Auto Rich … Net Worth Poor!

AAAT’S What I’m Talking about!!

If there is one single lesson I can teach a 20 something person it is this one.  Driving the latest, coolest, fastest, most desirable car is the surest way to never acquire growth.  There I said it, and I just burst your bubble <sorry>.

I am going to add that this is advice I did not really get from Harold.  Sure, when he was younger he bought used cars and kept them for a long time but once he was about 50 years old he started buying a new car every year.  Then again, by age 50 he had done the “heavy lifting” of creating wealth and could afford a luxury like that.  I’ll make you a deal – you save and build a solid net worth then you too can trade for a new car every year.

Almost 30 years ago I got my first computer and of course spreadsheets were the first thing a good engineer would learn about.  One of the things I created was a spreadsheet showing the long term wealth impact of owning new and fashionable cars.  At the time I was conflicted; I was a supposedly successful engineer and lived in Southern California – a society where a person was absolutely defined by what they drove, but I had opted for the most mundane ride you might have ever seen – yes I was driving a 1978 ElCamino (I bought it from Harold, who replaced it with a new Buick)!  Even though it seemed intuitive that driving a boring used car like that would save money, I needed to prove to myself why I had made such a sacrifice.  Solving this gave me something to learn on my new computer, while it also would help ease my bruised id.

I dug out this now almost 30 year old spreadsheet the other night and updated some of the basic criteria and refined some of the formulas etc.  Here is what I did and the results.

Two different people  – Mr. Cool “Chick Magnet”, and Mr. Net Worth “Chick Repellant”

Mr. Cool:

  • Buys his first new car for $45,000 (OK – he did not get the Audi but got a 3 Series BMW)
  • Borrows all his money to afford his cool car – but only pays 6% interest for new car rate (5 year Loan).
  • Pays  an additional $1,000/year for insurance and registration (hey, that  “GR8TANTRA” Custom plate is expensive).
  • He gets another new car every three years.  Sells the old one for 60% of what he paid for it.

 

Mr. Net Worth:

  • Buys his first 3 year old, low mileage, used car for $15,000 (60% of the $25,000 new price 3 years ago for that Honda Accord)
  • Borrows all his money – pays 7% since used car rates are normally more than new car rates (3 year loan).
  • He pays an additional $75/month in maintenance costs, because his car is aging.
  • Keeps his car for 5 years (paying it off in 3 years and having no car payment for years 4 and 5)
  • Sells his car for 15% of what he paid for it 5 years ago.

Some common criteria:

  • Inflation of 3% (increasing the price of cars each year)
  • Return on extra cash invested by Mr. Net Worth is 8% (he is a smart Geek!)

 

So what are the Results already (scheez – do we have to sit through all your pontificating?  Get to the punch line!)

After  5 Years

  • Mr Cool:      Owes $26,500 on his 2nd car
  • Mr. Net Worth:      Just got second car, owes $15,140, has $47,500 in the bank.

After 10 Years

  • Mr. Cool:     Owes $36,960 on his 4th car (and the new baby does not fit in the sports car).
  • Mr. Net Worth:  Owes $17,550 on his 3rd car, has $108,200 in the bank for Juniors College Fund.

After 15 years

  • Mr. Cool:      Just bought his 6th car for $70,000 (those Mercedes SUV’s are spendy), owes $52,700 on it.
  • Mr. Net Worth:  Just  bought 4th car for $23,400.  He owes $20,400 and has $197,500 in investments.

After 20 years (hey, these guys are only 40 years old)

  • Mr. Cool:     His 7th car cost $72,000 two years ago (Remember that 3% annual increase has a much larger impact on high end cars than it does on lower priced average cars).  He currently owes  $36,400.
  • Mr. Net Worth:      Owes $23,586 on his 5th car.  Has $328,577 in investment account.

 

 

 

 

 

 

But HERE is what I ended up with!

Conclusion:

My analysis and spreadsheet put numbers and scope to what I intuitively knew.  I just had no idea the vast scope of the impact (as much as $500,000 in 25 years).  When I first did this some 30 years ago the impact was about ½ of what I presented here, but the cost of cars was less than ½ of today.  As with any long term financial estimation it is just an estimation, nothing is exact and conditions will never be just as predicted.  Still, there is such a large difference between the two cases that I am convinced that “Fast Cars” are simply the quickest way to drain a person’s potential net worth no matter how the chips actually fall over the years.

I have just skewered one of the most sacred cows of the young adult just starting out on a successful career path, so I expect resistance (I KNOW you think I am full of “it” right now).  Believe me I have heard all the excuses and rationalizations:

  • I will just do it once in my life.
  • I owe it to myself
  • I deserve it (after getting that big bonus check)
  • I’m getting a great deal on this car.
  • I need to look successful for my job (great for Real Estate).

Let me clue you in <Y-A-W-N>.  Anyone with a lick of life experience can see through your façade of “success” and knows you are actually in hock up to your ears and just a few missed paychecks away from having that car reposed.  If there is anything you owe to yourself it is the savings brought on by owning a more practical ride and a big investment account.  Take the conservative route until you have established your net worth and you will be able to easily afford those nice cars later, just like Harold did.

After I did this analysis I decided to keep that old ElCamino until it just had no more giddyap (12 years I drove that car).  I have never owned a new car and am only on my second car since I sold that ElCamino 19 years ago.  Since then it has been Honda Accords.  Reliable, nondescript, economical and I normally get almost 150 – 200K out of one.  I guess I could probably follow Harold now and start rotating cars every year but I go back to my spreadsheet and know I am satisfied with the simplicity of my old cars and my extra change.

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