Seven Reasons Your Car is Driving You into Poverty
A friend of mine told me recently that my family car was “unapologetically practical,” which I took as a huge compliment from a guy driving a 1998 Honda Accord. The offhand comment reminded me that for many young professionals, our car is our greatest financial asset, and that our driving habits affect our finances more than almost any other factor. Owning a car is often thought of as a sign of prestige, but actually our cars are often a source of many damaging financial mistakes.
Below are seven financial sins that we commit with our cars, and how to correct them.
Buying a New Car
Is buying a new car is a smarter choice than buying used? Let’s assume that you’re buying a new car in cash, because you frequently have $20,000 just lying around, right? The biggest cost you will face in buying a new car is depreciation — the rate at which something loses value over time. Cars are a terrible investment and hold their value like a colander holds water.
How quickly do cars lose value? If you bought a new car today, the moment you drove it off the lot it would lose about 11 percent of its value. So if you bought a $20,000 car today, it would lose $2,200 in value on the drive home. In the first year, the car would lose nearly 20 percent of its value, or about $4,000. Within three to four years, your car would lose half its value.
There are two ways to combat depreciation. First, buy a used car — preferably one that’s five years old or more. By that time, the vehicle’s depreciation will have slowed down significantly, so you won’t be paying money that just vanishes over time. Second, no matter what car you buy, drive it into the ground. You are now a disciple of the church of BIFL, or buy-it-for-life. You will not buy a new car until your current vehicle has over 200,000 miles on it and is wheezing through the streets begging for sweet, sweet death. Whatever car you now have or may have in the future, plan for it to be the last car you will ever own.
New cars also impose higher insurance costs, and if you’re in a state like Virginia, the car tax is higher for newer cars. So used cars come with the double-barreled benefits of lower depreciation and lower marginal costs. As for maintenance, do your research to find high quality cars with low lifetime costs.
Buying a Car on Credit
If you’re planning on buying a new car, you’re also probably planning to get an auto loan. We’ve discussed before why loan debt is a cancer to your finances, but auto loans are particularly egregious. Why? Because you’re paying extra in loan interest to buy a product that is notorious for depreciating and constantly sucking away your money through fuel, maintenance, insurance, and taxes. There aren’t many financial rules that we can apply to our clients universally, but this one comes close: never, ever take out a loan to pay for a depreciating asset. Loans only work out in your favor if the thing you’re buying appreciates in value or pays you dividends over time. Your car is never going to do either of those things, unless you’re a taxi driver.
Buying a Non-Compact Car
I’ll assume that you’re driving the minimum car possible — a subcompact car. You understand that if you must buy a car, you should buy one that does just one thing: get your lazy, non-bicycling butt to work as efficiently as possible.
Oh wait, you’re driving a pickup truck or an SUV?
Let’s be real: you’re not driving on dirt roads and you’re not hauling anything on a daily basis. There’s probably nothing in the back of your pickup truck or SUV besides a yoga mat you forgot in there a month ago. So why would you buy a machine that is very good at tasks that you rarely need and very bad at commuting, which you do every day?
If you really need to haul something, renting a U-Haul for a few hours each year is almost certainly cheaper than the money you waste in a giant gas-guzzler “just in case.” You could also ask for help from a friend who owns a truck and repay him in beer.
Maybe it’s about your identity. Maybe you need a luxury SUV or pickup truck that tells everyone “I waste my money so I can impress people I’ll never meet driving on a commute I hate to a job I can’t afford to quit.” I don’t understand it myself, but if you want some insight into why people buy these vehicles, here’s an article about why General Motors’ SUV sales are rising. Warning: reading this article may cause difficulty breathing from laughter.
Buying a Luxury Car
This section can be summed up in two questions. Do you remember how cars depreciate in value? Guess which cars depreciate the fastest? Spoiler alert: high-end luxury cars, also known as the “people with more money than sense” car market.
Leasing a Car
Let’s say that you insist on buying a luxury car but you can’t afford it, even if you took out a sizeable loan. Too bad so sad, right? Oh wait, this is America — of course there’s a financial “solution” that’s designed for people who think that looking wealthy is more important than being wealthy. It’s called a lease.
A lease allows you to rent a car long term. You pay a monthly fee diligently and you have a car for three years, and then one day the dealership demands the car back and you’re left with no money…and no car.
Driving Your Car
Are you driving to work every day? Are you driving alone? If you answered yes to these questions then you’re on the express lane to poverty. There is a dollar cost associated with every mile that you drive your car that includes the fuel, maintenance, and insurance required to go that extra mile. The IRS has calculated this cost to be 56 cents ($0.56) per mile in 2014. This number may be higher or lower for your particular car, but we’ll use it as an estimate.
Let’s assume that you drive five miles to and from work each day, for a round trip commute of ten miles. At the standard IRS rate, this commute costs you $5.60 per day. If you drive five days a week, minus a few days for holidays, you’ll drive 250 days per year (this ignores the time you might drive on weekends or on personal time). This brings your annual commuting costs in 2014 to $1,400. What could an extra $1,400 per year buy you?
If you live within five miles of your work site and you’re not walking or biking then I urge you to do so. Biking puts money in your pocket and keeps you healthy and happy. I would only recommend using public transportation if it truly lowers your overall costs. Chances are, owning a car and using public transportation is more expensive than choosing one or the other, but do the math and see if it works for you.
If you don’t live within five miles of work, then you have two options: move closer to work or move work closer to you. This may sound extreme, but if you’re serious about becoming wealthy you should research housing and job options in your area and calculate the benefits of being as close as possible to the place you go most frequently. This could even mean working from home part time or full time.
Not Doing Your Own Maintenance
A while back when I still owned a car one of the tail lights went out. Maybe I should go to the mechanic, I thought. But then I wondered if I could fix the problem myself. I searched YouTube for how to replace light bulbs in my model of car and found dozens of videos with detailed tutorials.
Armed with newfound confidence, I went to an auto parts shop, bought a light bulb, and replaced it in the store parking lot in a few minutes. When my car’s battery later died I went back to an auto parts shop to buy a new one. At the cash register the attendant asked if I needed help replacing the battery — for free (of course this service is included in the cost of the battery somehow)!
My practical friend scolded me recently for not knowing how to replace my own engine oil, so I admit I have a lot to learn. Your car doesn’t run on dark wizardry — you can do much of the minor maintenance yourself. Investing in a little self-education is the best get-rich-quick scheme I know of.
As for washing your car; what the heck are you doing? It’s a car, not a pet. You’re not going to resell it anyway — you’re going to drive it into the ground! Almost all of your car’s normal dust and dirt can be ignored until a rainy day solves the problem for you.
Apologies to the Gearheads
I love an episode of Top Gear as much as anyone and I have to admit that driving stick shift is loads of fun. Still, I can appreciate cars without feeling the need to own more than the bare minimum. Cars are an expensive habit and for every adventure I have in a car there’s a hundred moments of bumper-to-bumper frustration.
I sold my car a year ago and now I share my husband’s car. Becoming a one car family is among the best decisions we’ve ever made. Plenty of friends warned us that we couldn’t survive without two cars. These days, I rely almost 100 percent on my bicycle, and I’m loving my commute every day — summer or winter. Can you say the same about yours?
Alejandro is a financial planner with Monte Largo Financial Advisors LLC.