Is A 15-Year Fixed Mortgage Better Than A 30 Year The Biggest Wealth Destroyer In America (A Humble Opinion)

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The Biggest Wealth Destroyer In America (A Humble Opinion)

Let’s talk about cars – specifically rental cars

The average life of a car in the 60s – 6 to 8 years

The average life of a car manufactured today – 15 to 20 years

So what happened – technology and innovation! As in the human case, this century has seen an exponential increase in the life of machines. Thanks to the convergence of various technologies such as computers, precision engineering and biomechanics. Also, vehicle maintenance regulatory requirements such as the California Smog Check program are mandated and managed by the Bureau of Automotive Repair. Someone who buys a new car today; can very well expect the car to run smoothly in the 2030s. So why is the standard for car rental 3 to 5 years?

Welcome to how a car dealer makes money. Dealers do NOT make money on the difference between the purchase price and the selling price. Times are very competitive, plus the internet has made price-shopping very easy for a buyer. This means the bargaining power is now in the hands of the buyer, not the dealer. This has led to dealers reinventing the way they make money. They make money on repairs, warranty sales and financing – financing is the heart of this article.

Funding method:

This works in one of two ways:

a) Buyer owns the vehicle, and finances the purchase price through a dealer-affiliated company. Typically, auto loans run 5 to 10 years (as opposed to a home mortgage that runs 15 to 30 years, with 30 years being more common).

b) Buyer has NEVER owned the vehicle; in the sense that the buyer is paying “rent” to use the car. The rental company owns the car.

Let’s look at the problem with a car rental in a mathematical way:

Assumptions:

· Average life of a car 15 years.

· Let’s say a consumer in life drives a car for 60 years.

· Average price of a car $30,000.

Cost of ownership

Cars owned in a lifetime = 60 divided by 15 = 4 cars

Cost of ownership = 4 multiplied by $30,000 = $120,000.

Rental price

Cars leased for life = 60 divided by 4 years per lease = 15 cars

Lease Amount = 60% Total Value = 60% $30,000 = $18,000

Lease price = 15 cars multiplied by $18,000 = $270,000.

The difference of $150,000 (lease vs. own) is what an average consumer spends extra. That is, an average consumer spends more than double the amount by renting, as opposed to owning! No wonder my auto dealer was so eager to give me “specials” to sway my decision toward a new J lease.

Granted, leasing allows new cars every four years – but given the life of a car, isn’t that a waste?

Now here’s where it gets really interesting – if you take the middle point of savings ($75,000) and the middle point of years (30 years); reinvest the money at an annual compound return of 8% – you’d have an extra ~$500,000 in retirement!

Back to the subject of the article – destroyer of the greatest wealth in America – what removes half a million dollars from your golden years – rent a car!

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