By Dr. Jim Dahle, WCI Founder

This rant started from reading an email sent to me by a doc looking for general financial advice who was several years out of residency and whose medical school was paid for by the military. I was surprised to see that he still had a negative net worth. The main reason was that his family “owned” a year-old car on which $30,000 was still owed and a brand new car on which $29,000 was owed. There was a little educational debt and some retirement and non-retirement savings, but the liabilities far outweighed the assets, despite several years of attending-level compensation and no medical school debt. As you might imagine, I recommended he spend less and save more, starting with his choice of automobiles. I had a similar conversation at about the same time with a nurse who was leasing a car that was worth about her annual salary.

 

You Aren't What You Drive

In The Millionaire Next Door, Stanley and Danko had an entire chapter entitled “You Aren't What You Drive.” What do rich people drive? The authors noted that only 23.5% of millionaires owned a car from the current model year and only 55% of millionaires owned a car older than 2 years old. Half of doctors aren't even millionaires. In fact, a large percentage of doctors in their 30s still have a negative net worth. If most millionaires don't drive new cars, why should a doctor? Stanley and Danko write about what buying habits among used-car buyers reveal:

“What factors explain variation in wealth accumulation? Income is a factor. People with higher incomes are expected to have higher levels of wealth. But note again that members of this group of used-vehicle buyers have a significantly lower income than the average for the other groups of millionaires . . . Occupation is another factor. We have noted many times that entrepreneurs account for a disproportionately large share of the millionaires in America. Conversely, most of the other high-income-producing occupations contain disproportionately smaller portions of high-net worth types. These include physicians . . . dentists . . . attorneys . . .

But there are exceptions. For example, each of these non-entrepreneurial occupations is represented in the used vehicle-prone shopper group we are profiling. Used vehicle-prone shoppers are unique even among their millionaire cohorts. Note that, on average, they have the highest score values on all seven measures of frugality. Behind their frugal behavior is a strong set of beliefs. First, they believe in the benefits of being financially independent. Second, they believe that being frugal is the key to achieving independence. They inoculate themselves from heavy spending by constantly reminding themselves that many people who have high-status artifacts—such as expensive clothing, jewelry, cars, and pools—have little wealth.

Being frugal is a major reason members of the used vehicle-prone group are wealthy. Being frugal provides them with a dollar base to invest. In fact, they invest a significantly larger portion of their annual income than do any of the other types of vehicle buyers . . . the used vehicle-prone shopper group also contains the highest percentage of prodigious accumulators of wealth (those with a high net-worth-to-income ratio).

The majority of people do not have the ability to increase their incomes significantly. Yet income is a positive correlate of wealth. What then is our message? If you cannot increase your compensation significantly, become wealthy some other way. Do it defensively . . .They successfully innoculated themselves from contracting the high-consumption lifestyle that many of their neighbors adopted. More than 70% of their neighbors earn as much or more than they earn. But fewer than 50% of their neighbors have a net worth of $1 million or more.”

You can save a lot of money on automobiles in two ways.

 

#1 Buy a Used Car

New cars cost far more than it takes to maintain a used one.

 

#2 Drive an Old Car for a Long Time

Even a new car buyer can get a great value if they keep the car for 10 years. Older cars also save you money on insurance and taxes. They can even save you money on maintenance. Who needs to fix a broken electric window or fix a little dent on a car with 150,000 miles? But on your brand-new car, you'll pony up some cash to keep everything working and looking sharp.

More information here:

The Cheapest Way to Own a Car

Why I Keep My Rusty Car

 

How Much Can You Save by Driving an Old Car? 

Consider this. Physician A buys a $60,000 car. They drive it for three years and then sell it for $25,000 and repeat the process. They will also pay more in sales taxes, registration fees, insurance, possibly maintenance, and most likely finance charges. I'd estimate their cost of car ownership at $10,000 per year, not counting gas.

Physician B buys a $5,000 car. They drive it until it dies in five or 10 years. Then they buy another one. They paid cash for it, didn't fix any of the little things, and paid minimal registration fees and insurance (liability only). I'd estimate their cost of car ownership at $1,000 per year, again not counting gas.

After 30 years, what is the difference between spending $1,000 a year on transportation vs. $10,000? Invest the difference at 8% and you'll get a million dollars. Yes, you read that right. Is driving a new car worth $1 million to you? Most Americans retire with far less than $1 million. Multiply that by two or even three cars, and you'll quickly realize the sum of money available to the frugal driver.

The example might be a little extreme, but run your own numbers and see what you get. I'm convinced that many Americans are kept in the poorhouse simply because of their automobile choices. No consumption item, except a house, will make as much of a difference in your accumulation of wealth.

Now, I realize full well that I'm an extremist on this subject. My parents have only bought two brand new cars in their entire life, and neither was bought during the 18 years I lived at home. I rode in beaters and I drove beaters, including a true Flintstone-Mobile due to a rusted-out floor. But they raised six kids, retired a little early on a middle-class income, and even owned a small floatplane (I did grow up in Alaska, after all).

med school scholarship sponsor

I learned early on that you're not what you drive (although I confess that, in high school, I was jealous of those guys with the jacked-up little Toyota pickups). My first car was an old Geo Prizm my parents sold to me for $3,000 as a college senior. I was just happy to get an interest-free loan from them. Before that time, I rode a bike or got a ride, so this was a huge upgrade.

I sold it after two years for $2,100, and we got another one for $6,000. I totaled that one after three years, and the insurance company gave us $5,500, which we put toward the next car.

My third car cost $8,000. It was totaled after about three years, and we got about $7,000 for it from the insurance company. Before it was wrecked, we bought a second car for $1,850, which was sold four years later for $1,500. We took the insurance money from the totaled car and added it to our savings to buy the car we really wanted, which we bought at four years old for $18,900.

When I got out of the military, I bought a car for $4,350 and drove it for six years before it died. When it died, we were rich, so we bought a brand-new car. We've bought a few other cars since—one for our daughter to drive, the infamous $800 beater, and, when it died a year or two later, a $5,000 car  (I did end up buying a brand-new expensive truck in 2021 that took nearly two years to get to me).

Initially, I thought I was just saving money now so I could drive whatever I wanted later. After a few years of driving beaters, I've realized I no longer care what I drive around in as long as it runs well and is comfortable to sit in and that I can carry what I need to carry and pull what I need to pull. I do like driving a $60,000 car better than the $5,000 car but not 12 times better. I probably won't buy any more cars that cost less than $10,000 for the adults in the house to drive. We simply no longer need to, given that we're already FI and are both still working (I'm still working two jobs). We basically stopped buying cheap used cars when we had no non-mortgage debt, had a good chunk of equity in the home, had started college savings for the kids, and had a portfolio on track to allow for an early retirement.

Can you say the same? Then, what's with the Lexus or Tesla you share with the bank in your driveway? I'd much rather have the ability to walk into a Lexus dealership and pay cash for a brand-new, top-of-the-line Lexus than actually have one in the driveway.

physician car

Do you drive a swag wagon? You're not alone.

Some complain that they can't drive an inexpensive used car because they need something reliable. I just don't buy it. I spent the vast, vast majority of my life commuting in a car with more than 100,000 miles on it. I've had to get a jump once on a cold morning after a night shift. I replaced the battery that afternoon. When the $4,350 car died, we had it towed to the mechanic (and then to the junkyard). Insurance paid for the tow. That's it. Even if you add on the cost of a AAA membership, you're still not going to get anywhere near the cost of driving new cars. Others worry about the cost of repairs on older vehicles. It's a rare car repair (not a collision) that costs more than $1,000-$2,000. Most are a few hundred dollars. It doesn't take long to pay for that when you don't have a $500 a month (or a $2,000 a month) car payment. Even if you insist on having one nice car for road trips and driving the kids around, you can still buy a cheap commuter as the other car and save thousands.

Who says your car has to be as nice as your spouse's?

More information here:

Frugal vs. Cheap – What’s the Difference? (Plus 11 Tips to Avoid Being Cheap)

10 Frugal Hacks to Automatically Save Money for Busy Professionals

=”2″ link=”YfWxL” via=”yes” nofollow=”yes”]Some complain that they can't drive an inexpensive used car because they need something reliable.  I just don't buy it.  I haven't commuted in a car with less than 100K miles….ever.

 

Should I Buy a New or Used Car? 

In the end, spend your money on what makes you happy. Do you need to drive $5,000 cars to be financially successful as a physician? Certainly not. But you do need to save and invest 20% of your income a year. If you can't do that AND buy an expensive car, then you'd best line up your habits with your true priorities. Just keep repeating “You aren't what you drive . . . you aren't what you drive” until you believe it.

What do you drive? Do you feel pressure to drive a certain type of vehicle just because you are a physician? Comment below!

[This updated post was originally published in 2021.]