What would you do with an extra $400 each month?   Think about it for a second!

Would you pay off debt?  Build up savings?  Start investing like you really mean it?  Give?  Go on a trip?  At the very least, you could do something fun, right?  $400 more blow money, fun money, food, or entertainment would be sweet.  Of course, I’d hope that you do something truly productive with it!

I don’t know anyone who would turn down an extra $400 each month!  That’s nearly an extra $5000 each year!

What’s the fastest way to get that $400/month?

Get rid of your car payment

I’m sorry to disappoint those of you who don’t have car payments; you’re already experiencing the benefits of living without any car debt!

Car payments have been on my mind recently [read: driving me crazy!].  According to CNBC, the average new car payment is $471, and the average used car payment is $352.  The average new car loan balance amounts to $27,430 and used car loans average $17,974.

I’m trying to wrap my mind around how to justify car payments like this, and as I dig into the numbers I’m becoming more and more convinced that one of the best ways to get on the fast-track to a healthy financial position is to get free from car debt.

Let’s look at what you’re not doing with this $400 each month.  If you have a $400 car payment, you aren’t investing it!  But if you were investing it for 6 years/72 months averaging 11% return, you’d end up with over $40,000.  That is $40,000 in assets that you would own, that would continue to grow unless you cashed them out.

Instead, we’re taking that $400/month for 72 months and making car payments, a total of $28,800.  But what’s happening to that $29k while we’re driving our new car around?  It’s disappearing, evaporating, thanks to the wonder of depreciation. 

Depreciation is when things of value become less valuable with time and use.  Very few things depreciate in value quite like new cars.  According to Edmunds, the average car loses 60% of it’s value in the first 5 years of its life!  After 5 years of making payments, that $28,000 car is going to be worth about $11,000, and you still have payments to make!

Let’s just look at what it does to your net worth.  Your calculate your net worth by subtracting the value of your debts minus the value of what you own.  It’s what determines if you’re a “millionaire” – whether or not you have a net worth of $1 million or more.   At the beginning of 2015, let’s say you purchased a car OR started investing $400/month.  The first columns represents a baseline net worth of $20,000 – perhaps in investments or physical property:

Net worth comparison

After five years of car payments, you have an asset worth roughly $11,000, but you still owe nearly $5000 on it, bringing your net worth to just over $26,000 (blue column).  After five years of investing, you have put in nearly $29,000 but have increased your net worth by $40,000 of total assets because of the investment growth (green column).

On top of that, the arrows signify what’s happening to your net worth because of these choices.  After five years, your net worth is dropping with a car payment because the car is continuing to lose value.  After five years of investing, the investments are continuing to increase in value over time!

Ok, so maybe you don’t invest the entire $400 each month.  Maybe you use it to get out of debt, or just build up an emergency fund the first couple years of the five that we’re talking about.  That’s OK!  You’re still moving in a positive financial direction, whereas debt on a car that is constantly losing value moves your net worth in a negative direction.

Free up cash and move your net worth in a positive direction.  Get rid of your car debt.  Do whatever you have to do.  Sell the car; work like crazy to pay it off; write a check and sell it at a loss if you have to – get the debt out of your life.

Start making those choices now, instead of five years from now when you’ll be missing a $35,000 chunk from your net worth and wondering why you’re not making more progress!