Anyone who reads this site knows that I am a fan of Dave Ramsey. The Total Money Makeover: A Proven Plan for Financial Fitness was one of those books that gave me a simple, no-kidding plan I could follow to get the finances on track. I have attended a 1-Day Entreleadership class taught by Dave, and have been working with a Financial Peace University representative to bring the 13 week course to my church. There is a lot of financial advice out there, but I have no problem recommending Dave Ramsey. However, I don’t agree 100% with all of his ideas. One such idea is Drive Free – Retire Rich. The basic idea is this:
Instead of upgrading your car and paying the bank month after month for a depreciating asset, keep the car a little while longer and pay yourself by putting the money in a interest growing mutual fund. Then by a used car with cash, rinse and repeat. After a few cycles, you’ll have more money put away for a better car purchase and eventually the mutual fund will generate enough gain such that you can continue to by new cars without monthly payments. Pretty cool right?
I think so, in fact, I can’t wait to be finished paying for my vehiclesoI can implement a modified version of this plan. Why modified? As I stated earlier, some things I don’t agree with 100% and this is one of them. In the video below, you’ll see the numbers soar. The formula is assuming a 12% return. Not only is this very optimistic, it is assuming that will be the rate of return when you are ready to make a withdrawal. What if your “car mutual fund” takes a tumble right before you are about to make a purchase? Do you wait for a rebound? Use your emergency fund?
Once I am done paying for my car (next year), I plan to allocate 70% to a car mutual fund and 30% to a savings account. Why 70/30? I’m planning (and hoping) to get at least another 5 years out of my car. Saving 30% of my current monthly payment for 60 months without including interest would enable me to buy a reliable used car in 5 years. If the mutual fund tanks….I’m not left without funds for a car. If it performs well, then I’m in a much better position. Also, I’m not banking on a 12% return, but if it happens, I’ll be pleasantly surprised.
I believe this modified approach will take out some of the risk.
Although, I’ll still have some driving expenses because this method doesn’t eliminate the need for car insurance and gas. However, I’ve gotten those costs pretty low by carpooling to work and comparing insurance companies on MoneySupermarket.com.
What about you? Do you think it is possible to “DRIVE FREE – RETIRE RICH?”