People get in financial holes because they are often responding to life’s pitfalls real-time and are unprepared or under prepared. Without preparation you will be unable to respond appropriately financially. You will be forced into a bad choice more or less. And usually one bad choice leads to a series of bad choices. It’s an avalanche effect of sorts. If you have lived your life in response mode that is all you know. If your grandparents, parents, aunts and uncles did it, well that is what you know. That is likely what you will do. You don’t know the options that exist. You don’t know the preparations you should make on the front end. And if you are fortunate enough to stumble across options while you are in the midst of financial peril, you are probably past the point of being able to use them or take advantage of them. It brings to life the phrase, “time is of the essence”.
Generational wealth is something that has to be taught. It will rarely come naturally. To gain and maintain generational wealth you have to understand capitalism, preplanning, investing and savings. Sadly many of those who truly understand generational wealth chose to keep that knowledge within their tight circles and then mock ignorance, even exploit it for their own financial gains. Generational wealth has a cultural divide. On average, in the African American culture we are anywhere from 50 to 100 years behind in generational wealth knowledge. Most of us don’t understand the power of setting $5,000 to $10,000 aside for investments when a child is born. Where do you even get the $5,000 to $10,000 to begin with many may ask when you are already living week to week? With compounded interest or investment gains that $5,000 to $10,000 could be worth $30,000 to $40,000 in 15 to 20 years. Imagine having that as a nest egg to pay for college instead of coming out of school with $40,000 thousand in student loan debt. And let me point out that generational wealth is less about being a millionaire and more about being debt free and having strong financial disciplines. This is how wealth is maintained over generations. Without this knowledge people are able to attain a rich lifestyle. But often can’t maintain it (lottery winners, athletes, 1st and 2nd generation black college graduates).
So let’s buy that car! The key of course is budgeting and saving. But not just setting aside money in a savings account. You will need to look at options like accounts that apply compound interest. You can also look at investments in stocks or mutual funds. There are many options. Some options have risk, but give you more return. Other options are safer (tied to interest) with smaller gains. Either way your money will work for you. So let’s get started. Let’s say your car payment is $350 a month (estimating conservatively because we know people are out there paying much more) and you just finished paying off your car. Rather than move that money to other expenditures start saving or investing. Over the period of a year you would save $4,200. Over 5 years that would be $21,000. Adding your interest gains of 3% you have $22,890. (Note: if you use stocks or mutual funds you could see higher returns like 6% to 8%) Let’s say you use that money to purchase a slightly used, but like new Nissan Maxima that is listed at $25,000. Since you are trading in your old car you get a trade in credit of $2,500. And since you are paying cash the dealer is willing to negotiate the sale at $22,750. (Most dealers understand a bird in the hand.) You spend $20,250 on the car and have $2,640 left over. Now let’s do the math the other way if you finance the Maxima at $25,000 over 6 years at 17% interest. You end up paying a total of $38,150 over 6 years. Your savings of $350 a month balloon to a monthly payment of over $529.86 a month. So you tell me, which is more maintainable the monthly savings of $350 a month or the monthly payment of 529.86? The difference is $178.86. This is money you could put to work to help maintain your financial stability rather than paying it to make someone else rich.
Now let us revisit the left over money from buying the car outright with the money from the savings/investment. That was $2,640. Spend $500 on yourself as a reward for following through with your plan. Put $1000 towards retirement investments and $1140 in savings and investments for car maintenance. And keep in mind you still have the $350 a month allotted for savings. You can either start saving for your next Vehicle or begin a new financial endeavor. Doing this over a period of 10 to 15 years you can easily graduate your car selection from a slightly used Maxima to a brand new Benz. I would be cautious in buying brand new cars or even spending big sums of money on cars. But the illustration is accurate and achievable.
We have been conditioned to think financing through a third party is the only way to buy a car. This mindset has left us with the short end of the stick. We have the power and resources to reverse this trend.
Are you ready to break up with the car note and start building generational wealth? Let us know what think! We would love to hear from you.
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