Personal Finance Tip of the Week, By Financial Fundamentals, LLC of Watertown

​As I’ve mentioned before, it’s very important to make smart car purchase decisions that result in an affordable car and a loan that won’t go under-water. (See our car buying picture and car loan picture for more details.)

But you may wonder if it’s worth all the trouble. After all, it takes more time and effort to deliberately target, buy, and maintain an affordable car than it takes to go to a showroom and pick up the car that’s been on your wish list.

I wondered the same thing, so I ran some numbers. And I was startled to see the results. In fact, the numbers were so big that I had to go back and double-check them.

I found that a single smart car purchase could deliver over 4 years of retirement income to you later in life! That’s a remarkable return on investment considering a smart car purchase requires only a few hours of preparation. If you repeat the process a few times during your working years, the total benefit could be substantially greater.

Let’s consider the hypothetical example of Jim, age 30, who earns $50,000 per year. He takes the time to make a smart car purchase, which saves him $950 up front and $60 per month in lower loan payment, fuel, and maintenance costs. He deposits these savings into a Roth IRA account that earns 8% per year.

After 4 years, his loan is fully paid off. At that point, he makes another smart decision to keep the car instead of opting for his usual habit of trading it in. Since he is now debt-free, he deposits the $290 per month car payment he had been making into the account too. After 10 years, Jim decides to buy a new car, and no longer deposits any money into the Roth account.

Many years later, at age 65, Jim decides to retire. He reviews his Roth balance and is pleased to see that it is over $195,000 - all because he made a smart car purchase and kept his car running strong for 10 years. Combined with his Social Security benefit, this balance will provide 4.5 years of retirement income. Given that a typical retirement period is 30 years, Jim addressed 15% of his total retirement horizon before ever needing to tap his other retirement savings in a workplace 401(k) plan. He’s way ahead of his former co-workers who didn’t make such smart car purchase decisions in their working years.

If you are struggling to save as much as you would like for important financial goals like retirement, look beyond your 401(k) toward less traditional places, including your garage. Your car choices represent a very large potential source of savings for you, and all it takes is a little extra effort.

Thanks for reading! You can learn more on our web site and Facebook page.

Stephen Barkhuff, CFP(R), CFA is the founder and president of Financial Fundamentals, LLC, based in Watertown, MA. Financial Fundamentals helps couples and singles with modest incomes take control of their financial future. Please feel free to email him any questions or comments.