As I was leaving work the other day I spotted a brand new Infiniti QX70 SUV, and I admit it… I drooled a little. This car was absolutely gorgeous and I know that I would look soooo good behind that steering wheel. Since I have no debt (outside of my mortgage of course), I’m sure I could qualify for the loan and start driving one tomorrow, but how much would this really cost me? And not just the cost in dollars, but how many years of retirement might this purchase cost me? Would it just be a couple of years or would this move be the difference between retiring with a dark, full head of hair, or a white whispy combover?

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**The Initial Cost of the Purchase**

These luxury SUVs sure are gorgeous and they do have many of us drooling, but how much do they really cost? Many times the dealer will show us a brand new vehicle and tell us that we could be driving it for just a few thousand dollars down and a monthly payment of $400 or less, but have you ever looked at that total amount? Without even including the interest amount that you’ll be making on these monthly payments, a luxury SUV like the Infiniti will cost you $47,000! That is a ton of money!

The real question is, “How much is a reasonable amount to spend on a vehicle?” First of all, it’s just not necessary to buy a brand new car. After just four years, vehicles typically lose 50% or more of their value. So, this $47,000 SUV will only be worth $23,500 four years from now. Unless you are worth millions of dollars and can afford this type of loss, you are severely hurting your future financial position. There is absolutely no reason for the average income earner to purchase a $47,000 vehicle.

So the next question is, “How much is a reasonable amount for someone to spend on a vehicle?” If you earn less than $150,000 per year, then I would say you should spend $12,000 or less on your daily driver. This can buy you a very reliable vehicle that will last for many years. In essence then, buying a $47,000 SUV means that you are overspending on your vehicle by $35,000!

**The Cost If The Money Were Invested**

If you had $47,000 and were considering an Infiniti QX70 as your next vehicle of choice, but then decided that a $12,000 vehicle would be suitable instead, you could invest that $35,000 into a low cost Index Fund. Assuming that you are 30 years old at this point of decision, you would have 35 more years to invest before a respectable retirement age of 65. By investing $35,000 and just letting it sit for 35 years at 10% interest, your money would turn into…

Almost one million dollars!

By avoiding the luxury SUV in your 30’s, you could instead turn that money into a million dollars, just through simple investing.

**The Cost in Retirement Years**

Now what if we thought a little differently about this purchase? Instead of thinking about how much money this luxury SUV would cost us (which sometimes doesn’t really resonate with many of us because it seems so hypothetical and cliche), what if we looked into how many retirement years this purchase would steal away from us in the future? Instead of retiring early, you might have to retire years later – all because of that one decision.

So how much impact would this $47,000 really have? Many of us might assume that the difference would be negligible – something like retiring at the age of 66 instead of 65 – but the impact is much, much greater.

The average person lives quite comfortably on about $38,000 of after tax dollars each year. If you would invest that $35,000 (the difference between the $47,000 and $12,000 vehicle) instead of purchasing that luxury SUV, your money will grow to $380,000 after 25 years (at this point, you are 55 years old). Do you understand what this means? Instead of working until the age of 65 years old, by foregoing that expensive vehicle purchase, you could begin drawing out $38,000 a year at the age of 55 and would no longer need to work because your money will last you until the typical retirement age of 65. **By purchasing an Infiniti QX70 instead of a used domestic SUV, you are postponing your retirement by 10 years.**

Isn’t that insane? This one simple purchase of an SUV will deter your retirement for 10 whole years! Instead of being able to retire early at the age of 55, you would have to work 10 additional years until the age of 65 to stop working in the same fashion! If I were you, I would really think twice before making that next vehicle purchase!

**Have you ever thought about how much your vehicle purchase was affecting your future retirement?**

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#### AUTHOR **Derek **

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

## 8 Comments

I try to look at my purchases in this manner. I typically ask myself if buying the item is getting me closer or farther away from my financial goals? Most times it takes me further away. Of course, you can’t simply not buy everything that will take you further from financial independence. You just have to figure out a compromise that makes sense for your life and goals.

Thanks for the comment Jon. I used to say that same phrase to myself, but it isn’t very quantifiable. Like you said, any purchase will technically take you farther away from your goal, so the real question should be, “How much will this set me back? And is that acceptable to me?” In the case of the new car, this would set me back 10 years, which is absolutely not acceptable. Now that I know the real cost, I’m going to stick with my dependable 14 year old Honda. 😉

Derek, Take a look at the Buffett Biography, Snowball. This is a constant theme throughout the time when he was first getting started. He looked at every dollar not invested in himself as wasted opportunity cost.

Makes sense, and it looks like the method worked out pretty well for him. 😉 I will have to pick up that book this upcoming week. Thanks for the recommendation!

This is essentially the conversation I had with my father in law a few weeks ago. He wants to replace his current car and said, “Now that I’ve driven such a nice car, I can’t go backwards and drive a worse car.” By my back-of-the-envelope calculation, shelling out all that money for a nice car would set his retirement date back 10 years — because in 10 years he would again feel compelled to replace his current car with another nice car! And he has already told us that he doesn’t have enough to retire by 65. SMH.

Sounds like he is more worried about status than actually having money. Sadly, he is probably part of the “normal” crowd. He will expect to retire at 65, but will run out of money long before he dies. So how do you feel about picking up his tab when he runs out of money?

Who earns 10% ? Where do I go to earn that ?

Steve

Real estate is one way. The other has been index funds. Check it out: https://investor.vanguard.com/mutual-funds/profile/performance/vfinx