Q.

I was wondering if you could post about car buying as a resident or brand new attending. What one should or shouldn’t do? Questions to ask? Special types of loans? Insurance to get? etc. It will be much appreciated. Thanks.

A.

I had to laugh when I first read this question. Not because someone asked ME about a car loan, but mostly just because someone would come to me at all to ask about cars. I keep hearing that there are “car guys” out there, who are really into cars. They really enjoy driving. They spend a lot of time cleaning, improving, and maintaining their cars. What they drive apparently really matters to them as they feel it reflects on who they are. I’m not one of those people. In fact, I’ve discovered that a lot of people, even very frugal people, find my views about automobile use to be rather extreme. Not quite Mr. Money Mustache extreme (I take a car, not my bike grocery-shopping) but extreme enough, especially for someone in my tax bracket. You see, for me a car is a very utilitarian item. My cars usually don’t impress anyone. For instance, I only wash my car in the winter. I don’t care if it is dirty, I just want to get the salt off the bottom after a run up to the ski resorts.

I’m An Extremist When It Comes To Cars

So before we get into this very far, you should know that my views may be extreme, and I’m undoubtedly overly cheap when it comes to cars, but I think if you are rich, you should buy and drive whatever car you like. If you are not rich, but would like to be someday, realize that like a college education, there is a dramatic difference in cost for a much smaller difference in actual quality and that sometimes, the much less expensive option actually has better quality.

I am frugal with automobiles for various reasons. I grew up riding in and driving inexpensive cars that we worked on ourselves. One of the funniest moments of my childhood was immediately after a snowstorm when my dad, driving our Chevrolet Chevette, changed lanes through a foot tall pile of snow and ended up with a lap full of snow. He didn’t think it was nearly as funny as I did, but cars rust out quickly in Alaska, and the floor on that car had completely rusted out. It was now a Flintstone-Mobile. The best part, however, was that he then installed a board for a floor and we kept driving that car for a while longer after that incident.

I also like feeling like I got a good deal on a car. But mostly, it’s just inertia. It’s a lot of work to go buy something new if you really want to buy it well. It’s much less work to repair a car than to shop for, buy, insure, and register a new one. So if it even remotely makes sense to repair it, I do. If it even remotely makes sense to keep driving it, I do. Because of that, I’ve had some rather remarkable experiences with cars as an attending physician.

You Aren’t What You Drive

Sweet car huh!

Sweet car huh!

My current daily driver is a 2002 Dodge Durango. I bought it over 5 years ago for $4,000. It’s not a great car and gets lousy mileage. I don’t recommend you get one. But it hauls everything I need it to, sleeps two at a trailhead, and gets to the ski resorts on a powder day. It had 107K miles on it when I bought it and has something like 175K miles on it now. I might get another 5 years out of it. Or it might die this week. I have no idea. I did have to replace the transmission at about 130K miles. That was kind of lame because the price was pretty close to its value. But I went ahead with it and have gotten my money’s worth out of that and it is built better than the original. It has a hole in the manifold, so it rumbles a bit, but still passes emissions, so I’ve just left that. I just Blue-booked it and it’s worth $3000. So, counting the transmission and some other minor repairs, and the decrease in value, this transportation has cost me $1000 a year. That’s not quite as good as my last daily driver, which may be the greatest deal ever. I bought it for $1850, drove it four years replacing the battery, two tires, and the windshield wipers, and sold it for $1500. I figure that was about $100 a year (the tires were used.)

I tell those stories to point out two things. First, reliable transportation need not be expensive. Both of those cars were very reliable. I did have to get the first one jumped one cold morning at work (the day I replaced the battery), and we had to get a tow when the transmission died on the second one. So two minor inconveniences in nine years that cost me about an hour total. Pretty darn good I think. So reliable transportation need not be expensive. Second, attending physicians do not have to drive fancy cars. You aren’t what you drive.

Driving To The Poorhouse

I think many people stay in the poorhouse due to what they drive. I’m always appalled to hear about someone making $30-40K a year who has an $18K car loan. Bizarre to me. If you only make $50K (the average American household income) and are losing $5K a year in auto loan interest, repairs, and car depreciation, then it becomes very difficult to get ahead. Most docs can afford to drive whatever they want and still save adequately, so it’s not as big a deal for this audience, but if you’re not rich yet, realize that if you really want to, you can probably save enough on your transportation compared to what a “normal” person does to fund a Roth IRA every year. $5500 a year from age 20 to age 65, invested at 8%, adds up to $2.3M, far more than most people, including doctors, retire on.

Car Buying As A Resident/New Attending

Enough ranting. Let me answer the actual questions asked. First, the best car to “buy” as a resident or new attending is the one you already own. Eking out another year on your car is worth several thousand dollars. Plus, it gives you another year to save up for what you really want. But if your car dies, and you’re still not rich, then buy something inexpensive. It doesn’t have to be as inexpensive as my last two cars (although that is a good method to speed your way to wealth.) It doesn’t even have to be used. A $15-20K brand new economy car driven for 15-20 years is also very inexpensive. But even if you just buy something reasonably priced, planning to drive it for 5 more years until you’re rich, that’s great.

Car Loans Are For Idiots

I find it hilarious the justifications that people use for taking out car loans.

  • “But I got it at 2%. That’s like free money after inflation.”
    • It’s still 2% worse than 0%. Besides, how much money are you really making off that arbitrage? If you run the numbers it might not be worth the hassle.
  • “I’d rather use the money to put toward paying off my student loans.”
    • What? You still have student loans? All the more reason to drive a beater. You’re worse than broke. That better be a $2K car loan.
  • “I’m leasing because I can write it off as a business expense.” (A lease is basically a loan in disguise.)
    • Leasing only looks reasonable if the alternative is buying a brand new car every 2-3 years. Either is a very expensive method of paying for transportation.
  • “I spend a lot of time commuting and so want something really nice.”
    • We all want something nice. That’s not a reason to buy something you can’t afford.
  • “I’m a car guy.”
    • I’m a yacht guy. But I don’t own a yacht because I can’t afford one.

Fine. Get a car loan. I don’t care. But I still think you’re an idiot. Mostly because I view a car as something you should cash flow. Like a washing machine. Or your groceries. Or a vacation. Imagine yourself applying for a washing machine loan. Or a grocery loan. Stupid-looking mental picture, right? That’s what I’m talking about. Since you can get a reasonably reliable car for $2-4K, and even a resident physician should be able to save up that much money in less than 3-6 months, the fact that you have a car loan tells me that either your finances are so out of control that you are basically living hand to mouth or that you honestly believe reliable transportation costs more than $2-4K. Neither of which impresses me much.

It’s even worse if you’re highly paid. Let’s say you make $400K. That works out to $33K a month. That’s the average price Americans pay for a brand new car. It’s a month’s income. I’m not talking about a beater. I’m not talking about an economy car. This is a nicely equipped full-size car like a Nissan Maxima. So if you stop your savings for 2-3 months, you should be able to buy it with cash, assuming you have NOTHING saved up when you realize you need a new car and get NOTHING for the old one. My car is worth $3K, right? How many of those do you think I can buy per month without impacting my lifestyle in the least? I assure you it is more than one.

So, to answer your question- yes, there probably are “special types of loans.” But don’t use them. That means use the money you have to buy a car.  If you need a loan, then by definition you cannot afford it. Don’t buy stuff you cannot afford.

How Much Car To Buy

I don’t really have guidelines on how much car to buy. I feel if you’re not rich yet, you should buy the least expensive thing that will be reliable and safe. If you are rich, buy whatever you want. But some people like guidelines, so here are Dave Ramsey’s:

  1. The value of all the things you own with motors (cars, boats, planes etc) should be less than 50% your annual gross income.
  2. If you have a car loan, pay it off instead of selling the car and buying a cheaper one if you can get out of all your debt except a mortgage within 18 months.

I think those guidelines are pretty good, even if they’re aimed at Joe Everyman, not a high-income professional. Just realize that even a doc can get over 50% pretty quickly. A $60K SUV, a $50K pick-up and an $80K boat is more than 50% for a specialist making $375K. But there are plenty of docs who cannot or will not get their student loans paid off within 18 months.

Car Insurance

Car insurance is relatively straightforward. The key point is to make sure you have plenty of liability insurance. Your state probably only requires you to carry $50K. I don’t think that’s nearly enough. I can run through $50K pretty fast in a hospital with a single injured person. A brand new SUV costs more than $50K. So bump that up and add an umbrella policy on top of it to the tune of $1-5M. As far as collision/comprehensive, I don’t really care. The company line is if you can afford to replace the car (which as I’ve convincingly argued above should be the case for most physicians) you don’t need that coverage. But the less expensive the car, the less expensive it is. Plus it’s nice to have that coverage for when you rent a car elsewhere. So if you want it, fine with me. I’ve gone both ways in my life.

4 Tips on Actually How to Buy a Car

1) Auction

Both of my last two daily drivers were bought at an auction, the first during the auction and the second before the auction. You can get a car very quickly (if you can wait until the auction), but you may not be able to test drive it. Plus, you need to have a portable blue book available (smartphone with internet service) and stick to your price. Overbidding is obviously dumb.

2) Private Party

For a used car, go for the private party over a used car salesman. Used car salesmen have their reputation for a reason. They also have a business profit that must be made to stay in business. Frequently they also do “237 point inspections” and “certifications” which jack up the price significantly, whether they add value or not. It’s not that there is no value there, but the cost is probably higher than the value in most cases and you have no way to know it was all actually done unless you do it yourself anyway. A private party selling their car, on the other hand, need make no profit and will charge you no certification fee. They’re also far less talented and motivated to deceive you. In fact, sometimes they are far more motivated to get the car sold than to get the best price for it. I’ve even seen people selling cars who didn’t bother blue-booking them. Of course, sometimes that means they’re asking a ridiculously high price for the car or refuse to negotiate to an appropriate price, but at other times it means you get a steal. Plus, you can use all the little things that are easy to fix or that you don’t care about (that would be fixed on the 237 point inspection) to barter the price down a little.

3) Dealer

Have fun with it– When buying from a used car dealer, realize it’s a game and have some fun. I spent five weeks buying the car my wife is now driving. We bought it in 2009, right in the middle of the recession when NOBODY was buying cars. That car just sat on the lot. It was exactly what we wanted. Unfortunately, it was the only one like that within hours and hours around. But we weren’t desperate to buy it. And they had mouths to feed. So I stopped in there once a week on the way to or from the disc golf course. Eventually, they sold it to us for a pretty darn good deal. (Yes, it cost a lot more than $4K. Just because I’m willing to drive a beater, doesn’t mean my wife is.)

4) Buy Over the Internet

When buying new, there is little reason to go to the dealership at all, except for a test drive and to sign the papers. Just find your closest 3 or 4 dealerships (and pray you don’t live in Anchorage) and send each an email saying you are ready to buy and will buy from whoever gets you the best price, tell them exactly what you want, and then play them off each other until you get the best price.

5) Get it Checked Out by a Mechanic

Have your mechanic go over it. I have a great, trustworthy mechanic. He treats me well, and I bring him plenty of business from friends, family, and these older cars I’m willing to drive.

[Update prior to publication: I actually applied # 5 with our recent purchase (the Durango died this Spring, unfortunately) and it worked great! More details in a future post.]

What do you think? Do you spend a lot on cars or are you frugal there? Do you buy new or used? Do you buy collision/comprehensive or just liability? What tips do you have for a resident or new attending buying a car? Comment below!