Auto loans are now the second-largest household debt in America, to the tune of $1.66 trillion. For perspective on common bills, that amount only follows mortgages at $13.07 trillion, and slightly edges out student loans, which come in at $1.65 trillion. Credit card debt closes out the list at $1.23 trillion.
With average monthly car payments still so high, it makes little sense to throw so much, or any, money at a depreciating asset and take on more debt. That’s the thinking of best-selling author, personal finance guru and radio show host, Dave Ramsey. He believes monthly car payments are costing you millions of dollars — here’s why.
Financing a Car Will Not Help You Build Wealth
Ramsey is well-known for his straightforward approach to financial education and, as such, is dead against wasting money that can be better spent on building wealth. This take makes sense, especially when you factor in that the average auto payment for new cars is around $748 per month, and used cars are not far behind at about $532 per month.
Posting a short video blast on X, Ramsey emphatically stated his case:
“And you scratch your head and wonder why you’re freaking broke!” he said. “The average car payment in America now is $499. That’s suspiciously like $500 bucks. If you take $500 a month and invest it from age 30 to age 70, you’ll have — would you believe it — you’re going to have over $5 million!”
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Successful wealth builders don’t give money away to Ford’s and Toyota’s finance departments, and they certainly don’t spend decades making payments on a succession of cars. Instead, they grow their fortunes by investing their income.
We already know that many of the world’s wealthiest individuals choose to drive affordable, dependable cars that suit their needs over expensive, swanky toys. The average American with a net worth under seven figures should really only be buying used and with cash, per Ramsey.
“Going into debt to buy one is a horrible idea, so go ahead and take getting a car loan off the table,” states a Ramsey Solutions article from early 2024. “That means the car you can afford is the car you can pay cash for up front. Not only is it possible, but it’s also the best way to buy a car, hands down!”
The Opportunity Cost of Car Payments
By staying away from unnecessarily high financing and lease payments, you can invest any extra money into assets to build wealth through unrealized gains — any investment that has appreciated on paper but hasn’t been realized through a sale — which could potentially net you millions, depending on their value when they are sold.
That means buying stocks, bonds, real estate, mutual funds and even collectibles known to appreciate, like art or antiques. This strategy might work for those hoping to grow wealth quickly without waiting until retirement to realize it. Of course, the assets you hold have to gain significant value throughout the years.
Better yet, for those with the patience to prioritize future wealth over immediate wants, try contributing to a Roth IRA. This consistent, long-term investing strategy allows individuals to take advantage of compound interest and can lead to substantial growth in their retirement savings over time.
In fact, investing the same amount that you would have through monthly car payments (around $500) for 40 years could yield around $5 million in a Roth IRA through the medium of compound interest over time. Ramsey discussed the benefits of compound interest in a recent TikTok video, using a $100 per month Roth IRA retirement savings example.
If you were to invest $100 a month (every month!) from age 25 to 65, averaging an annual return of 12% in a good growth stock mutual fund Roth IRA, it would be worth $1.176 million, according to Ramsey.
Becoming a millionaire in retirement is entirely doable by investing $100 a month. Cutting out the burden of a monthly car payment five times that amount and consistently contributing it to a Roth IRA could render you a multi-millionaire and set you up comfortably in your golden years.
Caitlyn Moorhead contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: Dave Ramsey Says This Common Monthly Payment Is Costing You Millions
