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How the Real Rich Roll (and how to buy a used car)

September 5, 2012

When I was 19 I found out I knew 3 wealthy millionaires. I learned something interesting about how the rich roll: Not one of them drove a car worth more than $7,000.

Vehicles are horrible places to put a lot of money.

The wealthy are smart with money.

THE OTHER END OF THE SPECTRUM:

I recently had a friend tell me about a guy at a party telling others about his gorgeous new Tundra truck.

My friend tried to tell him he was throwing his money away. He argued that “It fits my style and I can afford the monthly payments.”

Fair enough. Everyone has different values in life. I decided to run the numbers and see the full cost of style and his monthly payments (the email I wrote her):

I just did the true cost to own (clickable link) on that $50,000 Tundra. It’ll have a resale value of $19,500 in 5 years. Given that purchase price, he’ll lose $30,500 (in depreciation/taxes/fees/etc). If he has a good credit score and put 10% down (generous assumptions), he’ll lose approximately $7,200 in interest payment.

Total 5 year net worth loss: -$37,500

That’s an average loss of $7,500 a year (37500/5).

He’s actually having to earn $10,000 a year in wages to have $7500 after taxes just to cover just the loss in depreciation/interest (not repairs/gas/insurance). Said differently: $833 a month of his monthly wages go to pay for waste on his truck.

 

HOW DO YOU ROLL?

I took my rich friend’s advice to heart and got reasonably good at car bargain shopping and made a system out of it.

1. Start with Consumer Reports. Figure out which vehicles are most reliable, then pick one from that group. This drastically increases the odds of the car lasting twice as long as a less reliable vehicle. The best cars for reliability are Toyotas or Hondas, Consumer Reports studies show. There are other vehicles too. Consult their buyer’s guide. Study it and really learn what options are reliable bets. To get a good deal it’s helpful to be open to more than just one type of car.

2. Do the math on the “non-price” factors. This is possibly even more important. Smart shoppers focus on price and reliability. The next level is paying attention to depreciation and gas mileage. Most people aren’t aware depreciation is the greatest expense in owning a car.

Look at the deprecation for a Toyota Avalon, owned for 5 years.

Year of Car

Depreciation Loss after 5 Years

2011

17900

2009

11200

2005

6700

Compare that getting a car with much better gas mileage (ie, 50% better mileage — going from 20 to 30 miles per gallon):

Mileage

Gas Cost/Yr

5 Year Cost

Savings

20

1800

9000

30

1200

6000

3000

What these two tables mean is it’s important to pay attention to gas mileage and usually much more important to pay attention to depreciation. They’re significant expenses/savings that most people don’t think of — it’s not posted on the price on the car. It has to be researched and calculated. It’s worth the effort! It only takes 10 minutes of research and you can save thousands and thousands of dollars.

3. Buy older cars with low miles. A cars age should be mostly measured by how much it’s been used (ie, how many miles it has), but the vehicle blue books value the year it was built. A lot. An older car with the exact same number of miles can be more than 20% less expensive.

4. Expand your search. Craigslist, dealerships, autotrader.com, and even eBay.com. To find the older car model with super low miles I wanted, there wasn’t a single car in my state I could find that wasn’t selling at a premium. I finally got it on eBay and 4 years later, it still drives like a dream. I paid 11k (with shipping) instead of 18-19k for the newer year car with the same miles. I would have paid 8k (70%) more in the car price and $700 just in sales tax. A lot of savings!

5. If you shop online, increase your due diligence. The greater unknowns require more due diligence. Spend the $10 to pull a carfax report on the vehicle before bidding. If using eBay, only buy from someone with 100% feedback. Consider having a mechanic inspect if it’s a long ways away. Even then, you just have to be willing to accept the risk. If not, don’t play.

6. Stay focused on the full cost picture. If you have to drive to get it or have it shipped from somewhere, factor in transportation costs. Calculate sales tax. Figure out what it will cost to get the car here in your name. Figure in tires if it will need new tires soon, or a battery, or any other misc repairs. See the total price picture.

7. Take the car to a mechanic. For $50-$100, a mechanic can run a battery of tests. This includes a compression test which is a much better indicator of a vehicles “age” (based on how hard it was driven). They can also spot hidden damage, or covered damage — only a pro with 20 years might see the signs. Eliminating the lemons from the pool of choices is critical. It’s annoying to spend the money, but worth it. Avoid buying cars with anything but minor damage.

Lastly, a note on keeping your eye on the big numbers

Buying a new car to improve gas mileage 50% from 20 MPG to 30 MPG saves $3,000 over 5 years.

Buying an older car 6 years older may save $11,200 (depends on which car/year you buy). Saving that depreciation is the same as 18.6 years worth of gas savings!

Some well intentioned buyers purchase a newer car because it has “much better gas mileage.” While true, the depreciation will eat more than the gas savings – frequently much more (even for a new Prius depreciation is still much more than gas mileage savings).

I use the NADA “True Cost of Ownership” website to find depreciation.

To calculate average gas cost per year, take a calculator and punch in 12,000 divided by the gas mileage (MPG) times the current cost of a gallon of gas.

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3 Comments
  1. RJ Lott permalink

    Well thought out and superbly written!

  2. Thank you, RJ.

  3. Gina permalink

    This will take a few minutes to digest fully but this is exactly what I was looking for! Thank you for being a hard working genius!

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