I have been waiting to write this post since the start of the year. I was flying home from a conference and listening to some personal finance podcasts.
Fun tip: If you want to learn more about personal finance, start listening to podcasts. Even as a CFP®, I can’t get enough podcasts. Maybe it is my inner financial nerd, but I love em’.
Okay, back to our topic, the podcast that sparked my interest was the first episode from The White Coat Investor’s podcast, and it came towards the end in the Q&A section. The topic was the effect of an expensive car. I thought it was a beautifully simple comparison and it put the bad car decision into a numbers context.
There is pretty consistent guidance that cars are a bad investment for many of us. And keep in mind, I am referring to the daily car. If you recently bought yourself a 1962 Ferrari, 250 GTO Berlinetta, Chassis 3851GT, you are not my target audience or any “good” car collector. I am talking about the car you park on the city streets at night and have your kid’s Cheerios and toys all over the backseat.
So let’s do some math of our own, and to make this more real, I am happy to use myself as our first example. You learn from your mistakes and here is mine. I bought a VW Passat while I was a student at Penn State (the numbers below are updated for 2022, unfortunately, I was a student at Penn State many, many years ago now 😔) and made the number 1 car sin. I told the salesperson, I don’t want to spend more than “$X.” Well, he didn’t let me pay more than “$X,” but he had me paying it for the remainder of my life it seemed. If I recall correctly, I was paying around $300 per month for 72 months (6 years). If it takes you 6 years (72 months) to pay off a car, you bought a car out of your price range. Your goal should be 3 years (36 months) at the most. That was my first mistake, and the first mistake led to my second mistake.
We (my wife & I) decided to consolidate from 2 cars to 1 car when we moved to the city a few years ago. That was not a bad decision, it has been amazing having one car. The second bad decision was when I traded my VW Passat in for our Infiniti QX50. The issue was that my VW still had around a $4,000 balance (thanks to the car salesmen who financed my car over my lifetime 🤦♂️), but it was on the verge of exploding on the PA Turnpike (aka fix or trade). My wife’s car was debt free, so that was easy. The problem was not the QX50, it was the bad debt from the VW that caused the Infiniti payment to go to $585. The VW added about $200 to our monthly car payment, so every month I was still kicking myself in the butt. Personally, I think I negotiated a pretty solid deal on the Infiniti. I was throwing some big words around, money factor, net cap cost, residual. I basically went unconscious and woke up in a new car.
VW PASSAT VS. INFINITI QX50
For our first match, we have the 2022 VW Passat going against the 2022 Infinity QX50. We are going to use the Edmunds True Cost to Own tool for their 5-year breakdown. You can click on the links above to see what my specifics were for each vehicle. I kept the same year, 2022, to have an even comparison metric.
2022 VW Passat = $32,779 (5-year total)
2022 Infiniti QX50 = $50,145 (5-year total)
This is not “too bad,” this was a $17,366 error over a 5-year window. Or $3,473/year. So let’s put this into investment terms. For simplicity, let’s assume I took that full $17,366 and invested into a Roth IRA over those 5-years (using the Roth for my example since it would be after-tax dollars). We could assume modest annual returns of 6% per year, and assume a 30-year investment window. My “small” mistake was a $99,741 mistake based on those assumptions.
Okay, I started this post off by making fun of myself just in case any of my next examples hit too close to home for some of you.
HONDA ACCORD VS. BMW 330
Next in the ring, we have the official car of young physicians, the Honda Accord vs. the famous “I’ve made it” car for young doctors, the BMW 330. If you drive a BMW, please don’t take this personally, I have already made fun of myself (see above).
2022 Honda Accord = $31,049 (5-year total)
2022 BMW 330 = $56,162 (5-year total)
We are now getting a larger reading on our bad decision meter. This was a $25,113 error over a 5-year window. Or $5,022/year, we are getting dangerously close to an amount that would allow you to max out your Roth IRA each year. Keep the same assumptions from our first example (6% for 30-years) = $144,236 in bad decisions. For comparison purposes, the average 401k at Vanguard had a balance of $129,157 at the end of 2021. This is where things start to get upsetting.
TOYOTA COROLLA VS. LAND ROVER RANGE ROVER
And for our main event, we have the ultimate Point A to Point B driving machine, weighing in at 2,855 lbs, from Japan, the Toyota Corolla. And in the other corner, it has been seen with Bieber to the Kardashians, from the United Kingdom, the Land Rover Range Rover.
Full Disclosure: I originally typed up this great introduction for the Tesla Model S. Then when I went to get the True Cost to Own calculator, they didn’t have enough data…it was upsetting. “And in the other corner, Elon Musk’s first born child, the electric metric, from California, the Tesla Model S.”
Let’s get ready to rumbleeeeee (Michael Buffer voice. Fun facts he is from Philadelphia, he is also 77 years old now! I feel old….)
2022 Toyota Corolla = $27,249 (5-year total)
2022 Land Rover Range Rover = $118,000 (5-year total)
This was a $90,751 error over a 5-year window. Or $18,150/year, you don’t need me to tell you this, but that is a full year of mortgage payments in some parts of the country. Keep the same assumptions from our first example (6% for 30-years) = $521,228 in bad decisions. We have had clients that have retired with less than that invested. They also had pensions and social security, but you get the point, it is a lot of money to be “wasted.”
And there you have it folks, the small decisions today can lead to rather significant mistakes down the road. In the podcast, they used 8% rates of return, so the numbers were a little bit bigger but I think this gets the point across.
Yes, there are a lot of assumptions that happen in this analysis, and I am also trusting the Edmunds numbers are good. However, the main point is that a car gets you from Point A to Point B. For those of you driving the BMW but still have student loans and are not saving to your 401k or Roth IRA, it is time to reevaluate your spending habits. We all make mistakes, heck, I made a car mistake just a few years ago. If you want to buy the fancy cars, there will be a time and a place. I am just shocked by how many young physicians are making bad car decisions on a daily basis. By putting some data behind those car lot decisions, my hope is that it will help you make better choices next time you are shopping.
Having a “cool” car doesn’t make you cool. Being debt-free and financially wise is cool. Am I the only one that thinks the dating websites should have to show your credit score? Swipe left if their credit score is below a 650? Okay, getting off topic. Happy car shopping!
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