By Dr. James M. Dahle, WCI Founder
Before we get into how to buy a car, you should know that my views may be 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 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.
Why I Drive Inexpensive Cars
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
For the longest time my daily driver was a 2002 Dodge Durango. I bought it for $4,000 in 2010. It wasn't a great car and got lousy mileage. I don't recommend you get one. But it hauled everything I needed it to, slept two at a trailhead, and got to the ski resorts on a powder day. It had 107K miles on it when I bought it and had something like 180K miles when it finally gave up the ghost in late 2016. 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 got my money's worth out of that and it was built better than the original. It had a hole in the manifold, so it rumbled a bit, but still passed emissions, so I just left it. In early 2016 it Blue-booked at being worth $3,000. So, counting the transmission and some other minor repairs, and the decrease in value, this transportation cost me $1,000 a year. That's not quite as good as my previous daily driver, which may be the greatest deal ever. I bought it for $1,850, drove it four years replacing the battery, two tires, and the windshield wipers, and sold it for $1,500. I figure that was about $100 a year (the tires were used).
Sweet car, huh!
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 $30K-$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. $6,000 a year from age 20 to age 65, invested at 8%, adds up to $2.5M, far more than most people, including doctors, retire on.
Car Buying as a Medical 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 two cars mentioned (although that is a good method to speed your way to wealth). It doesn't even have to be used. A $15K-$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.
Additional Resources:
Should I Pay Off My Car?
Car Loans Are a Bad Idea
I find it hilarious the justifications that people use for taking out car loans. Don't be an idiot.
- “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 $2K-$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 $2K-$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 in 2016 was worth $3K, right? How many of those do you think I could have bought per month without impacting my lifestyle in the least? I assure you it was 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 Can You Afford to Spend on a Car?
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:
- The value of all the things you own with motors (cars, boats, planes, etc.) should be less than 50% of your annual gross income.
- 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 $1M-$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 previous 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 was willing to drive a beater at the time, doesn't mean my wife was.)
#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.
[Editor's Note: I actually applied #4 with our 2016 purchase and it worked great!]
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!
[This updated post was originally published in 2016.]
I love this -> “Fine. Get a car loan. I don’t care. But I still think you’re an idiot.”
I used to be of the mainstream mindset that only a new car could be “reliable”, and that leasing was great because “the dealer maintains it”. Having leased a new car while owning a 10yr old car side-by-side, I have learned that this mainstream mindset exists because dealers pay a lot of money to advertise that mindset to us. The leased car ended up costing a fortune to maintain. It is gone, the cheaper old car will remain in our stable for another 10 years, at least.
Let people drive what they want as long as they like it and it’s within their means. Just because you put no values on cars and others do doesn’t make them idiots. You come on here and talk about how you only wash you car to take the salt off. I wash mine every week and so what. You do what makes you happy.
Go ahead and don’t get a car loan because you want to save for your old age days or retirement, with prostate cancer. Then you will be happy with all the money you saved right?
An attending giving a resident a hard time because this resident bought a flashy car. Lucky it wasn’t me, I’ll put that attending to his/her place.
Save up or go broke, who cares. All we need is good doctors who care for their patients.
Let people do what makes them happy. Yes I am shrewd and I’ll buy whatever I fine cool to me. You do you.
Seems like you’re talking to me, not Peter as near as I can tell.
I guess this is you putting this attending in his place.
I disagree that broke doctors are able to care for their patients just fine. I think doctors without financial stress do a better job taking care of their patients. I also think young doctors deserve to be told that buying a flashy car before they have any money is unlikely to make them happy.
But it’s your money and your decision. It’s wonderful to live in a free country isn’t it?
We bought a new Honda Pilot in January. My husband price shopped over the internet. He said it was the easiest car buying experience he ever did. We got a great price, paid a $500 deposit, drove about 2 hours to the dealership, and got the car. We offered to let our local dealer match the price plus $800 to save us the trip. He said he couldn’t match it even with the extra $800.
What I learned from the experience is that the new car dealers really push the extended warranties to make money. We had already shopped the HondaCare warranty online and knew the price. The warranties we were offered at the dealership were not even actual Honda warranties and cost over twice the price. When we said could you match the online price, they were shocked at how low it was and stopped pushing theirs.
Just wen through this with my Honda. Online warranty was under $900, they told me their price was $1,900, but they would do it for only $2,000. My wife said I started laughing, I don’t remember that part, then said no.
The guy I bought the warranty from says that he makes $50 on each one, but he sells probably 100+ a week to people all over the country.
Can you send me that guy’s contact information. I do the same thing buying warranties by phone. Always looking for someone easy to deal with and doesn’t try to take you.
Hyannis Honda. Ask for Sean Rausch. Also price Saccucci Honda, although Hyannis beat them both times for me.
Extended warranties aren’t worth it in my opinion because you’re not sure how long you will have the car and when the original warranty runs out, you can get the extended warranty then.
We try to keep purchases “reasonable”. We have always bought used but are considering new now that we are about a year out from loans being paid off and our income has improved. My wife attracts car wrecks so we keep collision/comprehensive coverage on her car. I only keep liability.
Tips:
-Try to make it a long term process. We generally take up to 6 months to buy from the time we decide to purchase.
-If you are going to buy a “fancy car” and have thoughts that you might regret it..see if you can rent one for a few days prior to purchase. A $200 dollar premium rental may save you a ton of buyer’s remorse.
-If you are going to a dealer you should always be prepared to get up and walk away.
-Don’t buy a new car because you want to save on gas money.
I learned from my Dad to keep cars a long time. I kept my last SUV 12 years. My current SUV is about 5 years old now. It still seems new. These were both bought new. I have bought a couple of uses cars but did not keep either of them as long. The tech and safety upgrades on my 5 year old new car still amaze me. I think a backup camera pays for itself in that I have a long history of backing into poles, other cars, and utility boxes. I also agree with WCI that I really view a car as something I have to have and do not care about it at all. I need a SUV for big dogs and keep it filthy. I let the rain wash it.
Ditto on the buy new and keep a long time. The Pilot I described above replaced an 11 year old Odyssey with close to 170K on it that just began breaking down enough to be a nuisance. I too love the back up camera and don’t see the point of washing cars. Mine only gets washed when my 14 year old needs some cash.
So, what if you can’t afford anything but need a car? I am graduating residency and moving on to fellowship. I have maybe 2 grand to my name. Need to find a place to live, move across the country, and get a car. What are my best options? Should I look for a cheap lease for 3 years? Should I take outrage mythic 2% car loan and buy a used car? Any advice appreciated. Thank you!
Certainly don’t buy a car worth more than $5-10K. Use your $2K. Borrow the rest and pay it off as soon as you can. Then keep making payments to yourself so you can buy your next one with cash.
Do not lease unless you don’t care how much you spend on cars.
Completely agree with WCI’s recommendation for new resident/recently graduated folks. We drove beaters for first 10 years after residency until our net worth passed a certain point. There is nothing wrong with driving beaters until you can (at least) afford to pay for a new/used one with cash.
I am a car enthusiast but having the option to retire early is even more important to me. By the same token, we do not deprive ourselves of some of the finer things in life (note – some, not all). Our rule these days are – save 50% of our income then spend the rest as we want. We do not see the point of dying with millions in the bank but that’s just us.
Great rule, and you should be able to spend well in retirement with those numbers.
Love the points you make but had to comment on the disconnect of your last two sentences. If you save 50% of a $400K income for 30 years you end up with $13M in today’s dollars, and it is typical to die with 2.7X what you retired with. So with those kinds of habits, you almost surely will die with millions in the bank!
I think that, as long as you can afford it, new cars are always better since they tend to have the latest and greatest in safety and technology and you don’t have to deal with the problems that can arise from a previous owner not taking adequate care of their vehicle. That said, there is nothing wrong with looking for the most inexpensive new car that fits your transportation and cargo-carrying needs. Totally agree with not borrowing money to pay for a car; you should deposit money in a car account to save up for your next set of wheels rather than send payment checks to a bank. I only leased one car, and that was because it was an outstanding deal (and I ended up buying the car when the lease was up).
I have always bought cars for cash, mentally depreciated them at a rate of $5K per year, and when they were fully depreciated I felt free to sell or trade them in if I was tired of them or keep on driving them if I was still happy with them. Most cars I bought tended to be about $30K so I would drive them for about 6 years. At the 6 year mark they usually still had fairly good sales or trade-in value and reliability was not yet an issue, so that seemed to be a good point to get something new and let some cheapskate like WCI have the old one.
Definitely no reason to overspend on a vehicle early on in your career. I see young docs buying fancy expensive cars and figure they are headed for financial trouble down the road.
All cars are used once you drive them off the lot.
To each his own I guess, but in terms of straight up finance (“Investor” part of WCI) buying recent used and driving them for many years is the best way to have the most $$$ at retirement. Obviously if you have some other reasons for selling at 6 years, then good for you – but not as financial move. Feeding some other need there.
Also – the biggest safety feature is you. Not driving tired 🙂 or drunk or texting etc is orders of magnitude more effective at safety than newer tech (back up cameras, lane-change tech, etc.) None of them is a game changer in the same way that seatbelts, airbags were when they were introduced. So buying new to get the latest tech is probably not worth it.
ESC actually is a game changer. Stats show it’s as revolutionary as air bags if memory serves.
The way you drive is the most important factor though.
True, best ESC has been around for over a decade. My old Toyota Rav4 had it “back in the day.”
ESC was only standard since model year 2012…before you had to choose higher trims on “normal” cars to get it. 🙁
Automatic breaking is also very rare even now…you need to get high trims to get it.
It’s not so much the cost as the depreciation. (Over a sufficiently long enough time depreciation will equal the initial cost, of course.) Buying an inexpensive used vehicle is one way to get around that as there’s not much value to depreciate away, but one can also choose vehicles in part based off of their lack of depreciation. Examples in point: Wranglers and Tacomas. Ever compared used to new prices on those? Ridiculous.
I personally don’t like either of those two vehicles, have a UN-vehicle fetish, and my wife loves electric cars for various and sundry reasons so we ended up with a two vehicle used stable of a 2007 Land Cruiser (bought well depreciated in 2014) and a 2012 RAV4 EV (bought moderately depreciated from out of state in 2015). Their combined value is something on the order of 1/8th of what I gross per year, +/- a few points, so I’m certainly Ramsey-compliant. Nevertheless I financed them as I’ll explain below.
Side note: That EV netted me a $6k state tax credit from Colorado despite being used as it had never been registered in-state before. This leads to the point that in certain states one could probably make money or at least break even while driving a new or newish electric car by buying, holding for a year and claiming the credits, then selling out of state. When combined with the lack of unexpected repairs as compared to a semi-beater a la WCI there is an appeal to this…
Regarding financing: Instead of paying cash for at least one of the vehicles I invested my yearly bonus in Betterment and use that to balance monthly cash flow (+ and – alike). My two sub-accounts with Betterment have time-weighted returns of 9.3% and 4.5% while also tax-loss harvesting several thousand dollars over the same period. I’ll take those returns and that tax benefit in exchange for two car notes at 1.24% and 1.49% any day. Low rates don’t have to be only for new cars, after all!
Interesting state-specific strategy!
Completely agree with your take on cars. I can speak to seeing plenty of new grads (physician or otherwise) driving around Mercedes and BMWs, with no emergency fund to even speak of. They’re certainly nice cars, but I prefer low-cost maintenance and cars that hang on to their resale value. My last was a Honda, and my current is an FJ Cruiser (dog shuttle/hiking vehicle) going strong at 142,000 miles. The arbitrage argument is pretty silly to me as well; the S&P 500 eeked out 1.40% last year, and is shy of 3.00% YTD.
One year does not make an arbitrage, nor does simply the capital gains/dividends that single year. I’d take a compounding 1.4%/year difference over my lifetime any day, thats pretty huge. There are certainly more choices than just the S/P as well. If Im arbitraging something decision wise, its usually into a municipal bond fund or something with some yield, as well as the cash flow consideration side of things as well.
One certainly doesnt need a car that has to be financed for sure and I totally agree. However, its hard to act like theres some awful risk and concern about a 0.9% note that is less than a months salary, so I also find it hard to come down on people for it, as long as everything else is in order. Which for most people may not be the case, but this site is not representative of most people.
Very valid points. I used the Index as a simple point of reference. Auto loans typically run 3-5 years, and if you do it right (0.9% note as you mentioned) you should absolutely win-out in that context. But, that isn’t always the case if your in a bear market or, looking at the details (like munis as you mention) as closely. There’s nothing wrong with manageable debts.
I know plenty of docs with manageable credit card debt, manageable auto debt(s), manageable student loan debt, a manageable mortgage debt, and a manageable boat or second home debt. They’re broke, even though all those debts were manageable. An of course, nothing wrong with manageable debts as long as nothing happens that makes them unmanageable, like need/desire to retire early, divorce, illness etc.
I guess if the success of your financial plan is dependent on things such as arbitraging a month’s salary then you’d better keep doing that. 🙂
As mentioned in the post, doctors can get away with a lot more than a more median earner can, so it’s hard to be too strict about all this.
True, if you are totally debt free, then I would just pay cash.
This time, I did get a loan though. I had saved the cash for a new Civic, I know big spender, but they offered me 0 down and 1.99% so I took the saved amount and threw it at my business loan that was at 4.25%. If bugs me every month to get the statement and see that I paid interest on a car, something I’ve never done before. But, when I look at the interest saved on the other loan it makes sense.
Granted, I would never recommend buying an expensive new car as a resident although it’s less of a problem as an attending if you are keeping it over a decade like others have said.
I think the problem with that approach is it entices you to spend more than you otherwise would. It’s a behavioral thing. Maybe you’re exempt (like those docs who aren’t affected by drug rep advertising) but the majority obviously aren’t.
Every now and then I start to like cars, but then I just cant care long enough to waste much money on them. 95% of the time just sitting there doing nothing but losing value. I did rent a Tesla while on a trip last week, super fun, but want one even less now, and thats before you consider company specific risk (humongous).
Id much rather spend a fraction of that money on a new bike or bike related paraphernalia.
I’d like to rent a Tesla. I think I’ll look into that.
I used an app/site called TURO. It was easy and much cheaper had you tried it through some traditional venue.
I agree WCI.
We won’t persuade others who disagree though. I am amazed at how many people buy new cars or lease cars. They often think they are getting a “deal” too. I had an ancient civic until I was rich enough to upgrade. Even then a used car (2-3 years old or so) in the 10-12K range offers a wonderful sweet spot. Consumer Reports will have some data to know if it is a lemon or not and most of the depreciation has been gone. Current lower end cars come with all kinds of features that were considered “luxury” items even 10-15 years ago.
As Robert Kiyosaki points out we should focus on buying/building assets (that produce income) rather than on “liabilities” (doodads) that produce expenses. If I have 30K I might spend 10k on a beautiful, comfortable, reliable car and invest the other 20K. That process has worked very well for me.
One other Ramsey rule is don’t buy a new car unless you are a millionaire. Not a bad rule. Most millionaires I know still don’t buy a new car though since they see it as wasting money!
The millionaire rule is one of my favorites he has. But most people laugh when they hear it.
The other rule I’ve come across and like is from Financial Samurai, I think it basically boils down to your vehicle shouldnt be more than 10% of your income, which is a good rule.
For most people though, they would freak out as they are somewhere in the 50-100% level for average americans, which when you think about it is totally crazy. When I extend this to houses, and think how over leveraged many people are, its pretty jaw dropping. Taking that mentality to a doctors salary and forgetting about taxes and such is probably part of why doctors have such a hard time accumulating wealth.
10% of your income? That seems a little on the extreme side to me. Do I fall into that category? Absolutely. Does everyone need to in order to get ahead? Not even close. I think you can probably do just fine with 2-3 times that. Of course you’re right that 5-10 times that leads to lots of issues, especially with docs.
Ive never bought a new car either, i just cant make sense of it. The part about finding out if it has any issues is important, and though you’d think it wouldnt matter as much today, as someone on this site pointed out with Honda transmissions in newer vehicles, these things still come up.
For us, buying new is really just a time saver. We live in a small town. No luxury car dealerships. Limited used car selection. Our local Honda dealer doesn’t even get the decent new inventory of larger dealers. We just don’t have the time or desire to spend hours driving to look at a good selection of used cars. We did try before we bought our new Pilot. But, after two fruitless trips to look at used cars that seemed great online that weren’t in reality, we gave up and bought new. When we lived in larger cities, earlier in our careers-especially in residency, we never bought new.
That’s why buying on the internet makes a lot of sense if you live within 2 or 3 hours of a large city. It sounds crazy but that’s the way my kids have bought and sold all vehicles for years now and they always get good deals.
Yes, use the webs. Even though we have good selection in my city, since we are so close to LA I checked all over for comparable vehicles, etc….to make sure anything I looked at was in the right year/mileage/price range that was competitive.
Some dealers/sites will ship to a local place as well. You can always use a local place to test drive a representative vehicle as well.
My husbands business is across the street from a Ford dealership. It is easy to let him get my car serviced. I think the availability of service and repair places factors in. I split my time between a very rural area with no businesses whatsoever and a medium sized town. I have in the past owned both a porsche (cheap mid-life crisis) and a mercedes neither of which I can get repaired in the hinterland. I am pleased with the Ford Edge and it sure is easier to get serviced, insured, etc.
I totally agree with the article.
The big thing is not to spend a ton on a car and not to get an auto loan. Also owning a car for 10+ years really makes the math work out well, even for a reasonably priced new car. Ramsay’s advice about not buying new unless you’re a millionaire seems a bit extreme.
I would add that fuel economy is important if oil prices go back up to $4 or if you drive a lot. It’s one thing to have an SUV if you have a growing family, but I don’t understand why so many white collar workers drive fuel inefficient trucks or why families with two kids need a Chevy Suburban.
Yatch guy? We should hang out — I’m a private jet and private island type of guy.
We have gotten loans, but were either able to put down a decent down payment or the sale was well below Blue Book. Now all cars are paid off. Plan to keep it that way for a while. My wife drives a much nicer SUV now, but lived with driving a 15-passenger van for many years. She deserved the upgrade. :O)
Something that hasn’t been mentioned yet is the ROI for a cheap business car. If you buy a good used Toyota or another long-lasting car for $10k and drive it 20k miles a year for 5 years, you’ll get to deduct mileage of $10,800/yr (2016 rates) total of $54,000. You can all calculate how much that would save you in local, state, and federal income taxes. The depreciation component of the mileage deduction is the same no matter the cost of the car and it doesn’t disapper, no matter how many miles you drive it.
I guess if you have a business where you have 20K legitimate business miles that’s a great option. In my case, I have something more like 200 legitimate business miles.
Love it. You definitely channeled some MMM badassity with this post.
Big bucks can be saved on cars buying used, but I have wimped out and bought my last three new. This can still be economical though. I strive to keep them for 15 years so the cost per year is still relatively low.
One trick I’ve learned is to spend time keeping the car clean and taking care of it. It takes some time (not much though), but it provides some psychological benefits. My vehicles ‘feel’ newer, so I don’t feel like I’m driving an 11 year old car (except when I get in the van and wonder why the podcasts are not automatically streaming like the new car). So even when my fleet is quite old I don’t feel the urge to upgrade.
Yea, Bluetooth is definitely a feature I’m really enjoying on the new one and miss now in what used to be the new one.
I added an $80 radio to my 2008 Ford Explorer with 140k miles and in my warped mind have the both of best worlds. they even installed a microphone over the driver side for free that I can bluetooth calls through. I have no idea about all these new features you guys talk about, but for me ignorance is bliss!
We do buy new cars largely for the comfort, features, and reliability. We do however keep them for about 200,000 miles +/- some based on when we start having trouble with them. We have paid cash and have financed when rates are low. I feel we have done alright with this, though nothing nearly as good as WCI or other readers.
My car and boat cost me less than $20,000 combined. That was 8 and 9 years ago, and I haven’t replaced either one. Just got the boat in the water today! It’s a little choppy, but we’ll be taking the year’s maiden voyage momentarily. #TGIF
Cheers!
-PoF
When I bought my $6K boat in 2010, the dealer selling it called it a “great starter boat.” I felt a little offended as I didn’t intend for it to be a starter boat. He was right though.
I just bought a car last weekend from Enterprise car sales. It was extremely easy, no haggling (which I hate), and they let me pay for it with credit cards which I’ll pay off next month.
I have a little bad having a car loan, but I can’t justify paying it off early when the interest rate is 0% (dealer financing). I used #5 (email / text message) as my research / negotiation tactic – played 3 dealerships off of each other for weeks, negotiated the price down $2K+ off BB. In the end, I went in the dealership only for the test drive and then to sign papers.
If I knew what I knew now, I would probably have bought a used car off CL. But I didn’t have the time or luxury of craigslist back when I bought and I’m happy with my interest rate, so I’m good until this car dies (hopefully another 200K miles to go…).
I’m surprised how many people sit in the dealership to do their negotiating. Why negotiate on their turf? Easier to do it from the comfort of your own home, where you’re on your turf.
We recently bought a new Subaru Forester at the end of fellowship with cash. We are moving to an area with snow so wanted an AWD vehicle. Consumer reports said that it was the best in its class for snow driving with AWD. While we do not care about luxury, it was important to me to try to find as safe as possible of a car.
We wanted to buy used but the used market for Subarus in our area is tight. Furthermore, we wanted a base model and most used were higher end models. We ultimately decided on buying a new, entry level Forester.
We emailed all the dealerships and told them we would simply buy the lowest price and did not care about the color. We got an awesome deal this way. I posted on the WCI forum about our challenge with the warrantee. They sold it in a way that it did not sound like a warrantee (to me) so ultimately we bought it and then returned it for our full money back.
I have always thought buying new was crazy but in worked out for our situation.
I’m in the exact same situation- always buy cars that are 3-4 years old and drive them till they die, but the subarus hold their value so well that the outback a that were 3 years old and had 30-40k miles on them were only about $2-4K less than one you could buy. And I definitely played dealers off each other. Since the inventory was so low, any dealer was going to have to order the car from the factory, so it let me compare apples to apples and we got a great deal. Never had a new car before, but plan on driving it for 200k+ miles, so I feel comfortable it will be an ok decision financially in the long run.
As for financing, I financed 1/3 of it because that allowed me to pay for the other 2/3 with credit cards that gave me 3% back. Then inturned around and paid off the loan a few months later. The card rewards were much greater than 2-3 months of interest…
You sound like you’re trying to buy a car in Alaska. The good news is the floor will rust out in less than 200K miles in Alaska so you don’t have to worry about all the oil that Subaru engine is burning! What is it about Subarus and burning oil anyway?
Ha. I just replaced my third crankshaft seal on my 2010 Subaru. That’s why mine burns so much oil. This time the car repair place tried to glue to the new one in so it wouldn’t work it’s way out again.
I used to drive beaters. Now, I buy new cars.
The reason that one year old cars sell for much less than new is not because they don’t have the new car smell. It’s because of the information asymmetry between buyer and seller. They may be selling because it’s a lemon, and you don’t know that. In other words, you’re being rewarded for taking risk, but that risk isn’t diversified.
If you’re bargaining hard and buying at the end of the month,or better yet, at the end of the year, you can get a new car from the dealer for about what the dealer would charge for a year old used car. You could get a better deal from a private seller who needs to sell for financial reasons, but again, you never know if there’s really something wrong with the car.
Also, if you keep the cars until they die, by buying new you’ll get another year or two of use, so the extra money you’re paying isn’t going entirely to waste. Plus, you’re getting the newest safety features: more sensors, more automatic features,such as automatic breaking. Those features alone are worth the extra cost to me of buying new. Finally , I get to pick the features I want. All of those factors are worth the extra cost to me. Whether it’s worth it to you or not is another matter, but I believe that paying even an extra $5,000 or $10,000 for a car is not unreasonable if I’ll be keeping it for 10 or 15 years, and if it will last an extra 2 years because I bought it new.
I don’t think you meant to do this, but when you put it that way, paying an extra 10k for another 2 years of use, it makes we want to give back my new car and buy one 2 years older…?
I thought I was clear, but I’ll clarify. My point was that in addition to all the aforementioned benefits of buying new ( reliability, newer safety features, getting exactly what I wanted) I would also get an additional 2 years of use. I think that last point is often overlooked.
I also should have said, “Even if you spend as much as $10,000”. The reality is that you’re unlikely to save more than 5k or so off list from a dealer on a slightly used car, a discount not much more that what you can get on a new car if bought at the right time.
I actually saw some trucks a couple weeks ago brand new with a bunch of dealer incentives that were significantly (5k+) cheaper than the same model but up to 3 years old with tens of thousands of miles. Its the first time I’ve ever seen that, was really weird. Obviously in that situation I’d have no problem buying used, but thats very rare.
I always check as much price/new/etc…consistency as possible, and if the price for new to used isnt that different I buy new for all the reasons Alex mentions, its somewhat insurance. Im of course talking about things that are much more nominally cheap, but it makes sense to think about things like that.
*new*
There’s was a lot of that back around the time of cash for clunkers. I don’t think it has totally reversed yet.
Good point. Here’s the classic article about the market for used cars by Nobel laureate George Akerlof:
http://www.econ.yale.edu/~dirkb/teach/pdf/akerlof/themarketforlemons.pdf
Even if you take a car to a good mechanic, you can’t really be sure you’re not getting a lemon.
You can’t really be sure you’re not getting a lemon when you buy new.
Yes, when you get to the point when you can blow $5-10K in order to pick the features you want and get some fancy schmancy safety features, then you can afford to drive whatever you like. That’s pretty much the point of the article. A graduating resident is not at that point.
I’ll present the opposite viewpoint.
My wife and I both like to lease cars. Expensive ones to boot. We like getting new expensive cars every 3 years. We understand this makes absolutely no sense financially. We consider it a luxury. We also understand that we are making money at a level that is probably unsustainable and are OK with downgrading when the time comes. (As we both drove our first cars 15+ years)
For now,
– we save 50% of our gross income
– our net worth is > 1 million
– both mortgages are about to be paid off (50K left on #1 which is a rental property, 300K left on our primary home)
– we don’t splurge much elsewhere (no kids yet, primary residence is < 50% of annual income, we aren't big foodies, we don't like to travel, we don't own any fancier motor vehicles like boats/planes)
Similar ideologies here:
When I was a young attending I drove used cars/trucks, even to the point of being mocked in the parking lot by senior attendings. Once I made partner, I leased through the practice, as do my other partners. Always had nice cars, and kept a separate truck for hunting, fishing, camping and other fun beater activities. I have now downsized to one mid size SUV still leased through the practice. May have to pick up a used little roadster for fun driving on the weekends. For my wife, we typically purchase new or one year old vehicles. I realize that as we move into retirement that the situation will change, and I’m fine with that.
Also have a boat…and it ain’t small…
Yet, I’m having fun, financially on track for a strong retirement, and have no burning desire to retire before 60.
To each his own.
Good job to recognize that income can be fleeting so good to get rid of ongoing payments like mortgages early on. But I’d probably throw lease/car payments in there too.
A couple more good reasons to not finance a car.
1) By not financing you need to save up the cash and actually spend it. It is much easier to make $875/month payments than it is to write a check for $50K therefor you end up spending less on a vehicle
2) To win the finance arbitrage game, you need to invest the rest of the money. Most people don’t actually do that and end up spending some or all of that cash somewhere else.
I think number one is certainly an issue where you could buy more than you intended because its simple.
A few things.
1. As long as your investment is making more than your loan, your net worth is increasing. Hence the benefits of car loans.
I aware that many investments are not very liquid.
2. You *can* get impressive deals when leasing. I personally am not a leasing advocate but it’s great for getting the most safe, reliable car.
ESC, for example, was not standard on new cars until model year 2012. Automatic breaking is also not seen on many cars even now…and it is shown to reduce by like 20% in studies. New cars=pretty much safe check IIHS data.
3. You drive like 20,000 a year… that’s a lot. A middle ground could be getting a gently used car that was 40,000 new but depreciated to 16,000 in three years (volvo s60) and driving and living close to work.
I haven’t crunched the numbers but I’d imagine that the jet skiiing and boat activities you partake in greatly exceed the extra ~three thousand in running costs per year of a newer car.
4. Edmunds true cost to own gives good estimates; used cars actually aren’t as cheap to operate as people think. Cheaper than new/leased but not as good as people think.
4a. You have to wash regularly or else the paint really does get permanently affected. $3 a pop each month ain’t that pricey.
I’m aware
Reduce *crashes*
New cars=pretty much *more* safe check IIHS data.
Typing on phone sorry.
1. The math works, the behavior often doesn’t.
2. Sure. How many doctors do you know getting an “impressive lease deal.” I don’t know a single one. If your goal is the MOST safe car, then I’m sure you’ll find someone willing to take your money for that incremental increase in safety. It seems to me I’d get a bigger bang for my buck by stopping cycling as far as safety goes. Putting any metal cage around you is going to make a much bigger difference than ESC.
3. Losing 60% of value in 3 years is an awfully high rate of depreciation. The cars I look at these days are more like 25%. Now that doesn’t look quite so good, does it? Three grand a year seems about right for the boat, NOT including depreciation. Add that in and its way more.
4. I guess it depends on what people think. Having 20 years of experience actually doing it, I think I’m pretty clear on just how cheap they are to operate.
4a. And what the paint looks like matters why again? Remember, I’m not reselling this and I don’t care what it looks like. But you’ll be happy to know I hosed the dust off of it today in the driveway.
On autotrader the s60 I’ll be getting after residency *does* go down to 16,000 after three years.
To be fair it’s an extreme case of depreciation. Other similarly depreciating cars include the Hyundai Genesis and Lincoln MKS.
Most cars after three years retain about 60% of their value with outliers. (Subaru outback, toyotas, etc)
Your sample size of cars owned is much less than data that websites manage.
I wasn’t trying to contradict your article but show that in most cases getting a used car isn’t going to be a financial bonanza in regards to actual running costs. You have your things you splurge on and us car aficionados have ours.
Though buying a 16,000 used car as an attending isn’t what I’d call excessive. 🙂 As somebody living on 16,000 a year in residency (hospital pays for health insurance) I’m not exactly living it up haha.
If most used cars gave you a 60% discount after 3 years, I’d recommend buying those every time. That’s a huge discount.
There’s a reason those models have depreciated a lot.
Volvo S60: last redesign was in 2011. The new one will come in 2018.
Hyundai Genesis: model redesign and it has no brand cachet compared to the BMW and Mercedes.
Lincoln MKS: ditto the Volvo.
I don’t care that these cars aren’t as high-tech or stylish as other cars. In fact, the reason why I won’t get a new car out of residency is not just cost but the darn ubiquitous touch-screens out there.
I didn’t mean to have such a harsh tone in my first post; sorry if it came across that way.
Another option is to buy new and hold until it falls apart, having bought it with heavy incentives. Sedans are being sold with lots of incentives right now due to the crossover craze. And if you had used your GM 5% card to accrue a lot of credit…not *as* bad of a decision.
Still a used car guy myself but new/leased has some merit.
Dr. Dahle, the one thing that jumped out was that you did not publish how much you spent on your wife’s car.
Here’s a trend I’ve noticed. A lot of frugal doctors skimp on themselves. They buy used, and basically drive a beater into the ground. The wife, however, tends to drive the nice Mercedes/BMW (especially if they don’t work). This still doesn’t take away from the financial consistency of buying with cash, and avoiding financing, but does put a dent into the argument of a car being no more than a mode of transportation.
I am equally impressed by someone like DarrVao. Although I personally detest leasing cars, I am shocked that the guy can save 50% of his GROSS income. For somebody like myself who is in the highest tax bracket, paid on a W-2, I pay over 50% of my income in taxes. This leaves me saving only 20% of my income (barely). Even though I keep my bills to a minimum (my mortgage is <5% of my monthly income), trying to save for the kids college, and other living expenses, it makes it very difficult for any luxury items, such as a nice car. By the way, I drive a 14 year old POS.
I can also gather that you tithe 10% of your income faithfully. I do the same every month, regardless of my financial situation, and of course have other charitable contributions as well.
Anyways, my point is that anybody who can save 50% of their gross income is well on their track to financial security. If they want to spend their disposable cash on luxury cars, boats, etc, I'm all for it.
I, too, can’t figure out how DarrVao can save 50% of gross income and own a home that is almost paid off. Assuming he lives in a state w/o income taxes (surely!) and is in only the 28% tax bracket, that means saving $115,725 of $231,450 (top dollar in bracket), paying $68,486 in federal and $10,930 FICA (more if both spouses work). $35,950 left for debt payoff and all living expenses for a year? Haven’t worked out higher tax brackets as I’m still wrapped around “mortgages are about to be paid off” totaling $350k. Surely he is in a much higher bracket – but then paying incremental 39.6% fed, while overall FICA lower, haven’t counted NIIT, (AMT?), etc.
Actually the savings w/b even more than the dollar calculated above b/c retirement savings would reduce gross. My hat is off to you, DarrVao. Would love to see the math!
We are definitely very fortunate.
I’m also in the highest marginal tax bracket, also paid on a W2 (although my wife is a 1099). I am in a better reimbursed subspecialty, my wife is not in medicine. Combined our income is in the high 6 digits, low 7 digits. I don’t have the exact numbers in front of me but an effective tax rate of ~35% + 500K in savings annually (2 401Ks, 2 backdoor Roth IRAs, 1 HSA, the rest into a taxable account) still leaves roughly 160 – 200K/year for us to play with.
As Johanna noted, we do live in a state without income taxes. The combination of the mortgages is <5% of our monthly income (the total cost of our primary residence was <450K). We don't have kids yet so that helps in terms of not needing to pay for schooling or save for college. My wife graduated with zero student loans, I was fortunate to graduate with <100K in student loans and was able to pay them off in my first year after fellowship. I was saving >20% that year but certainly nowhere close to 50%.
I will confess our charitable giving is something that needs improvement. My wife and I are both not religious and we do not tithe. We both have charitable contributions but nothing that approaches 10% of income. We were both a little ashamed reading through some of the more recent forum posts on charity and giving. I think this is something where we can and should (and will) give a little more even if it means saving (or ideally spending) a little less.
$18,900 for a 4 year old Sequoia with 42K miles on it paid for with cash. Happy? 🙂
I’ve saved 50% of gross before, and that was on an income of something like $120K. Of course, I had some pretty sweet tax advantages back then…
I doubt you pay over 50% of your income in taxes, especially if 10% is going to charity as discussed here: https://www.whitecoatinvestor.com/doctors-dont-pay-50-of-their-income-in-taxes/
If you really do, it’s time to move out of Manhattan or the Bay Area.
Hmmm I must be doing something wrong here. I drive a beater while MD husband drives the newer car which I bought before we got married. And I work. How did that happen?
I actually purchased a new car in 2009 during my younger and more ignorant days. I’ll share my method in case someone is dead set on buying a new car: I utilized Truecar, Costco and Sam’s Club’s auto purchase programs for price comparison. Once I decided on the car model and trim level (Honda Fit Sport 2009), I contacted all of the Honda dealerships within 100 miles and asked for the lowest price they can offer. I let them know I will be buying a car within the next 48hrs and all it mattered to me was the lowest price. I went through 2 rounds of bidding and was able to get a price that was within the “Exceptional Price” range on Truecar’s price graph. I paid for the car with cash.
The one thing I wish I had done differently though was to finance the purchase. I believed in paying for everything in cash back then. In retrospect, I should have financed the car at a very low interest rate and then invested the difference.
As far as insurance, I recommend checking out JD Power’s rating for customer satisfaction data (http://www.jdpower.com/ratings/industry/insurance) and My Money Blog’s “Big List of Auto Insurance Premium Comparisons for All 50 States” (http://www.mymoneyblog.com/big-list-auto-insurance-premium-comparisons.html) for objective pricing data.