By Matthew Glatt – CPA, Founder, and CEO of FLP Financial Group, LLC
It’s easy to say “yes” to the Mercedes. You like the Mercedes. You work long hours. You have a long commute and want to be comfortable. The other executives own luxury cars. You’ve earned it. You deserve it. You can afford it.
There’s no doubt that luxury items are appealing, especially when you’ve worked hard in your career to be able to afford them. We associate luxury cars with greater comfort, advanced features, higher quality materials, better safety, and success statuses.
This may all be true, but before signing on the dotted line, consider the impact a luxury car — or other high-end purchase — has on your nest egg.
The Lease vs. Purchase Debate
Read ten articles about leasing versus owning a car and you’ll receive ten different opinions. Some liken leasing to renting an apartment and throwing cash out the window, while others recommend renting depreciating assets, like cars, to save money in the short and long run.
Leasing has significantly increased in popularity. Nearly one-third of vehicles on the road are leased and 75% of luxury cars are leased. Luxury cars are more affordable leased because there are little to none upfront costs, lower monthly payments, and fewer (if any) maintenance and repair costs.
Consider the Total Cash Cost
Car salespeople are fantastic at selling cars based on the monthly cost, not the total cost. They don’t want you to fully consider the total price tag. Before you commit to spending any amount on a financed car, take into consideration the total cost in cash.
If you’re signing on to purchase a Mercedes at a total cost of $60,000, ask yourself an honest question. What you would do if you had the same $60,000 in cash? Would you put it towards your retirement, pay down your debts, or use the whole $60,000 for a luxury car? Many people would prefer to purchase a less expensive car and get ahead financially with the difference. Your choice should be no different when you’re financing a car or paying cash.
The Ongoing Toll On Your Wallet
Whether you lease or purchase, driving a Mercedes has a big impact on your bank account. First, there are the initial costs. On average, you can expect to pay between $3,500 and $9,000, at signing and between $299 and $1,699 per month for 36 months.
After upfront costs and the monthly lease payment, there’s car insurance. Typically, the more expensive the car, the pricier the insurance. The Mercedes-Benz Sl65 AMG is one the most expensive cars to insure, running as high as $3,544.
And then, of course, there are fuel costs. Mercedes (and other luxury vehicles) require premium unleaded gas, which costs nearly $0.25 more per gallon than regular unleaded. If you upgrade cars, plan to spend more at the gas station.
The Influence On Your Net Worth
Your net worth is the difference between your assets and your liabilities. You can increase your net worth by accumulating and saving more than you spend whereas spending in excess can quickly destroy your net worth.
Your assets are anything you own that is valuable and can be converted into cash, such as real estate and personal property. However, if you don’t own your car and are leasing yourself, that Mercedes isn’t an asset; it’s a liability, just like your loans, mortgages, debt, and other ongoing bills. A disciplined budget can help you evaluate the impact leasing a luxury car has on your net worth.
The Long-Term Impact on Your Retirement Funds
Even if you can afford the Mercedes, consider this: the money you allot for a luxury car could have instead been invested for your future retirement.
Let’s say you leased a less expensive car that allowed you to save $300 per month and $1,000 per year for insurance costs. Each year, you could invest that $4,600 into your 401(k), IRA, or another account. Assuming a 6% return rate, you would have saved $15,523 in just three years (the average lease terms), and $64,270 in 10 years.
And if you chose to lease a less expensive car and invest that money throughout a 35-year working career? You could potentially earn $543,356, which can go a long way in your retirement years.
Resources You Can Count On
Before making a significant purchase, you should consider how it affects your nest egg, both immediately and in the long-term. You can take the first step right now by downloading our Back 2 Basics whitepaper for tips to improve your financial well-being, reduce debt, and increase your net worth.
After reading, reach out to us to schedule a consultation. We can help you evaluate your net worth, compare your spending habits, and determine what steps you can take to increase your wealth and pursue your goals.