I wanted to share a financial insight I had recently while helping a client. We observed that her car payment was over $500/month. That’s a significant amount, for any budget.  

So I looked it up. According to 2024 Experian data, the average car payment for a new car is $734/month. Used cars have an average monthly payment of $525.  

And that’s when it struck me. 

Did you know that the maximum contribution for a Roth IRA in 2024 is $7,000 (under age 50) or $8,000 (over age 50)? That’s either $583 or $666/month (depending on your age).  

I’m not saying that everyone needs to stop paying for their cars and start paying into a Roth IRA instead. We all have different financial situations to deal with. But whatever your situation, it’s worth considering how you allocate your monthly expenses.  

This example illustrates the clear difference between buying assets and buying liabilities. Understanding this difference is an important step towards making informed financial decisions! 

A car, while useful, is a liability. It’s not going to increase in value. Rather, it begins to decrease in value as soon as you buy it.  

A Roth IRA, on the other hand, is considered an asset. Over time, it should increase in value. It also has the potential to create a passive income stream for you in the future – something a car is not likely to do. In other words, paying monthly into a Roth IRA can eventually give you the freedom to live life on your terms. Paying monthly for a car can only give you a car – which is going to need maintenance and upkeep, as well.  

If you currently have a car payment, there are still ways to optimize your financial strategy. If your car loan interest rate is relatively high, consider paying a little extra each month to get rid of that payment as quickly as possible. On the other hand, if your car loan has a relatively low interest rate, you might consider prioritizing Roth IRA contributions, while continuing to pay the minimum amount on your car loan.  

Most importantly, if you don’t have a car payment, or your car is close to being paid off, you may want to consider this. (First, give yourself a high five!) Then, think hard before you go out to buy a new car. Do you really want to take on another car payment? Or do you want to take control of your future? 

Remember, small steps can lead to big changes. I’m rooting for you!