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MONEY MANAGEMENT


How To Save $13.25 Per Mile. Really!

12/11/00 04:27:01 PM PST
by Bruce R. Faber

With your IRA limit $5,000 instead of $2,000 these days, here's how buying an excellent used car instead of a brand-new one could save you more than half a million dollars!

And now that I have your undivided attention, let me guess your next thought. Is it something like: "That's impossible! You can't save $13.25 a mile on any car, just because it doesn't cost that much to operate a car!"

Wanna bet? Just hang in here with me for a couple of minutes and I'll show you that not only is it possible, but $13.25 per mile is a very conservative number. How conservative, you'll find out.

But first, let's lay a little groundwork so we're on the same page. In one of the wisest moves made in recent memory by politicians, the US Congress raised the amount per year that can be contributed to an IRA account. Even more impressive, the contribution ceiling was more than doubled, from $2,000 to $5,000 per year. If there ever was an incentive to get a job early and sock away every cent you can for an IRA, especially during the early years of your life, this is it.

In the November/December 2000 issue of Working Money, I explained how money works through compounding. This article continues on that theme. Working with $5,000 to sock away into your IRA rather than the previous $2,000 makes the results so much more impressive and the reward so much more exciting, it might even spark a new interest in saving. The simple fact is this: Through compounding at 10% per year -- which is a little less than the stock market has returned on average since there's been a stock market -- every single dollar put into an IRA on your 20th birthday will be worth more than $106.72 the day you turn 70.

It doesn't take a rocket scientist to do the math. If you put $5,000 into your IRA the day you turn 20, then on the day you turn 70, you'll have well over half a million dollars -- that's more than $500,000! -- for your golden years of retirement. That's just from that one investment in your future! Imagine what you would have if you invested that much every year until you retired. Can you say "$6 Million Man (Woman)"? Well, okay, it wouldn't quite be $6 million, to be honest. But it would be close. How does more than $5,800,000 strike you?

AND HERE'S THE PUNCHLINE

Let me tie this all together and show you how to save $13.25 per mile. While there are other choices that would prove my point even more significantly, let me use a conservative example. In Seattle, the difference between walking into a dealership and buying a brand-new 2001 Honda Accord LX two-door and searching through the classified ads for a 1998 model (same car, four years old) -- in excellent condition and with 40,000 miles on it -- is more than $5,000. With many other makes, the contrast is even greater!

Do I see the lightbulb switching on in your mind? Allow me to make sure. Say you are buying a car for your 20th birthday, and it so happens you're deciding between a brand-new Honda Accord and a model that's four years old. Say you choose the older model using the argument I've just used. That $5,000 you saved by getting a four-year-old car instead of a brand-new one is going into an IRA making the 10% yearly gain I mentioned previously. When you retire at age 70, that five grand of savings will be worth -- better sit down -- $533,595!



Future value of $5,000 after 50 years at 10% = $533,595


The price difference between the 1998 Honda Accord (left) and the 2001 model (right) is more than $5,000. Is it worth it?

I said that your four-year-old car had 40,000 miles on it, right? Okay, now grab a calculator and divide 533,595 by 40,000. It comes out to $13.34. (It was just easier to use $13.25 in the title. And I did say I was making a conservative estimate.)

As with most of the important decisions in our lives, this one is up to you. Is that new-car smell worth more than half a million bucks? You might keep in mind that if you wait and buy that new car later, you'll also find that it will cost you a lot less to operate. With just a small amount of the difference between a new car and a used one, as a reward, you can take a tropical cruise to reflect -- as you inhale the balmy breezes on the Lido deck -- on how much you really didn't need that new-car smell after all. It's up to you!

Errata: How To Save $13.25 Per Mile. Really

I have bad news and good news.
With considerable regret, I agree. Your observation is correct as I write this on 12/11/00. House Bill H.R. 1102, which contained the change from $2,000 to $5,000 for IRAs, had 200 bipartisan sponsors. On July 19, 2000, it was passed by the House of Representatives with a 401 to 25 margin. The overwhelming majority inspired overconfidence in both the news media reporting the fact that day, and in me as I wrote the article. H.R. 1102 went to the Senate on July 20. Its first reading was on July 27, the second reading was on September 5, and at that time it was referred to the Committee on Finance. By September 13, the Committee on Finance had made an amendment to the title and placed it on the Senate Legislative Calendar. And that is where it remains today, according to (great place to find out what our government is up to!) Thomas Legislative Information on the Internet: http://thomas.loc.gov/cgi-bin/bdquery/z?d106:HR01102:@@@S|/bss/d106query.html

In the final days of the 106th Congress, the majority leadership included much of H.R. 1102 into the doomed-in-advance tax bill. There is pro and con in all bills and although this bill has shown much progress, it has yet to pass Congress. Until such passage, the $13.25 saving per mile given in the article will need to be adjusted slightly. Instead of putting the whole $5,000 in at one time, it would have to be spread out over three years. By depositing $2,000 on one's 20th and 21st birthdays, and $1,000 on the 22nd birthday and going through the calculations, the savings per mile is just over $12.39 per mile. That's the bad news. The good news is that in reevaluating my spreadsheet, I discovered that I had only gone to age 69, not age 70. It turns out that - even with spreading it over three years instead the one-time deposit - at age 70, the savings is $13.63 per mile. $545,237 divided by 40,000 miles.

I apologize for any inconvenience this may have caused.

Sincerely,
Bruce R. Faber

RELATED READING

Faber, Bruce [2000]. "How Much Did That Really Cost?" Working Money, Volume 1: November/December.





Bruce R. Faber


Title: Staff Writer
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