If you think driving a $5 car is crazy, wait until you read this one. You might have come across some illustrations pointing that what you drive has a very actual effect on your ability to acquire wealth at some point in your life. And that the easiest way to save money is by driving a crappy car. And maybe you just shook your head and wondered what a dumb article.
But the second part of the illustration is very crucial. An example of such an illustration is the episode of a lady on the Dave Ramsey show. She claims to have made $36,000 a year and owed $25,000 at 12% on her car worth $17,000. We do not have to say much why that is a problem. The other two episodes are threads on the Bogleheads forum and the WCI forum where young physicians had a car debt and were trying to justify it.
It is incredible how much money people will spend on four tires and a steering wheel that gets from point A to point B, particularly when they are spending money that they do not have. This leads to why there are high-income earners who continue to struggle with money for their entire lives. To permanently win with money, we must stop the major leaks in our personal lives. These leaks are equivalent to cash running through our hands and out of our lives forever. If you do not plug the holes, you will have a hard time saving enough to achieve early financial independence or to achieve any worthwhile financial goal.
How buying an expensive car is a gravedigger?
Not unless you are driving a Ferrari RACE, 5.158%, a car is not an investment. A car is typically a massive waste of money- it is often an ego trip that lands you in debt for years. Where else can you take $50,000 and set it on fire in seven years? And pay a bunch of interest to the bank in the process. Not to mention that after a very short period, the car wears off and you are justify with an expensive monthly bill. That is a real disaster.
The funny thing about cars- people’s egos are really tied up in the brand of car. People like to say they drive Beamer, Benz, or a Puke. Some even buy newer cars for specifically better cash ratings. There is nothing wrong with driving a Toyota, they never break down, and they last forever. They are a great car to win that is paid for. Do not get this wrong, a car is relatively essential in this day and age, but buy something that you can afford and not get hung up keeping up with the Jones’s.
Opportunity Costs are real
Before we get into the actual illustration of how driving a crappy car will make you rich, there is a main financial principle you need to know. One dollar spent today loses its earning ability forever. Simply put, there is an authentic opportunity cost for each dollar you pay on anything that does not give you back a return. After you spend it, you permanently lose the ability to invest that dollar and have it grow and compound.
Let’s define what a $5,000 car is
Let us take a pause and explain a $5,000 car. In case you have never owned one or have never been shopping for one, this might be a foreign concept to you. A $5,000 car is Mazda 6 with 100k miles on it or a seven-year-old Nissan Sentra. The car will possibly run for another 50 to 150,000 miles over five to fifteen more years while requiring a few minor repairs and a significant repair. At the time of the second major repair, the car will be regarded as ‘totaled’ and can be sold to a junkyard for %$500. That other major repair might be 20k miles away; however, it is possibly 100k miles away for that $5,000 car.
Driving $5,000 car is not awesome
Let us acknowledge for a second that driving a crappy car is not an awesome experience. It does not have that new car smell. You are not going to impress anyone with it. Several things are wrong with it. It has a little thing in the rear bumper. The rear window on the passenger side does not go down any more. It is going to require new tires next year. It might burn a little oil. It turns out you can purchase a lot of oil for the price of an engine overhaul, but the point remains that this is not a car you have dreamed about and drooled over. In case you are a middle-class earner who wants to become wealthy eventually, this may be a long term proposition; however, for the high-income professional, these minor inconveniences are far more temporary.
How you win driving a crappy car
The takeaway here is that financial well-being is not a product of a million small decisions, but two or three big decisions. A car can bankrupt you. Or even worse, you can get to watch helplessly as it gets towed out of your driveway. Various costs go into owning a car that you may or may not have considered.
A brand new car might lose half its value in its first five years. On a $30k car, that is $15k over five years. Typically, a $5k does not depreciate in any significant way.
2. Opportunity Cost
The finances you shell out for a car could be invested and earn a return of maybe five to ten percent a year. The distinction between a $5k car and a $30k car is $25k. Over five years at 10%, that $25k earns another $15k. The return on $5k is far less.
Basically, the more expensive the car, the more expensive the repairs. In case you are purchasing a $5k car, it is probably something such as a Mazda 6, Nissan Sentra, a Dodge Neon, or perhaps a Honda Civic. Repairs of these famous cars are very inexpensive. Besides, when you have an ol car, you are far more likely not to repair every little thing or malfunction. So while an older car possibly will need more repairs than a newer car, the difference is not nearly as vast as most assume, and might even be negative.
4. Maintenance cost
Consider this: Where do you take a $30k car for maintenance? To the dealership. And where do you take a $5k car for maintenance? To Wal-Mart. Now, where is it affordable? And chances are the maintenance is less often. Besides, who washes a car with 150k miles on it? Another expense is saved.
5. Insurance cost
It is simply more expensive to insure a newer car than an older one. This is because it costs the insurance company more to replace it. However, you are less likely to be able to simply replace the car, so you are more likely to buy comprehensive and collision insurance rather than just liability insurance on the car.
6. Fees and interest on loans
Most people will fund a $30k car but can buy a $5k car for cash, skipping all those fees. Typically, the cost of ownership on a brand new car may be $5 to $10k, while the cost of ownership on a $5k car might be $1 to $2k yearly, and possibly less in case you get lucky with repairs. However, there is more. The majority of the households have not one, but two cars. In case you have two cars, you can double everything in this segment.
The sad part is guys go down this road. Partly because of arrogance and ego, but the worst of it is lusting for the status and dominance that car offers.