty high. Since, Columbus, the United States has been the promise land.

The reality today however is a lot different. The American middle class is disappearing. The rich are getting richer while the middle class is pushed towards deprivation. If that is the feeling you’ve had lately, you’ve probably thought to yourself how you could move towards the affluent side of the gap. Well, over the next several posts, I will help you identify various things you can do to move towards financial success and independence. However, like most positive changes, the journey begins with breaking habits and eliminating past missteps you’ve made and fair warning, some of what I am about to say may sound uncomfortable but someone once told me that growth only happens in discomfort. Financial success takes discipline and sacrifice but I well and truly believe that anyone can get there with discipline, persistence and time.

So lets get started with what I believe is the single biggest thing holding you back from financial success – Your car

Barring your house, your car is likely the second costliest purchase most people will make. The average new automobile sold in the United States in 2019 clocked in at a whopping $36,820 according to Statista. In 2016, that number was $34,450. That is close to a 7% increase in a matter of 3 years. Meanwhile, incomes of the average American have hardly moved. It can be argued that the rich getting richer are buying more expensive cars driving up the average sales price of the new car but that argument would be wrong. What does your car really cost you? How does it impact your ability to ACTUALLY become rich?

Let’s break down the numbers on the average new car then to prove this point with the below assumptions.

  1. You have great credit so you managed to snag a 3% interest rate which is far better than average (actually the average is 5.76% for a new car)
  2. You made a $5000 down payment since you are a smart buyer and did some saving before buying
  3. You wanted a lower payment and went with a 72 month term (the average is 69 months for a new car)
  4. You are buying a much cheaper than average new car which costs $30,000.

Now consider a second scenario where you purchase a used car that costs a third of the new car.

  1. You have good credit and managed to get a loan at 7%.
  2. You made the same $5000 down payment
  3. You went with a 4 year loan but make the same payments you would have made on the new car
  4. Once your car is paid off, you continue to make the same car payments to yourself (minus an extra $20 a month you put aside for additional maintenance since the car is older) and invest the money into a stock fund that will give you 7% return

Below is the summary of what you would be spending in each scenario and what you would have left at the end of 6 years.

Imagine what you could do with an extra $7 every single day or $23,500, 6 years from now. You could literally sell your existing car and pay cash for your next $10,000 car and still have $16,100 left over to do other things or just let it grow. They say money doesn’t grow on trees. It doesn’t. It grows in an investment account.

So you have two options to choose from.

  1. Purchase a brand new $30,000 car and drive it for 6 years to be left with a $10,000 vehicle in the end.
  2. Purchase a used $10,000 car, drive it for 6 years and invest the difference in an investment that compounds at 7% to, in the end be left with a $3600 car and $23,500 in cash (totaling over $27000).

If you are wondering about leases, don’t even think about it. A car lease is one of the most imprudent things you can do with your money (less so if you eventually buy it once the lease is up, but still, pretty up there in terms of recklessness). I am sorry but I’d rather you wrapped a $100 bill around a pebble and threw it in a lake every month. At least you’ll realize how wasteful that is.

You pay the same kind of money as buying the car (I know you get a slightly nicer car with a lease but I really don’t care), pay high insurance costs (the dealership will make you get top notch insurance since you are really driving and paying to protect THEIR property) and you don’t even get to have the car at the end of your term of making the payments. I mean why anyone does that to themselves is beyond me.

Finally, let me address the psychological aspect of the car we drive.

Think about the last time you sat in front of the TV. How may car commercials did you watch in a half hour period. Why are car companies spending so much money trying to convince you that these machines which really only serve one purpose – lugging people and equipment from one place to another are meant to represent your personality or pressing on a gas pedal is somehow going to give you the most exhilarating feeling you’ve ever experienced in your life? The reason is simple – It is a sophisticated way of indoctrinating the society into making decisions that are inherently bad for themselves and great for the auto makers. Business majors spend years learning how to convince the consumer that they need something that they have no business buying and indoctrination takes effort and reinforcement. They need us to believe that society perceives us based on what we drive. That is why Toyota also operates the Lexus brand. They take a Toyota, slap some useless add-ons and sell it for a lot more money with a Lexus badge. Ultimately, we need to understand if our life is made materially better by the few minutes a day we spend in what we drive or how people we may or may not know perceive us based on the car we step in and out of or is actually achieving the American dream of higher value?

Its simple really – Would you rather be actually rich and nobody know it? Or would you rather be actually broke and have others think you’re a baller? The choice is yours to make.

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