How Much Does That New Mustang Really Cost At 5 Years And Retirement
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| Picture: Illustration Mustang Really |
How Much Does That New Mustang Really Cost At 5 Years And Retirement
A 28 year old engineer walked into my office the other day
with a question about his personal finances. Joe (not his real name) was the
owner of a 2002 Mustang GT which he had finally paid off after five long years
of payments.
I had helped Joe with his taxes a few weeks ago. I had saved
him a few bucks and more importantly gained his trust. He really wanted to
trade in his Mustang on a new one, but wanted my financial opinion on the
matter first.
My gut reaction was that it was much more expensive to drive
a new car than a used car. Being an engineer Joe did not want a gut reactions
instead he wanted facts.
I decided that it would be a fun exercise to run the numbers
and find the true cost of the car both for the term of the loan and the long
term effect at retirement. We began by defining some variables.
The cost of the new GT 2dr Convertible (4.6L 8cyl) Mustang
according to WWW.Edmunds.com is $31,268 which is a bit expensive, but the
engineer is making good money and loves Mustangs.
The trade in value of the existing 2002 GT Mustang is $7,300
according to Kelley Blue Book. The young man has decent credit and was able to
obtain a 9.5% finance rate on the prospective new car purchase.
Joe had the choice of buying the new car and trading in his
old one or keeping the old car and investing the cost difference.
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The difference he wanted to invest in his favorite mutual
fund Fidelity Value Fund (FDVLX) which has a ten year track record return of
12.64%.
He figures that it will cost an extra $80 a month to pay to
set aside for the increased repair cost of the used vs. the new car. One final
variable is the full coverage insurance which will be $290 for full coverage as
compared to $90 a month for liability only.
The value of the $623.37 difference invested in the Fidelity
Mutual fund with a rate of return of 12.64% after five years will be
$51,778.72.
Now at this point Joe would have a ten year old Mustang
worth $4,900 and mutual fund worth $51,778.72 for a net value of $56,678.72
while if he would have purchased the new car it would be worth around $8,000
with no mutual fund.
Joe was stunned he had a choice of being 33 years old in
five years with a mutual fund + a 2002 car worth 56,678.72 or just a 2007 car
worth $8,000. I asked him if it was worth $48,678.72 dollars in five years to
own a new Mustang rather than driving his old one.
The answer was obvious he would keep the his Mustang. Here
is the real shocker if he just kept the $ 51,778.72 in the mutual fund and did
not add another dime between 33 and retirement age of 65 he would have
$2,885,514 more than enough to retire on.
When I think of these numbers the new car smell does not
smell as sweet.
