Cars

Ah yes, part of the American persona is it's affinity for nice cars and trucks. There is no greater smell in the world than that brand new car smell and the odometer reading 13 miles on it. Owning your own car is kind of a rite of passage into adult hood and freedom. My parents bought me my first car, but I'll never forget the day I bought my own first new car and the feeling of "I made it" I had driving off the lot. I was no longer a kid and dependent on my parents, I was my own person with my own ambitions and the freedom to do what I wanted when I wanted. After about 6 months I realized I couldn't afford the new car and traded it in on a newer, cheaper car. Little did I know the funny math that the dealerships did and added amount I was upside down on the car to the price of the newer car. Over the course of the next few years this was a perpetual cycle. I never held onto any of the cars, always traded them in on the next car and anything that was owed was simply tacked on to the next loan balance. It was a never-ending cycle of car payments, but a nice car and car payments is just the way it is today, right?

The average monthly car payment in 2017 is $479 per month and the average car loan is just over $30,000 with an average length of 68 months!! And if you're like most people, when that car is paid for or almost paid for, you'll go trade it in on another one and keep paying the $479 for another 60 months, so forth and so on. So let's assume for a moment that you are a smart consumer and would never trade in your car before it was worth more than you owed and let's assume you continuously paid that $479 from 25-65 at 5% interest back to the bank... you will have paid $460,000 in principle and simple interest. Let me say that again, in your adult life you would have paid $460,000 in car payments... and yes that is PER CAR! And in the end, what do you have to show for it? A car? ROFL. Let's say you invested that money over the course of the same time with the same interest rate, with compound interest that comes to $713,022 per car. Opportunity costs really put things in perspective.

As mentioned above, the average loan amount for a car in this country is $30,000. Sure you can get a new basic car for much less, but if you are like many, basic isn't good enough. We need upgraded this, bigger that, pushing it higher and higher. A 2017 Nissan Altima runs from $24-27k, 2017 Chevy Camaro starts at $25k and can go way up from there, 2017 Ford F-150 XLT starts at $32,000 and a Raptor package starts at $49k. Financing is easy and cheap, simple supply and demand. If people started paying cash for their cars I guarantee the prices would not be this high.

LEASING is absolutely the most expensive way to buy a car. First and foremost when going this route you are in fact renting this car for the term, typically 3 years. The way it works is you pay monthly payments (with interest) on the difference between the money you owe and what the car is expected to be worth in 3 years. So let's say you buy a $30,000 vehicle and put $3000 down. You still need to pay $27,000. Financing the whole $27,000 is too expensive for you (@ $497 per month), but you really want the car so they offer it to you at the lease rate which will be a much smaller monthly payment. The computer projects this particular car to be worth $15,000 so you will finance the difference (27000 - 15000 = $12,000) over 36 months and the monthly payment is now $354. There you have it; you sign on the dotted line because you are about to take home your dream car that you can't afford for the affordable new lease price! You forget to read the fine print that states you must have regularly scheduled maintenance or the contract is forfeit or you pay a fee, you have a finite mileage of 36,000 where if you go over you will pay a fee. There are many conditions in which you must follow to return the car to them and owe $0. But let's say for the sake of argument you jump through all the hoops and play the game. At the end of 3 years you need a car which puts you into another cycle of payments and thus begins making car payments for life. But the big kicker that the consumer isn't paying attention to is the fact that you are financing the largest depreciation term of the car!! Which leads me to my next point of buying new cars:

DEPREICATION is an absolute killer for cars. The fact that we as a society find it acceptable to finance (borrow money) on items that GO DOWN IN VALUE is just asinine!! Do any of you borrow money to invest in the stock market?? Of course not! If your financial adviser came to you and said "Hey there, give me $200 a month and in 3 years I'll give you $3600" you would probably tell him to kick rocks! So why is it OK to do it for a car? Below is an idea of how cars depreciate over time. In the first 3 years, your new car will lose HALF its value!

Car Depreciation Chart

Now think back to when I was talking about leasing... you are leasing the portion of the graph that depreciates the fastest. You will give the car back to the dealer in pristine condition and they will find some other sucker to finance the rest of the $16,000 and you end up with ....probably another lease. This graph is the best reason I can give to you to not buy new cars. If you wait 3 years, you will still have an almost new car, possibly still under warranty, and you'll be ahead of the depreciation curve. Take a hard look at this graph and find the spot you are comfortable with and pay cash :). Now I can see a lot of grey area when I say comfortable. Just because a car is older does not make it unsafe, uncomfortable, unreliable, etc.

Repair Costs

Cars are going to break down. I tell you, the more I think about it, health care and automobile industry are simply the best industries to have a business in simply because you will never run out of customers. Drive by any shop in town and they will have cars in the bays. I don't want to pay for a new car so I go with a used car, of course any car is going to break down and/or need repairs, the shops know this and they also know that you probably are not going to buy a new car so they charge anywhere from $47 to $215 per hour to repair your car. Which leads me into the next segment of:

BUYER BEWARE - ALL AUTO SHOPS RIP YOU OFF ON PARTS AND SOME WILL TRY AND RIP YOU OFF ON THE OVERALL REPAIR.

Yes, I have experienced this first hand in many shops. First let’s talk about the parts. I have a very dear friend who used to work as a parts manager for a GM dealer. There were many times he told me how he had a minimum cost to sell the part at but could go up as high as he wanted. He made a commission on the difference. If a customer was being a jerk to him, he would raise the price. I had brakes pads put on a car a couple years ago and the shop gave me a quote for $39 per pair, came in later that day and the cashier says "Sorry, the $39 was our cost, we usually give a 300% up charge". By the way, this shop bought parts from O'Reilly's. A regular customer cost for this same part is about $55 at O'Reilly's. And most recently, my car needed a water pump so I bought one from AutoZone for $82. Just to keep things honest, I called a few shops and asked for a quote for a water pump replacement on my particular vehicle. The quotes came back at $500 and higher and the part itself they quoted $200-$220.

Not that it happens everywhere, but I also have firsthand experience with shops doing things like maintenance that wasn't needed, running tests that were not needed, diagnosing bigger problems than what they were, and many many others. Most consumers are not savvy when it comes to cars and some shops may try and take advantage of it. It definitely pays to educate yourself on basic concepts of a car and how they work to keep your shop mechanic in check. I’ll give you a perfect example of something that happened not too long ago. My car overheated and I figured it was either the thermostat or water pump. When I went the next day to try and diagnose the problem I noticed the coolant reservoir was empty. As I began putting fluid, I hear water dripping on the ground, and then it turned into a gush. As much as I was putting in, just as much was coming out! Clearly there is a HOLE IN A HOSE somewhere. Couldn't have been a hole in the radiator because it was toward the back middle part of the engine. So I tow it to a local shop as I was not able to determine exactly where the leak was coming from. I drop it off, tell them the problem and I ask them to fix the hole. I get a call a couple hours later and they tell me the head gaskets are blown and I need a new engine to the tune of $8500. I laughed out loud literally on the phone at the dude and simply asked him if he fixed the hole. "No sir, our manager said you need a new motor and we don't make band-aid fixes. Fixing the hole will not solve your overheating problem, you have blown head gaskets and need a new motor". So, a couple things right here... 1. Didn't fix the hole 2. Ran an unauthorized block test for $70 3. Determined blown head gaskets 4. Need new engine, total cost $8500. A quick Craigslist and Google search showed me a head gasket rebuild for $1500 and refurbished complete motors for $1700. The fact they suggested putting $8000 repair into a $7000 vehicle is just crazy and they lost all credibility with me. I took it to another shop, told them the situation, the repaired the hole in the hose for $94 and I haven't had any problems since.

EDUCATE YOURSELF and Do It Yourself

From my experience and some of the stories I've shared here, clearly you can see the value in educating yourself when it comes to cars. Ms. Navi has told me numerous times that before she thought about repairs she would just take the shop's word for it and do whatever they said. The automobile-unsavvy customer is prey to these vultures. If you know a little bit about the problem, you can determine whether or not the shop is trying to get one over on you. In addition, if you are mechanically inclined or ever had an interest in learning how to work on your own car then I definitely encourage you do so. Just about any simple repair how-to video is on YouTube and you will save tons of money over the years with doing simple repairs yourself. At a minimum, buy the parts yourself and find a shop that will put them in. Shop parts cost about 2-3x higher than if you bought them yourself from any car part store. If you are not mechanically inclined to do it yourself or simply just want someone else to do it then shop around for a good and reputable mechanic. There are tons of mechanics who do side jobs if you are prepared to pay with cash. Many of them are mobile too and can do the work right in your driveway.

Navi's Final Thought: Cars are a part of the American Dream, but can also be dream crushers financially if not thought about and handled appropriately. Any business is in the business of making money, sure they may sell this or that but ultimately to stay in business it must make money. The auto industry has perfected ways in getting money from the consumer and they are perpetual expenses for decades and decades. I've said before on this site Mr. Money Mustache rides a bike most everywhere and cars overall are a major expense in this country... 1 of the Big 3 to be certain. I know of some people who spend more on their cars than on their house! I recognize that carless households are on the extreme side so if you are going to have cars, do so in an educated way. The auto industry has years of marketing built into their business model and it is very important for you to recognize how it all works. If driven, ALL cars go down in value and ALL cars will breakdown. Having tons of money tied up in a depreciating item is just crazy. Think of cars as a tool to get from point A to point B or to carry this and that. Would you finance a hammer? Would you pay $35 for a hammer when the $10 one is good? You are a fool if you think cars are status symbols!! You are an adult, or at least working to becoming one. When was the last time you pulled up next to an old beater car and thought any less of the person driving it? I guarantee no one cares. And to that point, if you find yourself hanging around with someone who does then you need to change friends. I want you to win with money and make financially responsible decisions. Given the amount of money that you could potentially pay and overpay, I really want this topic to drive close to home.