Are you trying to justify that new car? Maybe you are trying to rationalize it by better fuel economy, better reliability, or maybe you feel like you need a car that better represents who you are today… Just remember this: rationalize = rational lies. If you “rationalize” that new car, you are telling yourself rational lies (lies that makes sense).

OK, so you decided that you want that new car. Let’s say that you are buying a relatively modest car at $23,000. You negotiate an average interest rate of 6%, and a loan term of 5 years. By being the shrewd financial guru that you are, you decline the extended warranty, but opt for the gap protection. (Gap protection is insurance that will cover the difference between the value of your totaled car and the remainder of your loan. This could be several thousand dollars, so gap insurance for $300 sounds like a bargain.)

Summary: $23,000 + $1610 (7% sales tax) + $50 (title) +$300 (gap insurance) = $24,960. Plug the numbers into the loan calculator, and you come up with a payment of $482.55, and over the life of the loan, you will pay a total of $28,952.80.

Financial nuts will also look at depreciation of this car, so they will have an idea of the resale value in a few years. Let’s say that you bought a car with good resale, so it only depreciates at 20% per year with average mileage.

Now, instead of purchasing that car, let’s say you keep your already paid-for car, and invest your car payment into a mutual fund earning a modest 10% per year. (To keep this simple, I will roll the car payment into a single yearly payment.) We do this for five years, and then we don’t touch the money until retirement.

Our yearly payment is: 12 * $482.55= $5790.60

- year 1: Contribution = $5790.60 | earns 10% | total value = $6369.66
- year 2: Contribution = $5790.60 | earns 10% | total value = $13376.29
- year 3: Contribution = $5790.60 | earns 10% | total value = $21083.57
- year 4: Contribution = $5790.60 | earns 10% | total value = $29561.59
- year 5: Contribution = $5790.60 | earns 10% | total value = $38887.41
- year 6: Contribution = $0 | earns 10% | total value = $42776.15
- year 7: Contribution = $0 | earns 10% | total value = $47053.77
- year 8: Contribution = $0 | earns 10% | total value = $51759.14
- year 9: Contribution = $0 | earns 10% | total value = $56935.06
- year 10: Contribution = $0 | earns 10% | total value = $62628.56
- year 11: Contribution = $0 | earns 10% | total value = $68891.42
- year 12: Contribution = $0 | earns 10% | total value = $75780.56
- year 13: Contribution = $0 | earns 10% | total value = $83358.62
- year 14: Contribution = $0 | earns 10% | total value = $91694.48
- year 15: Contribution = $0 | earns 10% | total value = $100863.93
- year 16: Contribution = $0 | earns 10% | total value = $110950.32
- year 17: Contribution = $0 | earns 10% | total value = $122045.36
- year 18: Contribution = $0 | earns 10% | total value = $134249.89
- year 19: Contribution = $0 | earns 10% | total value = $147674.88
- year 20: Contribution = $0 | earns 10% | total value = $162442.37
- year 21: Contribution = $0 | earns 10% | total value = $178686.60
- year 22: Contribution = $0 | earns 10% | total value = $196555.26
- year 23: Contribution = $0 | earns 10% | total value = $216210.79
- year 24: Contribution = $0 | earns 10% | total value = $237831.87
- year 25: Contribution = $0 | earns 10% | total value = $261615.06
- year 26: Contribution = $0 | earns 10% | total value = $287776.56
- year 27: Contribution = $0 | earns 10% | total value = $316554.22
- year 28: Contribution = $0 | earns 10% | total value = $348209.64
- year 29: Contribution = $0 | earns 10% | total value = $383030.61
- year 30: Contribution = $0 | earns 10% | total value = $421333.67
- year 31: Contribution = $0 | earns 10% | total value = $463467.03
- year 32: Contribution = $0 | earns 10% | total value = $509813.74
- year 33: Contribution = $0 | earns 10% | total value = $560795.11
- year 34: Contribution = $0 | earns 10% | total value = $616874.62
- year 35: Contribution = $0 | earns 10% | total value = $678562.08

By year 35 (remember, you can’t withdraw from your IRA/401k/Social security until you are 62.5) your “new car” payments will be worth $678562.08, or in other words, they will be earning $67,856.21 per year for you. Pretty nice yearly income for simply sacrificing that new car purchase.