A few years back I met a pretty smart young man – someone who was one his way to being very financially responsible, and assured a prosperous life of asset growth. He had obviously been through at least a little bit of personal finance training in his life.
He had saved throughout all of his teenage years while driving an insanely cheap and uncool beater of a car. He had banked gifts from family members instead of blowing them on useless stuff. He had secured a four year college scholarship and financial aid for the rest of his expenses. He had stayed away from expensive outings while everyone else churned through their money like it was nothing.
He had done everything right to save up a huge chunk of cash create a much better life for himself into his early 20s.
Then he went and did one of the dumbest things a kid can do. He took all of that money, and bought a brand… new… car.
This kid was 21 years old, had accrued a $20,000+ net worth, a college degree, and went and dropped $20,000 in cash on a brand new car. Yes, it was probably one of the coolest days of his life, but at that point he erased the financial lead he had amassed, all for a shiny new toy.
Who was that kid?
It was me – about 7 years ago.
I was young and dumb at that point, thinking about nothing but the coolness factor of that car and how it would affect my social life. It did make a pretty big difference granted I was driving a rusted out dented up beater, but when I look back on that decision, even though it taught me an important lesson, I regret the outcome for how it set me back financially.
Don’t get me wrong, I love that car. In fact, it’s still sitting right outside my window as I type this article and running like a champ – but what I realized a few years later is if I had taken even half of that $20k and invested it – I could have gotten a massive head start on my retirement goals and long-term financial planning – something that separates the rich from the poor when they hit 59 1/2 – something you’ve probably seen with your own eyes (anyone with poor parents or grandparents probably knows what I’m talking about)
Now, I doubt there are many late teen or even early 20 somethings reading this post to start saving now, and maybe it’s unrealistic to expect a kid at that age to think long-term anyway, but there is a lesson to any audience in my mistake – and that lesson can be the difference between zero dollars and hundreds of thousands of dollars in your bank account.
Focusing on Big Financial Wins
That lesson is about how much you can save throughout your life by being smart about vehicle purchases – one of life’s opportunities for a big financial win.
The decision I made at 21 taught me a powerful lesson. A car costs a lot of money. It costs even more money the newer it is, and just a little bit of thinking and research can go a long way in the long-term impact the cars you own throughout your life can have on your pocket book – we’re talking literally hundreds of thousands of dollars over the course of 30 years here.
And that’s a lot of green when you’re rolling towards your golden years.
It’s a principle of mine, and it should be a principle of yours to focus on big financial wins. These are the easy ways to accrue wealth in your life.
Ramit Sethi, author of “I Will Teach You to Be Rich” - www.iwillteachyoutoberich.com, New York Times best selling author, and a man who I have a lot of respect for, always preaches about how stupid it is to worry about saving money on lattes and appetizers. He says to focus on the big wins, those that can mean several hundred or even several thousand dollars per transaction.
A car is definitely one of those things. Take my fiance’s most recent vehicle purchase decision for example.
Initially she was looking at cars in the $35,000 range. She wanted something safe with style and that fit her personality. Fair enough. We should all want those things in a vehicle. That’s a lot of what you drive is about.
Then I explained to her the story I just told you above. I explained how this decision impacted my life financially, and explained how it would be even further amplified at a later age (because there’s not as much time to grow money now).
Long story short, after months of convincing – we ended up with the perfect car for her, and a great financial decision. For less than a third of what she was looking at initially, we go the beauty pictured below – a BMW 3 Series, in immaculate condition, as you can see.
Sure it needed a little bit of maintenance, and that’s to be expected with any used car purchase. It should be factored into the cost you’re willing to pay for it.
The Many Long Term Financial Benefits of Smart Vehicle Purchases
A lot of people will actually let the small detail of a little bit of added maintenance deter them from buying a used car. When you think about it, this is completely irrational. Even if you spent a couple thousand dollars in repairs to get a used car up to the condition you need it to be in to drive it, you’re still saving yourself thousands, if not tens of thousands of dollars.
Now factor in the very low depreciation factor of used cars. This car for example, is worth about $8,000 right now. Even in five years with another 60,000 miles on it, it will have depreciated at most a few thousand dollars. Compare that to the depreciation of a brand new car – which plummets in value by over 25% in the first year you own it.
Again – you’re talking several thousand dollars with just one decision.
Now factor in the reduction in insurance costs, property taxes, easy availability of parts, and much more, and you’ve saved yourself another several thousand dollars over the course of a few years.
That’s a shitload of money that you can drop in an index fund and watch it grow.
How Thousands Become Millions
Now take all of that money you just saved yourself, multiply it by the several car purchases you will make in your life, apply time value of money principles and compound interest to it, and you’re literally talking about hundreds of thousands of dollars over the course of your life – maybe even millions if you manage your investments well
Take the money we saved on the BMW as an example. If this was intelligently invested instead of spent on a vehicle, this is what we’re looking at, plain and simple.
$20,000 @ 8% interest over the course of 30 years = ~$220,000
Take a few cars throughout your life, and suddenly those seemingly small decisions to buy used cars over new cars carry high six figure implications. Pretty awesome for something most people don’t even think twice about.
If you’re young, say around the age of 30, this is even better for you. Your money has a lot more time to grow to the point where it will start paying off bigtime in the long-run.
Use this Compound Interest Calculator to find out how much your money can be worth.
Here’s How to Do It
So by this point, you’re probably wondering a few things, and subconsciously making up your own reasons about why this won’t work for you (yet it works for everyone else). Things like…
- It’s too hard to find good used cars
- What about the added repair costs
- I want that brand new car smell
- I don’t want to drive a car someone else has driven
Ok – Here’s the deal.
You may have to do some looking around, and you may have to pay a mechanic a couple hundred bucks to look over a few cars for you for soundness, but that couple hundred bucks is nothing compared to the tens of thousands of dollars of difference a new car would cost you.
Figure out what you’re looking for and then look around online on sites like autotrader.com, craigslist.org, cars.com, even drive around town and see what you can find – there are literally thousands of used cars for sale everywhere. If you just look they’re easy to find.
After you’ve gotten over your fear of finding quality used cars, now you have to stop letting those other minor roadblocks get in your way of financial success. Yes, you may have to spend a bit of money on repairs once you find a something, and it may be a little bit of trouble to arrange, but that’s way better wasting your money.
As for used cars not being as “reliable” – go for used cars that have a history of reliability – your Toyotas, Hondas, BMWs, etc. If you take care of them, these vehicles will last forever, and when you’re ready to part with them, they’ll sell for more as well. Sorry American automakers – imports are just made better. If you’re still worried about it, just get AAA and stop worrying. Trust me, it’s worth it.
As for the other stuff. Yes, it’s a little bit of a lifestyle sacrifice to not drive a brand new car around everywhere, but dude, seriously – suck it up and stop being such a snob. There’s nothing wrong with saving money. If you take the time to find something you’ll love and take care of it, there is no reason a 7-8 year old car can’t be just as awesome as a brand new car. You’ll probably actually appreciate it more.
This is a quote from Dave Ramsey – author of Total Money Makeover and a very bright man when it comes to personal finance mindset.
“If you will live like no one else, later you can live like no one else.”
This basically means, making small short-term sacrifices can result in huge long-term gains. This is evident by the example above of that $20,000 turning into over $200,000 in 30 years. The exact same thing will happen for you. Maybe even more.
That’s the mindset change you have to make. Train yourself to think about the long-term implications of your financial decisions, especially the big ones like cars, houses, weddings, and other large expenditures. These are the ones that can literally make or break your lifestyle.
Your Call to Action
The next time you’re in the market for a new vehicle, think about this post and it’s lessons. Think about how much you can save by simply taking the time to shop around, be smart about what you buy, and be smart about what you do with what you save.
Also, if you know someone who is currently car shopping, show them this post. Spread it around to your friends. Help them save money and design a lifestyle for the long term.
I know this was a long one, but I think this is an extremely important financial lesson. I hope that you got something out of it. Even if you don’t follow the car buying strategy within, at least think twice before you make large financial decisions. Even a seemingly small amount of money now can be a huge amount of money in 30 years.
A Note for the Naysayers
A few personal finance bloggers out there will tell you that buying a used car is a dumb move. They’ll justify it by citing the maintenance savings, how much longer you can keep a new car, the emotional win of having something new, and other justifications that have some merit, but can easily be overcome with a little bit of thinking.
But here’s the thing. Most people don’t have the discipline to keep a car for 10+ years, which is how long you’re going to have to keep a brand new car to get enough value out of it to justify the cost. If you can, I say more power to you and go for it. The fact is, it’s a hard thing to do. We value variety too much as humans. It’s just our nature.
That’s why well kept used cars are the way to go for the vast majority of people out there.
I’d love to see some discussion about this topic. Comment below and let’s get the conversation started!