I ran across a friend’s neighbor who had one hell of a car. When I saw it, I had very mixed feelings. To look at it, you would think that a porn king owned the car. The front, sides and back were highlighted in pornographic artwork. On one hand, the effort and artistry to create something had to take dozens of hours and the artwork itself looked fabulous. On the other hand, it was pornography! But I eventually sided with disgust for two reasons: (1) the car owner lived in an apartment complex, where anyone, even kids, could walk by and publicly see this and (2) a car is a depreciating asset.
Pimp My Ride Please!
I spoke with owner. He (let’s call him Tom) was actually pretty friendly and a little young to have any genuine wisdom about money. Tom paid $8000 for the paint job, $5000 for a sweet interior and he finished it off with 4 sets of phat rim tires ($100 x 4 = $400), for a total of $13,400 added cost. This doesn’t include replacing those tires several times too, as “rimmed up” wheels happen to come with thinner treads. Unfortunately, thinner treads need to be replaced twice as often as normal wheels. Can Mr. Bling, Bling say ca’ching, ca’ching?
The first problem Tom had was putting money into a decrepitating asset. As soon as you drive out of the showroom most cars can instantly depreciate 12% to 30%, and it doesn’t stop there. For every mile you put on your car, there is wear and tear, there is better technology and quality that newer models have that you don’t, there is gas inefficiency and there is risk of an auto accident, all of which work against your car to bring its value down.
Finally if you insist on overspending for a car that is not within your budget, you lose on the opportunity cost. Spending $450 a month on a car payment sucks more out of your pocket than spending on a $250 a month car payment. That $200 in extra savings can be used to eliminate your debt or help secure a better future through smarter investing. And I have shown in my guide, that $200 monthly contribution is all you need to get to your million dollar portfolio.
A car is there to get you from point A to point B. While all the evils of consumerism and peer pressure may tempt you to the dark side of buying a fancier ride, take pride instead in the fact that for every penny you save and wisely invest now brings you one step farther away from having to work at Wal-Mart when you can’t afford to retire because of an expensive car payment 20 years ago.
In this case, Tom’s opportunity cost is the cost of education. He is only 24, but has a long way to go to get where he wants to in life, including a basic 4 year degree. When I talked to him the other day, he was looking to sell his porn car for $13,000, and will use the proceeds for school and a more modest car within his budget. This would almost cover the cost of his “pimpage” but would certainly fall short of adding in the additional book value of the car. Maybe he can find someone who hasn’t developed any wisdom of owning a depreciating asset.
Things to consider when buying or leasing a car
Budget: Is the monthly payment within my budget or am I pushing the edge? Can I further “simple-size” my choice to a payment that won’t bug me at the end of the month? If you feel yourself straying from making the right decision, remind yourself that a bigger bank account is much more impressive than a bigger car.
Gas: Depending on your driving, consider the full cost of gas before making that car purchase. Figure out how much you drive a year: 8,000, 12,000 or 15,000, and let’s see the impact of choosing a more fuel efficient car.
Let’s calculate driving at 15,000 miles a year with $4.00 per gallon of gas:
40 mpg - 15,000 miles / 40 mpg = 375 gallons of gas per year x $4.00 = $1500
35 mpg - 15,000 miles / 35 mpg = 429 gallons of gas per year x $4.00 = $1716
30 mpg - 15,000 miles / 30 mpg = 500 gallons of gas per year x $4.00 = $2000
25 mpg - 15,000 miles / 25 mpg = 600 gallons of gas per year x $4.00 = $2400
20 mpg - 15,000 miles / 20 mpg = 750 gallons of gas per year x $4.00 = $3000
15 mpg - 15,000 miles / 15 mpg = 1000 gallons of gas per year x $4.00 = $4000
As you can see, getting a Toyota Prius (40mpg+) versus a Hummer (<15mpg) will run you an extra $2500 in gas at year ($208 a month), not to mention the extra $200 in car payments plus an extra $50 for insurance for that SUV. After all is said and done, you may end up spending an extra $458 a month to look good. Tell you what, give me the difference, and I will call you every week to tell you that you look good, even if you don’t.
Insurance: Get an estimated quote before you buy the car. Too many people consider the cost of the car without the insurance. Insurance can add $90 to $150 a month to your car payment. By the way, it pays to shop around, as I have personally saved $40 a month with the same coverage with Geico than my prior national insurance company.
Maintenance and repairs: A friend of mine visited an auto auction for dealers only about a year or two ago. She noticed a strange thing happening when the Range Rovers and Jaguars came up to bid. Dealers were bidding 40% below book value those cars as opposed to other vehicles. Her friend explained that repairs on those vehicles were frequent and very pricey. Lesson here is it’s good to be aware of estimated maintenance and repair issues for the car you want.
Where to start
The best place to begin is right here on the net. There are a couple of sites give great insights, including your true cost to own, how and when to negotiate, buying vs. leasing and what vehicle may be best for your needs.
While you can spend hours pouring over the right car for you, it may be best to write out your objectives and budget first before researching or making excess considerations so you can stay focused. After all, a car, for all its beauty and horsepower, is just a car, but making a frugal decision will have a lasting impact on your financial future.
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