Cars are Evil.
December 7th, 2007This is the first in a series of posts I promised (or threatened - it’s a matter of perspective) a while ago. This series, Todd’s Ten Financial Tenets, is meant to share some of the family finance insights I gained during my previous (professional) life as a community banker. And, day in, day out, the most pervasive form of financial suicide is the love of cars.
Cars are evil.
Much truth I find in the advice my father gave me, upon owning my first car. “It’s the worst investment you’ll ever make”, he said. Twenty-some years later, those words are more true than ever. What other investment would intelligent individuals willingly seek out, knowing that a scant five years later it would lose nearly all of its principal value, after subjecting it’s poor investor to repeated and unconscionable administration fees (i.e. routine and not-so-routine maintenance expenses) ?
Yet the love affair with the car continues …
These family finance friendly posts are intentionally non-technical, as the topics I post on should present a compelling enough case, without needing to scare off the math-intolerant among us (it’s okay - this is a safe place !). For example, how many times in a typical person’s life will they subject themselves to the five year (or less) cycle of financial destruction described above ? Sans supporting calculations, I would posit that the typical person could easily blow through $150,000 of principal loss in their lifetime of car “investments”, which, of course, ignores the administration (maintenance) fees of such “investments”. Now, I don’t know where you live, but where I live, $150,000 will still buy a 3 bedroom, 2 bath home in a decent neighborhood. The home that used to be romanticized as “the American dream”, before McMansions took over the cul-de-sac.
But, you say, cars are a necessity for modern life. Well, depending on your zip code, that may or may not be true, given the urban/commercial/residential density of much of world at this point. For brevity’s sake, though, let’s just assume that cars ARE a necessity, like food or water or shelter. If we must have them, then how can we limit our financial downside ?
One of the best pieces of financial advice I’ve ever read came out of a book titled “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko. I believe the gist was something to the effect of, frugal people should buy a used car and drive it for 10 years. I’m assuming the term “used car” would mean a car just a few years old with mileage in the 20,000 to 40,000 range. But that is speculative, on my part.
The same book, however, went on to build a theory that these “millionaires next door” were inclined to purchase American vehicles that tended to cost-less-per-pound (i.e. heavier, more luxury-type vehicles). And, while I’m certain that their exhaustive research bore out that conclusion, I think it might reflect the point-in-time lifestyle of the millionaires studied. In my un-scientific way of thinking, those types of vehicles might not be among the most frugal choices out there.
So, what type of vehicle would better serve the family financial budget, if you’re not buying by volume ? Well, my first consideration would be the vehicles shown by reputable publications to be the MOST RELIABLE. Reliability is key, IF you plan to keep your car, not just trade warranties. Experience over the last several years has shown that the reliability favorites tend to come from either Honda or Toyota. And, while it is possible for “lemons” to exist even within these vaulted nameplates, I would look at the most reliable (and best selling) among those brands. Toyota’s line-up (of which my family has owned 4), tends to be a little more varied than Honda’s, allowing more choices for the truck-enthusiast. An additional benefit of these vehicles is their tendency to sip fuel, rather than gulp it down. (That being said, as soon as I graduate from the “thrifty” stage of life, I’m buying an H3 just because I love them ! Talk about a guilty pleasure.).
One more stop-loss measure for your car “investment” might be to limit options (even after-market equipment in the case of used cars) to those that are common in the market for your type of vehicle. Power passenger seats, media centers, and pimp-my-family-ride rims probably will only hurt your family’s financial bottom line.
So, in summary:
- Cars are evil for your financial net worth
- Buy a reliable, gently used car
- Drive that car for 10 years
- Save approximately $15,000 - $25,000 every time you repeat this cycle
- Put that savings in a better investment
Now, if you live for cars, far be it for me to try to deprive anyone of their happiness in life. But, if you, like me, value your family finances more than the ability to put on your shades and “cruise the miracle mile” (thank you, Billy Joel !), I think you can find some value in considering this financial tenet.
NEXT TIME - A discussion of an “asset” that is the virtual dot-com-posterboy of plummeting principal.