As with most things in life, the devil is in the details on this one. But the basic idea is solid. If instead of spending ALL your money on a car (or worse yet BORROWING money for a car, and magnifying the devastating impact of interest and depreciation) you spend HALF your money on a car and invest the rest, you’ve created an unlimited car financing machine!
In broad strokes, cars depreciate about 10% per year. If you buy a $20K car, a year later you can sell it for about $18K. In broad strokes, index funds go up in value about 10% per year. If you invest $20K, a year later it’s usually worth about $22K. But as time goes on, the depreciation becomes smaller and smaller (because the limit is $0) and the growth of your investments becomes bigger and bigger! 10% depreciation on $18,000 is $1,800 while 10% growth on $22,000 is $2,200!
And for sure, the devil is in the details. If you’re not getting top dollar for your old car, that’s gonna hurt. I would suggest selling it on craigslist, not trading it in to the dealership. And of course there’s always some short term volatility in the stock market. That might impact your timing of buying a new car, or your available budget when it’s time to buy another one.
Since this money is in a brokerage account, you may owe some taxes on the capital gains when you sell 50% of your index fund to buy a new car. (But long term capital gains tax is actually 0% if your income is under $40K and only 15% if your income is under $441K)
But something to think about when buying your next car. Spend less than you can afford, invest the rest and make yourself an infinite new car machine!
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.