Live in your car and drive your house could give you a financial edge. Previously I had commented on the idea of time shifting. Let’s look at another type of shifting; resource shifting. There is a finite amount of resources no matter who you are. You only live a certain amount of time, you only can earn a finite amount of money, etc. So it would be best to take a step back and re-evaluate the what are your resources spent on.
The two most expensive items the average American purchases is an automobile and a house. The car decreases in value over time while the house generally increases in value over time. What if you were to spend less money on the car which decreases in value and reapply the savings into the house? Do you think this could make a difference in your long term outlook?
Live in your car; meaning drive your car until it has no value except as a mode of transportation. If a car is able to be driven to the point where the cost of depreciation is statistically zero, the car is then only the value of what it can do for you. The value of a car was presented on my very first post. How old a car is is irrelevant what it does for you is. If it provides transportation to work which provides money for your family the value is higher than a car that is used for a joy ride.
The normal car buying cycle for the average American is purchase a car keep it 11 years and purchase another car. If the car is purchased new by a loan the term is usually between 6-7 years. This means you are continually making car payments and that cash flow is gone. What if we look at the car as a mode of transportation and focus just on that function. Does a car fall apart after just 11 years? Most likely not. This leaves 4-5 years of no payments. The average car payment is $482 according to Experian Automotive. 4-5 years of no payments can be $23,136-$28,920 for the average new car finance buyer. There are some reasons to drive an older car but, the most important in my eyes is to have money to spend on other things which add more to my life.
When the car is payed for the cash flow from the car payment is freed up. The next step would be to direct that cash flow towards your home mortgage if you have one or some other form of real estate. This is all great but how may this look in some numbers:
(I used tools from Free-Online-Calculator-Use.com to aid some calculations – Thanks Again Dan Peterson for all the wonderful tools!)
If I start with the following assumptions:
If I keep my car the average 11 years and pocket the $23,136 to use for a down payment on a house, I could realistically afford the following with continued payments of $482 per month:
This is a $76,630.39 house. Lets suppose you were to buy this house to rent it out it may be possible to get about $900 per month. This would maybe give you about $200-$250 per month profit after all the landlord maintenance, mortgage, insurance, etc. ($2400-3000 per year residual income) This is a vision of what can happen by just being average with a plan.
So in 11 years I would have a paid for car with about 132,000 miles on it (average 12,000 miles per year) and a rental property. After that if you save the $482 car payment and the $250 rental profit for 2 more years you’d have $17,568.
The options open up with the momentum built. The money could be used to buy another car. Additionally you could sell your car with 156,000 miles on it and add those proceeds. Or another option might be to pay down the rental and push to increase your monthly cash flow from the rental. When the rental gets paid off that would be about $700 per month profit (at the same rental level) If the car payment of $482 and $700 per month are added together you would be looking at an additional $14,184 per year.
Of course there are always bumps in the road and nothing ever happens exactly as planned but, I wanted to paint a picture showing the implications of how you deal with car buying can be the one thing needed to put a good financial foundation in your life.
Resources shifted from a car to a rental property is a powerful concept. The shift is to put money from an item that sucks money from you to one that gives residual money back.