By Dr. James M. Dahle, WCI Founder
Over the course of a few days several months ago, I ran into several instances that just make me shake my head. All of them illustrate the fact that what you drive has a very real effect on your ability to acquire wealth and reach financial independence and the freedom and joy that come with it.
The first episode was a lady on the Dave Ramsey show. She made $36,000 a year and owed $25,000 at 12% on her car worth $17,000. I don’t think I have to say much about why that’s a problem. The other two episodes were threads on the Bogleheads forum and the WCI forum where young physicians had car debt and were trying to justify it.
I always find it amazing how much money people will spend on four tires and a steering wheel that gets them from point A to point B. Especially, when the're spending money that they do not have. Admittedly, I have never been a “car guy” and I grew up in a house where there was always at least one “beater” if not two or three. There were important lessons learned in that house, especially over the long run. Those two parents of mine raised six kids on a very middle class, single-earner income and retired as millionaires. One of the main reasons why they were able to do so is that they drove “$5,000 cars” for a good portion of their lives
Can You Really Get Rich Driving a $5,000 Car?
First, Let's Define What a $5,000 Car Is
Let’s pause for a minute and define a $5,000 car. If you have never had one or have never been shopping for one, this might be a foreign concept to you. A $5,000 car is a 7-year-old Nissan Sentra or Mazda 6 with 100K miles on it. That car will probably run for another 50-150,000 miles over 5-15 more years while needing a few minor repairs and a major repair. At the time of the second major repair, the car will be considered “totaled” and can be sold to a junkyard for $500. That second major repair may be 20K miles away, but it is probably 100K miles away for that $5,000 car.
$5,000 Cars Aren’t Awesome
Let’s acknowledge for a second that driving a $5,000 car isn’t an awesome experience. It doesn’t have that new car smell. You’re not going to impress anyone with it. There are a few little things wrong with it. It has a little ding in the rear bumper. The rear window on the passenger side doesn’t go down any more. It’s going to need new tires next year. It might even burn a little oil. It turns out you can buy a lot of oil for the price of an engine overhaul, but the point remains that this isn’t a car you've ever dreamed about and drooled over. If you are a middle-class earner who wants to become wealthy eventually, this might be a long term proposition, but for the high-income professional, these minor inconveniences are far more temporary.
How a $5,000 Car Makes You Rich
There are a number of costs that go into owning a car that you may or may not have considered.
#1 Depreciation
A brand new car may lose half its value over its first 5 years. On a $30K car, that’s $15K over 5 years. A $5K car basically doesn’t depreciate in any significant way.
#2 Opportunity Cost
The money you shell out for a car could be invested and earn a return of perhaps 5-10% year. The difference between a $5K car and a $30K car is $25K. Over 5 years at 10%, that $25K earns another $15K. The return on $5K is far less.
#3 Repairs
As a general rule, the more expensive the car, the more expensive the repairs. If you’re buying a $5K car, it is probably something like a Nissan Sentra, a Mazda 6, a Dodge Neon, or maybe a Honda Civic. Repairs of these popular cars are very inexpensive. Plus, when you have an old car, you are far more likely NOT to repair every little ding or malfunction. So while an older car probably will require more repairs than a newer car, the difference is not nearly as big as most assume, and may even be negative.
#4 Maintenance
Where do you take your $30K car for maintenance? To the dealership. Where do you take a $5K car for maintenance? To Wal-mart, where it is much cheaper. And chances are you’re going less often too. Who washes a car with 150K miles on it? Another saved expense.
#5 Insurance
It simply costs more to insure a newer car than an older one. That is because it costs the insurance company more to replace it, but more importantly, you are less likely to be able to simply replace the car, so you are more likely to purchase comprehensive and collision insurance instead of just liability insurance on the car.
#6 Fees and Interest on a Loan
Most people will finance a $30K car but can purchase a $5K car for cash, skipping all those fees.
The Bottom Line
Your cost of ownership on a brand new car may be $5-10K a year, whereas the cost of ownership on a $5K car may be $1-2K per year, and possibly less if you get lucky with repairs. But wait, there's more. Most households have not one, but two cars. If you're a two car household, you can double everything in this section.
The Sentra Factor
Let’s say there is a difference in the annual cost of ownership of a new fancy car and a $5,000 car of $6K per year. Now, take that $6K a year from age 18 to age 65 and compound it at 5% real. What do you get? You get rich. That’s what you get. That adds up to $1.1M by age 65.
The vast majority of America’s middle class retires with far less than $1.1 Million. In fact, many doctors retire on less. Forget the Latte’ Factor. If you want to get rich, consider the Sentra Factor. Heck, in the personal finance world I’m considered a moderate on this topic. At least one personal finance blogger suggests you shouldn’t drive a car at all and should go pick up your groceries using a bike trailer. Having done both, trust me when I say that the luxury difference between a $5K car and a bike is 10 times the difference between a $30K car and a $5K car.
When Is It OK to Buy That Nice Car?
Now, many doctors and other high-income professionals have challenged me on this point. They are correct that a mere $6K a year probably isn’t as big a deal for someone earning $300K as for someone earning $50K. They are absolutely correct. If you’re saving $60K a year, then $66K a year doesn’t get you to a dramatically different place. So if you’ve already got your $1.1M socked away, you can skip the rest of this and go buy that $30K car you want.
What’s that you say? Your net worth isn’t $1.1M? In fact, it’s -$300K? Well, then you’re worse off than Mr. Middle Class. You’re far worse than broke. It’ll be years before you get back to broke. Go get yourself a $5K car. Medical students, residents, and new attendings are usually worse than broke. Start acting like it. Fake it until you make it might work as an MS3 trying to play doctor, but it isn’t going to work in the financial independence game.
Excuse #1 – “A $5,000 Car Isn't Reliable”
There are three excuses that people, especially doctors, throw out when I suggest they drive a $5,000 car for a while until they can afford to drive something nicer. The first excuse is the reliability argument. “But I can’t drive an old car. I don’t want to be stranded on the side of the road.” The average car in America is over 10 years old. How many cars did you pass that were broken down on your commute this morning? That’s right. None. All those 10-year-old cars got where they were going just fine. Sure, a car with 150K miles on it probably does break down a little more often a car with 50K miles on it. But the difference is far more trivial than most who have never driven an inexpensive car realize.
Consider my own history. For the last 10 years, my daily driver has been worth less than $5,000. (One was $2K, the other $4K when I bought it.) In that period of time, I have had two breakdowns. The first required a jump and 10 minutes at the auto parts store to get a new battery. The second was a transmission that went out. While that was far more expensive, the inconvenience factor was only slightly worse, requiring about an hour of my time while waiting for a tow truck and a ride from a friend back to our other car.
But the point remains that despite driving a car much less expensive than $5K, I’m averaging a breakdown about once every 5 years. And it’s not like I’m not taking these cars out and abusing them. You’ve seen the pictures on my blog. That beat-up Durango has made plenty of trips into places where “getting stranded on the side of the road” could have dire consequences.
But if you absolutely cannot stand a $5K car, then fine, buy a $10K car. What's a $10K car? It's a 3 to 4-year-old Sentra with 50K miles on it. You're going to have a very hard time making the case that a car with 50K miles on it is unreliable. You still get most of the benefit compared to a $25-30K car.
Excuse #2 – “It's Not Safe”
The second excuse I hear is the safety issue. “But new cars are so much safer now. They have airbags and anti-lock brakes and stuff.” Well, guess what. Both our 2002 and 2005 SUVs have both anti-lock brakes and airbags. There is actually published data on safety, which of course varies by vehicle. It turns out that a 5-year-old Accord is just as safe as a brand new one and a 10-15-year-old Accord is only marginally less safe.
Besides, even if you buy a brand new car, it's going to be a 3-year-old car eventually and not have all the latest safety gear. Then what are you going to do? Churning brand new cars every three years is, without doubt, the most expensive way to pay for your transportation needs.
Part of the “safety argument” is just marketing. Since cars are so reliable now (remember the AVERAGE is over 10 years old) they have to come up with some other reason to get you to buy cars frequently. Look at it this way. If your “family's safety” is so important to you that you're willing to go into debt to buy a car, are you at least buying the MOST SAFE car on the road? Probably not. This is just an excuse to go into debt and not a very good one at that.
Excuse #3 – “Lives Rely on Me”
This third excuse is my favorite because it is just so dumb. It basically goes like this — “I'm a doctor and sometimes I have to get to the hospital very quickly to save a life. A breakdown could kill somebody and I couldn't live with that.” Your financial advisor or your spouse might buy that argument, but I don't because I actually work in a hospital.
“She may not look like much, but she's got it where it counts, kid. I've made a lot of special modifications myself”.
The times when minutes actually matter in medicine are few and far between and impact very few specialties. So if you're even thinking about this one, you'd better be an OB, a pediatrician who responds to L&D, perhaps anesthesia, perhaps trauma surgery, and perhaps even vascular surgery. Everyone else can forget it, including emergency docs. Your partner isn't going to leave before you get there and at worst you're going to be an hour late. Most specialists I call (including OB, peds, anesthesia, trauma, and vascular) don't even call me back for 20 minutes.
But even if you're one of those select docs in this category, bear in mind the odds we're talking about. We're not only talking about just the odds of having a patient where minutes matter, but you've got to multiply that tiny risk by the tiny risk that the car breaks down on that particular trip. Again, the odds are astronomically low. If this tiny risk is a big deal to you, then I would again suggest you move closer to the hospital because if a half hour could matter, then “that extra four minutes” could matter too.
A Reminder That You're Not Rich
One other benefit of driving an inexpensive car is you have a daily reminder that you are NOT rich, at least not yet. Expensive purchases tend to run in packs if you don't spend very consciously. Nice clothes, nice cars, nice vacations, nice homes etc. It seems silly to park that $5K car in the driveway of a $2M house. So if you'll drive a $5K car for a few years, chances are good you'll spend a little less on some other luxuries, grow into your income a little more slowly and reach financial independence much faster. If nothing else, it will give you a daily reminder of your financial goals.
Now, I don't plan to drive a $5,000 car the rest of my life. When this Durango dies, we'll probably replace it with a brand new $50K-$60K SUV, bought with cash, just like every other vehicle, toy, vacation, or home improvement we've ever bought. My business manager told me she was wondering when I was going to replace that Durango. I told her I love that $5,000 car and its predecessor because they made me rich.
[Update: The Durango died and was replaced. More details in this post.]
What do you think? How much of an effect does driving an inexpensive car have on building wealth for someone on a middle-class income? What about for a high-income professional? How did you decide when to upgrade to your “doctor car?” Comment below!
This point maybe doesn’t apply to physicians, I don’t know…
But I’m pretty sure in some professions, a nice car signals to clients or customers that the driver possesses more talent. If that’s case, spending an extra (say) $300 a month on a vehicle might make economic sense if you pick up an extra $3K a month in revenues or income.
Further, and again maybe not the case in medicine, in some roles a beater car sends the wrong signal to people one wants to sell to.
FWIW, not saying a middle income person should get the Porsche… I also think it’s easy to buy too much car and signal to clients or customers you’re gouging them. To quote the line from Spinal Tap, there’s a fine line between clever and stupid.
I think the opposite dynamic exists in medicine. Driving a flashy car sends the rich doctor message to patients making them more likely to sue you.
I agree with Stephen. This won’t apply when you’re parking in the hospital garage everyday, but if I can figure out what my doctor, dentist, attorney, contractor, insurance agent, etc. is driving, it tells me a lot about the person, or at least gives me a feeling about him or her.
As petty as it sounds, when people see an attorney roll up in an old jalopy with a cracked windshield, faded paint and a loud exhaust, they really think less of them. A young attorney might get a pass, but an older guy looks like he’s down on his luck or just a mess. Spending $200/mo on even a Toyota Camry avoids this perception.
As a funny anecdote, one of my buddies is an insurance salesman out in the river parishes here in Louisiana. Despite being a car nut and owning a Porsche 911, he drives a used Ford Escape everyday to avoid the perception that he’s making too much money off his largely rural clients. 😉
My friends 911 was brought up in his malpractice trial. Not funny!!
Objection for relevance 🙂
The jury heard it before the objection
But it does present us, as a profession, with a difficult argument to make. We want to point out the challenges of declining reimbursement, increasing educational debt burdens, etc. But if the public were to drive by any physician’s parking lot in the country they would be given the opposite impression (even if most those vehicles are leases or debt purchases). It just contributes to the lack of sympathy people have for physicians in the healthcare system and why we are easy targets for decreased funding. (In another 10 years most those luxury cars will probably belong to hospital administration 😉 ).
Very true. Hard to claim poverty when you lease the Bently.
Not all physician’s parking lots. Ours is full of trucks, not too many brand new either.
trucks and suvs here.
Actually most of those fancy cars are driven by admin now. And they park in the physicians lot of course.
You’re exactly right about signaling theory, which is also why you dress like a professional and people take you more seriously than if the same person dressed in beach attire gave the same experience.
For doctors at hospitals though, the signaling theory is really for themselves and their peers, no one sees your car that you’re treating really. In a small practice the pts still wont see it, but your staff does, and they do fall for all those psych things and can effect their interpretation of you, and thus how confidently you’re presented to pts, etc…
That was really hard on me and I felt extreme pressure to buy at least a respectable car, as mine was 10 years old (only 100k mi), no power door/lock/nothing, and lamer than the least paid staff. I eventually gave in and bought a doctor car, and that seems to have worked perception wise, and its really very nice. However, after a couple years I just dont see the big difference, you go from point A to B, then the other 95% of most days it sits in the garage. I did pare us down to one car for some consolation, but the calculation on what I could have done with the money instead still bothers me.
I appreciate cars, but its really weighted towards their time of us and utility, which is pretty small and basic.
Hate to rain on your parade, but if my cpa drove a Porsche, I’d find a new cpa who was less expensive, and can still do the job well. A new Accord or similar, wouldn’t think twice about it. Perception goes both ways.
And when attorneys drive expensive cars, knowing how hard it is for lawyers after school etc., I feel like they are over compensating.
I’m only starting my career though, so maybe it will change as I get older.
You’re not raining on my parade. And FYI I don’t drive a Porsche. 🙂
A new Accord looks a lot better than a rust bucket beater Sentra.
ID consultant here. 150k 2011 Volvo. Lots of dings etc. I tell my kids it’s more important to have the car clean and neat than fancy. Sends a message to other docs in the lot about how well I may look after their patients. Just my two cents regarding the image thing.
I think that’s pretty rare to make the jump that a doc who doesn’t clean his car or fix dents isn’t going to take good care of patients. I think some would assume just the opposite- he is working so hard to care for patients that he doesn’t wash his car each week.
And that’s a heck of a lot of miles in 5 years. Serious commute or something.
Used to be until I got my financial house in order and was able to limit my practice to one hospital. Much happier with lower income and more time, but only possible after serious savings.
Dents aren’t going anywhere but I do try to keep it washed at least every couple of weeks. I, and the two spiders that live somewhere in the hatchback and make a new web every morning hope to get at least another 200K out of it.
I think it’s important to keep it organized and neat. Wrong message sent if the inside has papers scattered everywhere etc. That’s all.
Meh, it’s general cleanliness and appearance. Like the clothes you put on everyday. If you walked in to a consultation with a dusty, ragged suit on, that’s not going to make the patient think you are too busy taking good care of patients to go get some dry cleaning done or buy a new suit every now and then.
We should get a shrink to come expound on this one 😀
And it’s not that someone will see the car, jump to some weird conclusions, and run away (though you can find crazy people who do). It’s just a general impression, how you are perceived, which impacts how a patient or client takes and values your advice, or is likely to recommend you to someone else. Going to a doc or a CPA etc. who is in a dumpy office in a dumpy part of town driving a dumpy car wearing a dumpy suit doesn’t instill confidence. Unless you have a strong recommendation from someone you trust that this Yoda guy is a jedi master, you’re going to instinctively judge this guy as a quack and go elsewhere.
The spiders tend to make nice symmetric webs, so I think that helps.
A suit? I’m just happy if there are no bodily fluid stains on my scrubs.
Touche!! That should be your next post– How to get rich by choosing a specialty that only wears scrubs. Save $3-4k/year easy. 😀
It adds up quickly. I like expensive cars but found I haven’t had to upgrade my wardrobe to match.
Employer provided scrubs at work
Tshirt, shirts, and flipflops after work
I’m firmly sticking to “spending your money on what makes you happy” ☺️
My office is dumpy. I will probably retire next year so who cares. Keeping overhead low is another key to wealth accumulation. I also wear hospital acquired scrubs most of the time.
And the scrubs definitely help when you get pulled over in your expensive car. Occasionally you’ll still get the ticket, but most of the time the man is pretty easy on medical professionals. 80% of the time, it works 100% of the time 😉
Yea, but you make up for it by having to buy more shoes. Some stuff just can’t be wiped out.
The best Doc I know is so down to earth he dresses, speaks, acts and drives a beater just like the average Joe. He has come up behind me at the office and said Ms. So and So is coming in or out please don’t charge that poor sole she has no money! He also takes his old black bag to his little lake house to see older people who don’t or can’t get out anymore. He once told me bring those boys to my lake house fishing anytime dear. (And truly meant it) God Bless this man we need many more docs like him. I hope he is enjoying his retirement he was a true gem of a man. God Bless You Dr. B.
I believe many of the people driving the cars certainly think that.
My goto pick for an illustrative example has always been Realtors.
Good post. Very true. Easy when one doesn’t care what they drive. We bought beaters in residency. Then, new when we were able to buy with cash. But, we drive them for 10+ years. I am 50 and only this year bought what I guess is my “doctor car” which is a Honda Pilot Elite. My husband got tired of how often the old Odyssey kept breaking down. I do miss the old factor and not caring when it got beat up. Fifteen year old son taking out neighbor’s mailbox bothered me more in the new car than it would have in the old. I think it helps that we live and work in an area where driving fancy cars is not the norm.
BTW…I am writing this comment as I sit at the Honda dealer getting broken trim pieces replaced. They are under warranty and not related to kid driver mailbox issue. Never would have wasted time on this with the old car. It was bugging Hubbie so decided to do it. I’d rather be at the YMCA though!
Lots of great points in here but IMO the marginal utility of a newer, nicer car is worth the added money. Doesn’t have to be brand new, or an optioned-out Mercedes Benz, but newer & nicer buys things like air conditioning, a lack of flashing lights on the dash, airbags that still work, paint that’s still there.
And for someone who buys things like life & disability insurance, spending money on a larger, heavier vehicle is absolutely a wise decision and easily justifiable. Even that beater Durango of yours is likely to fair far better than the beater theoretical Sentra. In a collision, the higher, heavier vehicle wins the battle of physics. https://www.youtube.com/watch?v=6GU_geAPQwg
Obviously this gets out of hand when you’re trading in for a brand new S-Class every fall, but on a physician income or anything remotely close, driving a beater everyday until you’re 65 is needless suffering 😉
No one is saying drive it until you are 65,not even WCI did that. But justifying buying a newer car for airbags…. Really? I will give you the air conditioning though. Did my first 2 years without air conditioning in the southwest, that wasn’t fun.
Dave Ramsey advice for a new car would be to have a million dollar net worth first and no more vehicle value than half your annual income. At that point the depreciation doesn’t really matter so much. A doctor shouldn’t have trouble getting to at least a few hundred thousand in net worth by the time he is done “living like a resident” for those first 5 years. After that, go buy the new car if that’s been your goal.
Directly quoted from the article “Let’s say there is a difference in the annual cost of ownership of a new fancy car and a $5,000 car of $6K per year. Now, take that $6K a year from age 18 to age 65 and compound it at 5% real. What do you get? You get rich. That’s what you get. That adds up to $1.1M by age 65.”
And you don’t believe in airbags? How about seat belts? Crumple zones? Antilock brakes? 😉
Ok, I get the 65 thing now. I think he was proving a point not saying everyone should do that. It would be very hypocritical to tell everyone to drive a beater until retirement when he doesn’t plan on doing it.
And he also makes the point that a $5000 car doesn’t mean a car without crumple zones, airbags or seat belts,or even ABS.
Everything in life is a trade off. Drive the fancy car if it makes you happy, we all have things we do that are for reasons besides a financial decision, but realize the costs and be OK with it.
Also, comparing an Accord with a good crash test rating to a fit with a poor crash test rating is hardly fair. Obviously more weight is better, but a fair test would be 2 cars with the same crash test rating.
https://m.youtube.com/watch?v=agCCJQIPLD0
Don’t blow all your great points now. Make them wait for the Pro/Con!
Yeah! Looking forward to the response on that. 180+ comments here! Nuts.
I’m sorry to hear about your loss. I’ve owned four cars in my young life so far. The first was a 1999 Pontiac Bonneville. It was the best car I’ve ever owned. I went on a trip overseas and my parents parked it under a tree. A squirrel got up underneath the car and built a nest under the master cylinder of the engine. It also chewed through the ignition wire cover. So parents decide to take it for a spin while I’m gone, and the car catches fire and melts slowly. They were fine. Second car was a $10,000 Kia Sorento, which I hydroplaned off the interstate into a tree at 70MPH during a really bad storm at night. Very lucky to have lived through that. Third car was a Chevy Equinox which I bought because I liked that the front of it looked like a truck. I also liked the leather seats and premium trim. I was a total idiot. The sunroof leaked and caused a ton of electrical problems. I had to seal the sunroof shut and duct tape it, which made the resale value pretty pathetic when I sold it to travel the world. Girlfriend just got a new attending job but has lots of debt and minimal savings. So we bought a used 2004 Honda civic all manual everything except transmission (locks, windows, etc). I love this car and hope we can make it last. We paid $2200 for it with 180,000 miles and you can hear them. I think she would feel much more comfortable with a 2011 $10,000 Hyundai Sonata, but we’re gonna try to wait til her loans are gone. Thanks for the encouraging word WCI. Nothing destroys your net worth like cars, except maybe houses.
Good choice with the older Honda. Our choice was older Accords till our loans were gone. I backed into one in the driveway and dented the door pretty badly. We just lived with it for two years then gifted the car to my sister when she was in residency. Best wishes!
Why were you driving 70MPH in a really bad storm at night? Looks like you were seeking the Darwin award. Glad you lived to tell the tale.
My current car is a 4 year old Ford SUV. My dog has chewed through a seat belt but I have not fixed it yet as she is still a puppy. The car is filthy and I could care less. I will admit that I went middle aged crazy and bought a Porshe boxster on ebay. I kept it several years and sold it. It was fun but I got paranoid about debris from log trucks decapitating me driving to my lake house. As far as safety improvements go I kept my last car 12 years and I was amazed with this ford’s blindspot mirrors and backup cameras. I have backed into several telephone poles and other cars in my driving career so a backup camera pays for itself with me. As for reliability I never missed a delivery from car problems. I actually live very close to my hospital and have walked/run from my house on occasion however.
Fix the seat belt already! I hope for more lunches. Make husband take it to Ford dealership for you!
Its her seat. She is 8 months I will fix it when she quits chewing. (She is part lab so maybe never.) No human will sit in the seat until it is fixed. Yes more lunches!!
Strange, I work with a large group of engineers and scientists. A large portion of which make 100k+ and are millionaires and we all tend to mock the new shiny car in the lot. We also tend to keep track of who’s car is the oldest and most beat up. Definitely and element of peer pressure.
Engineers really are their own breed. 😀
My civil engineer father-in-law still owns the blue Volkswagen Beetle he bought in Germany in the ’70s when he was in the Army.
My reply to you ended up way below. IDK why…
When my husband and I got serious about our finances we sold my 2013 SUV and bought a 1999 Corolla (from a 93 year old lady!) with 48,000 miles on it. Paid $3000. The BEST part of my day is driving that into the Physician Parking and parking right next to the Audi, BMW and Land Rovers that are all down there. It’s now a joke between my partners and I, but it’s helping me reach financial goals and getting into it everyday reminds me what I’m working toward. This thing will probably run another 17 years (only drive it to work – currently 55,000 miles on it) and getting into a $5000-$10,000 car paid for in cash will be a luxury!
I drove a Mazda 626 for 12 years — purchased in college (new with help from family) and drove it for 12 years (halfway through fellowship). The last 2 winters I owned it the vents only put out hot air when I hit the gas pedal. When I let go of the pedal it only made cold air. I had one door that wouldn’t open for a couple years because a lock was messed up. Every so often when the weather was right it would unlock, then stop working again.
I didn’t wait to become an attending to replace it — when my wife started working as an NP I traded that thing in as fast as possible. One of the wheels was about to fall off and I was so scared of driving it I repaired it the week I traded it in because I thought the dealer would find out and reject it. I was ticked when they didn’t even look at the car before making the trade in offer.
We just traded in our 9-year old Accord for an Odyssey since we need something that fits 3 car seats. I was sad to let it go since it would’ve driven for another 100k miles (and has never had mechanical issues), but we didn’t need a third car. It would have sat in the driveway and rarely if ever get used taking up space and insurance money and it helped us pay cash for the minivan.
The first 2 cars in our marriage (the Accord and a Kia Sorento) we bought new (we this minivan used) — I wish we had bought an older model year Accord, but I think we kept it long enough to justify the purchase. Hopefully our current 2 cars will be around several more years.
@WCI,
How much did your Durango cost in annual insurance, maintenance, repairs?
I roughly estimate that annualized repairs , maintenance, and insurance cost at least $3000 /year + gas costs. The alternatives to ownership being prn rental, Zipcar, car sharing, etc.
Tangentially, RENTAL CAR damage insurance is predicated on one’s own collision insurance.
If you have collision coverage on your own car or use a credit card to pay for the rental, you may be covered for any rental car damage. Alternatively, buy the rental collision damage waiver.
Hey wci
Are you posting these later in the day?
I can no longer read them before work and be the first one to reply
🙁
I noticed that also
Same for me.
No, they are scheduled to post at the same time as always but I noticed for some strange reason it is not posting when it is scheduled to do so. I’ll bump it up an hour and see if that fixes the problem. Sorry! -Cindy
I think I am walking a thin line between frugality and frivolous and am kinda proud of it.
I bought a brand new SUV six months out of residency (ordered direct from the factory with no optional upgrades except a premium paint job). The total price was just over 10% of my annual income and now I’m just over halfway done paying it off with a monthly payment that I can pay with about three hours’ wages.
My plan is to drive it until the wheels fall off.
I intentionally got it without the technology package, which was kind of a big deal for me coming from my past few cars having push-button start and lots of other bells and whistles. Now every time I turn the key in my ignition,(barbaric, I know) I get a subtle reminder of the relative frugality which is keeping me on track toward my financial goals.
This is a far cry from what is recommended by this article, but something that anyone trying to keep up with the Dr. Joneses of the world should consider.
Interesting choices. Obviously not what I would do/did but it sounds like it’ll probably work out for you.
Somewhat of an aside, but I think this is related to why many auto manufacturers have been hesitant to push electric vehicles until the market (Tesla, Nissan) forced them to make an effort. What could be lower maintenance going forward than an electric vehicle? Way fewer moving parts, no oil changes or emission tests. Theoretically you could drive one for decades (battery life being the only issue of course, but maybe that will not be big deal in the future, you might easily and cheaply be able to swap it out). In another 5-10 yrs EVs might be the ultimate MMM-type vehicle.
That would be awesome if electric cars would go a million miles or something.
I got a Tesla Model S last year and have <10,000 miles on it. It cost $85,000 dollars plus $5,000 sales tax and $5,000 to register (did get electric vehicle rebate $7,500 fed and $6,000 state). So far it has twice completely failed and required Tesla to come pick it up. There have been various "bugs" I needed to address. Recently the front drivers window has nearly fallen out and the rear door handle stopped working. Plus, I got a speeding ticket for $200 cuz it accelerates so fast (my fault of course, my only ticket ever). I get worried parking it as a small scratch would be super annoying. In short, I have hated this car experience so much I'm looking to sell it. I want a car similar to my wife's 2010 Honda Odyssey which has 100K mikes but works great (value $10,000 dollars on KBB). So, in short, a luxury electric vehicle has been a huge disappointment.
Great post! I started following this advice in my late twenties and here I am in my mid-forties and the results speak for themselves. I drove beat-up cars for all those years, and was the butt of all kinds of jokes from my friends and family. Let’s see….. you want bottom of the barrel? I bought a 1995 Ford Aspire (turquoise, mind you) in 2004. It costs $2100. Then a Ford Escort Wagon, which got totaled in a crash and Allstate gave me more for it than I paid!! Then a beat-up Ford Focus Wagon which got way better gas mileage than any SUV out there and also had more cargo room than most. All of these cars were bought with scratches, small dents etc. I went so long without washing a car that I don’t recall how to do it, nor do I care.
The results? I topped a net worth of 1 million in 2014, and not too long afterwards bought a brand new Subaru Outback (24k), with cash of course. That is a luxury expense for me, but I earned it and I’m now financially independent, so whatever. All the money I saved and invested that worked for me for all of those years – simply by not falling into the typical “car-obsessed” lifestyle – put me where I am.
Life is good…
Oh yeah Ford Aspire. I admire your fortitude. That’s some dedication.
She was ugly but she got me places
I had a ’94 Ford Escort in College that was the same color teal I bet – made $1000 off of a rear end collision from insurance for the “paint job” – I think it looked better with the dents and scraped off pain so that went toward tuition 🙂
I’m going full on Mustachian for my daily commute by biking in every day. I figure that I could always be in better shape plus it’s a really nice feeling to not be sitting in a car in traffic like the rest of the world. (I do have a protected multi-use path that almost all of my commute is along, so it’s not like I’m trading sloth for the chance to be hit by a car.)
With regard to cars rather than just transporation to the hospital, as mentioned in prior comments my household’s vehicle lineup is chosen deliberately but isn’t the roster of near-beaters that one might expect from someone who wants to retire early, as I do.
Vehicle 1: 2012 Toyota RAV4 EV, bought lightly used in 2014. Rationale:
– really, really cheap to run and maintain
– environmentally sound (PV on our house’s roof + wind-offset electrical power from the grid)
– $6k CO tax credit (Federal credit didn’t apply to us since we bought it used)
With this electric vehicle + a Toyota extended warranty (also bought at a discount–these have HUGE margins on them and dealers will compete) that’s good through 2021 I’ve guaranteed my wife and kids reliable, quiet, clean transportation through that period. To me that’s worth the premium above a beater, and with the lower running and maintenance costs that premium may well prove to be negligible.
Vehicle 2: 2007 Toyota Land Cruiser, bought not as lightly used in 2013. Rationale:
– I’ve wanted one since the mid 1990s, and satisfying this childhood desire has some value to me since I’m not merely a machine to make perfectly rational decisions (see: carbon mountain bike in garage for other evidence)
– due to its mass, solid body on frame construction, and presence of modern features like side airbags, ESC, and did I mention already how heavy it is? it is probably one of the safest vehicles on the road for when we take it on road trips or when I head to mountain trailheads with the bike
– Land Cruisers have a cult following, especially out in Colorado, and thus depreciation is really low. Depreciation is just as important as purchase price as that’s ultimately what you “pay”.
– this cult following is based on exceptional reliability. See UN vehicles in Africa or data from this site: http://longtermqualityindex.com/vehicles/Toyota_Land_Cruiser.html
These two vehicles’ used prices ex tax credit add up to about 14% of my yearly gross income. Could I have spent less? Sure. To me they’re worth it for the reasons above, and represent an investment for the future in that the Land Cruiser may well end up being the vehicle that my young kids use when they learn to drive…
Wait…a carbon fiber bike isn’t rational?
Ah, did you spring for one finally? I recall you saying that you’d stick with your aluminum bike even though your riding buddies were on carbon, but that was pre-new boat and pre-WCI revenues going through the roof.
(I picked up a 2016 Santa Cruz 5010, fancy and carbon with X01 all around. It has improved my quality of life, or so I tell myself.)
Did you miss the series on loosening the purse strings?
https://www.whitecoatinvestor.com/loosening-the-purse-strings-part-2/
I’ve spent most of my career in a manufacturing factory. We always joke that we have the nicest cars in our parking lot. Most of my co-workers would be hourly and probably do not make a whole lot of money.
I don’t think any of these people could ever envision the idea of having a nest egg of something like a million dollars. Most likely it’s work in a factory somewhere doing manual labor until you are eligible for social security. When we switched from weekly paychecks to bi-weekly paychecks, there was some push back with that.
If someone else wants to feel proud of themselves for working for several years and reaching their big scary status symbol goal of being able to finance a nice vehicle, who am I to judge that life choice, even if it’s not something I would do personally?
We also have plenty of employees who get dropped off and picked up so it’s certainly not all frivolous car buying.
Not being mean, but I’m not sure I understand the point you’re making.
My point was that I’m just not surprised that this happens for the aforementioned reasons. Doc’s opening line was that he was very surprised that people spend all this money that they don’t have. Average debt in the US is pretty crazy last time I looked. Wages aren’t exactly high either.
If someone wants to spend their cash or apply for credit on a nice vehicle and they get enjoyment out of it, how is that any different than spending on any other sort of luxury in life? Such as vacations.
I’ve never been a car guy myself, but a lot of people in America are very attached to their cars.
There’s always going to be a way to optimize your money management and I do agree with the white coat doc that vehicle choice would see some serious savings, so I hope people do pay attention to what was mentioned in this post, but I’m not surprised, and I try not to judge it.
Hope that helps.
I don’t think WCI or many others here are necessarily judging those decisions….. it’s more just factually stating that those decisions are going to likely prevent you from becoming FI. And even though the thought of becoming FI is probably pretty foreign to those folks you mentioned, the point of this blog and others is to show how simple it really is. Spend less than what you earn, save the excess and invest it simply. Rinse and repeat, bingo
Plenty of examples of people who don’t have high income jobs retiring financially secure? The book “The Millionaire next door” is a classic example. The advantage of a manufacturing career over a physician career is that physicians feel pressure to drive a nice car, live in a fancy neighborhood, or send kids to private school even when they can’t afford it (they graduate with a quarter of a million dollars in debt!). The punchline of “the Millionaire next door” is that someone in an alternate career can very reasonably retire as a millionaire just by living frugally — often with a pension in addition to social security.
I’ve had my 2000 for ranger for 12 years now. It has 203,000 miles on it and going strong. It’s got at least 50,000 more to go. My wife thinks it’s a tin can and hates it but I love it. she will try to make me get rid of it when our first kid comes because no back seat for a child seat but I can switch off the passenger air bag. When number two comes it will have to go then.
Also another large expense of buying nicer cars is sales tax. In Washington, we had to pay $800 in sales tax on a 2008 outback with 100k miles we were given for free by my mom because it was originally bought in Oregon with no sales tax. The sales tax on new would be outrageous.
I would not drive my kid around in a Ranger of that vintage. You probably don’t have side airbags. This is what a side impact in such a vehicle looks like:
https://youtu.be/IvQGQa8VIEw?t=67 (skip to 1:07 if the link-with-time doesn’t work)
“The Ford Ranger received the following ratings in the IIHS’s crash tests:
Frontal Offset (Reg. Cab): Acceptable
Frontal Offset (Ext. Cab): Acceptable
Side Impact (No Airbags): Marginal”
Crash test ratings are normalized to vehicles within that class. A poorly rated SUV will provide superior protection to a highly rated coupe or sedan. If I’m involved in a Ranger/Focus collision, I hope I’m in the Ranger.
The side impact tests are generalizable across all vehicles, regardless of size. The IIHS tests simulate being struck by an SUV on the side.
I wish you didn’t write this article.
I was having doubts about getting myself a 30k truck now that I’m an attending. I drive a 15 year old outback that has well over 200k miles on it and I promised myself I wouldn’t drive anything else until my 300k in student loans were paid off or my car dies. I cry a little bit every time this reliable old bucket turns over wishing it would give me the excuse. I found the truck that I wanted and was about to pull the trigger this weekend, but know it’s stupid and I should just be patient.
Get back to your loosening the pursestrings bits…. I’m just going to put another quart of oil in the car because its been a few weeks…
Hilarious.
classic!
Hang in there CC!
I know how you feel. I admit I kind of rejoice when a car dies or is wrecked (as long as no one was hurt.)
I am only commenting as I hope to bring some hope to the car guys out there that it is OK to spend your hard earned money on a car but …. pay cash, have a significantly positive net worth and buy the right car. You don’t necessarly need to drive a 5k dollar car to get rich, but buy one that is not going to significantly depreciate or has already taken a huge hit in value from new. Yes the opportunity cost of your money is higher and maintenance could be higher (unless you DIY) but it is worth it.
Examples of these cars:
BMW M series cars
Porsche (GT3, air cooled 911, Turbo)
Miata
VW Golf GTI
The list goes on….no need to drive something that you hate everyday.
I’m going to go ahead and guess that you don’t have a family with that list of cars. At a certain point it becomes not about oneself, and those cars are about glorifying the self.
I’m a former locally competitive autocrosser so I get the allure, but have moved on to new goals that are ultimately more rewarding.
Baby seats fit great in the back of a 911…..
I thought that too. I bought a E92 BMW M3 for about half its original MSRP. It summarily depreciated another $10k before I sold it 😀
Only way to avoid depreciation on a car like that is to buy something thats either 1) already been appreciating (like your air cooled 911 example) or something that’s hit total rock bottom of its depreciation curve (E36 M3 for like $7k or an old Miata for like $3k). Everything else depreciates. And even then, with the German stuff in particular, you can have catastrophic failures that cost thousands or even tens of thousands to fix.
Perhaps the M cars were not a great example but I still think you can drive something enjoyable, have a family and still gain FI. Interestingly, the only cars I have actually lost any money on are the “practical cars” that I bought for the family not on impractical fun ones (that my 4 year old daughter actually enjoys quite a bit).
I am a car nut, Ok? I have petrol in my veins, you see, and I suffer just sitting in Toyota Corolla 🙂
Hence I drive a lovely second hand Alfa Romeo Julietta bought second hand for cash .
It is the cheapest car in our doctors parking lot, but best looking by far . Costs very little in petrol, too . Patients don’t care what I drive.
I do most of my thinking during commute , and get out my frustration by gunning it ( within speed limit of course )
Could be worse- could be spending 65 K on a shiny Benz ( Australian prices ) but I am really happy with what I got .
Thanks for reading from the land down under!
Engineers are awesome…My daughter drives a 2004 Acura MDX that was the only car my husband ever leased through his practice. He bought it when the lease was up. She gets teased by her engineering friends for driving such a nice car despite its age.
This is response to H_Corey. IDK how it made it down here.
Let me preface this by saying I completely agree that paying more than absolutely necessary for transportation is a major impediment to early financial independence. But there are other factors to consider when deciding how to live your life in keeping with your values and priorities. I happen to believe that electric vehicles will be one of the technologies that will be important in combatting climate change by reducing carbon emissions (with a proper renewable power source), so I’ve prioritized driving electric pretty early in life despite being a new attending with a fair amount of loans.
This doesn’t mean you have to drive a Tesla. A used Volt or Leaf can be had for the same price as a typical econobox car. Though I confess I shopped around for it for a long time and got an absolute steal of a deal, I lease a Mercedes B-Class Electric Drive for less than the historical monthly payment on the 10-year old Honda Civic Hybrid it replaced (would have kept that forever except the transmission went – never a problem with the hybrid parts).
No doubt this decision to lease a car (even at just over $200/mo) impairs my ability to secure early financial independence, and objectively is not the wisest financial decision. But other than this one strong moral principle-driven decision, I’m very frugal in the rest of my decisions and continue to live like a resident, setting aside the majority of my salary for retirement and loan payments. And I have the deep satisfaction that comes with being an early adopter to try to advance a technology I believe in. Plus, driving electric is extremely exhilarating (super torque-y), and I highly recommend everyone to consider it if it makes sense for your lifestyle. Again, Google some prices for used Leafs and be shocked at how they can be had for $7000.
How much down on that $200/month lease? If 0 down that’s really, really cheap.
It was about $4000 down. Not the greatest deal in terms of down payment but I’m blown away by my monthly payment. The effective price was about 20,000 off MSRP.
If 36 months that works out to $311/month overall. If 24 months then $367. That’s pretty good given the high MSRP, and right on par with what I paid for a much lower MSRP Nissan LEAF SL Premium lease back in 2013-2014.
That was with a capitalized cost of invoice – $1k – $7.5k and a 51? % or so residual value calculated from full MSRP. EV lease deals are solid.
Your electricity is generated from nuclear, coal, waterfall, or gas. Geographic differences vary.
http://www.tsp-data-portal.org/Breakdown-of-Electricity-Generation-by-Energy-Source#tspQvChart
I thought I recently read that tesla charging stations are powered by solar energy, but I may be wrong
The Tesla superchargers do work at night you know 😉
There is a way to store excess energy you know 😉
Not efficiently.
Right. Mine is nuclear. Even the dirtiest electricity mix is about even with burning gasoline for carbon emissions. The point is that driving electric now is a way to help, in some small way, usher in a form of transportation that is capable of using cleaner, less-carbon-intensive energy. The carbon savings aren’t that great if you are on a coal grid, so the whole thing is predicated on increased penetration of renewables in the grid in the near future.
Right, due to size even the dirtiest is better utilized in an electric motor. ICE motors are extremely inefficient. As the grid improves so does the cars utilization and better for all.
That said, no point in not running your conventional gas powered car until it gives up the ghost! Electric cars still have a long way to go and, at present, produce more environemental harm in production that conventional cars (particular wtih rare-earth metal mining practices and resulting ground water contamination). The first generation of prius’ are also coming to the end of battery life and eventually the US is going to have a hybrid battery problem. While recycling is a possibilty, most cars are going to want next-generation batteries and this is going to significantly impact resale values for first generation nickel hydride/lithium batteries.
I understand your narrative Robby but forgive me if I continue to drive my 10 yr old outback for another 8 years before jumping on the electric bandwagon.
Yes as an economic consideration the premium offsets any value and makes no sense. A hybrid on the other hand does, if not bought new, those are really where its at. The value proposition of electric cars goes down oddly enough the more they are adopted and take pressure off of oil and gasoline demand.
Some form of electrification will win out still however, as it not only improves efficiency and pollution, but it improves performance, not only acceleration and such but in normal day to day driving.
Until batteries start pulling 50 ton tractor trailers 900 miles without a charge, we’ll see a lot more petroleum. I agree though that hybrids are a no-brainer.
I posted above about my cars (still pending moderation), but here’s a different anecdote relevant to WCI’s mention of Mr. Money Mustache’s advocacy for living a car-free life:
During the tail end of med school and throughout intern year I lived in Seattle without a car. When I needed to move within the city I rented a minivan hourly via Zipcar. That same Zipcar membership also counted as continual insurance coverage, which affects rates greatly when one signs up for conventional insurance yet again.
I built an electric bike, a la Mr. Money Mustache but predating him by half a decade, and zipped around town on that, using the bus system, and with sparing additional Zipcar use. I back of napkined the math a few years back, but using the assumption of depreciation and mileage of a frugal, small car (and not the RX-8 I was previously driving!) I saved about $3,900 per year by going car-less.
The point of this is that there’s a continuum, and if one hops on a bike (or even an electric bike as I had built) the savings can be substantial even relative to a frugal car.
For the morbidly curious the math behind the savings estimate is here: https://endless-sphere.com/forums/viewtopic.php?f=3&t=3999&start=250#p140903
I’m lost on how 2 gas-guzzling SUVs could be considered frugal? Surely your wife and you aren’t carrying the kids in each car at the same time, so why don’t you downgrade one to a used Prius?
Gasoline cost is but a tiny fraction of total cost of ownership.
# 1 Because we can afford to drive two SUVs.
# 2 Because we like driving SUVs. Both of us. We like to see over traffic. We like to haul lots of stuff. We like the headroom etc.
# 3 Car swapping is a pain. If she drops off two of our kids and a few friends I can pick them up in a couple of hours without any logistical issues.
# 4 Prius’s don’t have 4WD. We don’t need it often (less than 10 days a year) but when we need it, we really need it.
# 5 You can’t sleep two in the back of a Prius at a trailhead.
# 6 A Prius can’t haul a boat. Nor can it haul a bunch of kids while dad is using the SUV to haul the boat hours away.
Should I go on?
2004 First car was a 1985 Toyota Pickup bought for $200.
2005 2nd car was a ’91 Jeep Cherokee bought for $1100. 2 weeks later I got rear-ended and it was totaled. I got $1150 from insurance and continued to drive that jeep for 3 years with minimal repairs (<$1000) and finally my parents traded it into cash for clunkers while I was on a mission and got $4K credit for it. I made out like a bandit with that jeep.
2010, bought a '96 Honda Civic with manual everything for $1000. AC didn't ever work. Sold it for $800 in 2013 when starting med school and bought a bicycle for $500. Rode that for first 2 years of school.
2015 bought a 2002 oldsmobile alero for $1300. Leaks power steering fluid slowly and front right window doesn't go down. Hope it lasts me through residency. It has required some very minor repairs that I did myself. (Tail light bulb, window brackets, battery)
I look forward to the day I can buy a car without the pre-acquired dings, dents, and chipped paint. In the meantime, I can handle driving junk so long as it gets me from A to B and keeps me warm I'm the winter.
Another insightful and largely accurate article from WCI. A few points where I would disagree:
1. How you pay for the car is independent of how much you spend on the car. Set a budget and stick to it, and once the car is selected, pay for it in the most advantageous way. You have student loans at 5%? Don’t pay cash for the car if you can get a 0% loan from the manufacturer or a 2% loan from a credit union. Take the loan (which typically involves zero fees) and use the money to pay down your student loans. You can make a decision to take a loan on the car based on your desire for liquidity and other investment opportunities that may arise. When loan rates are 0-2%, I would be inclined to take the loan even if I didn’t have an immediate use for the money.
2. A $5,000 car costs $8,000 in some markets. Looking at my local Craigslist, if you are looking for historically reliable cars, $5,000 buys something >12 years old, >200,000 miles, or salvaged. This may be a local phenomenon.
3. Given #2, don’t dismiss the possibility of a cheap new car. Our local Toyota dealer is advertising new Corollas for $16,500. With 0% for 72 months. Given that this car, based on depreciation curves referenced above, will be worth about half the purchase price for at least ten years, the monthly cost will be the same or less than the $5,000 cars currently available. I am much more confident the new Corolla will go 10 years than a 12 year old car will go another 4 years. Yes, you will have some debt, on a depreciating asset no less, but if the monthly costs to own are similar, a new, warrantied car seems like a much better deal. Insurance will be more, gas/maintenance/repairs will be less.
4. What’s a good rule of thumb for car costs? I don’t know, but outside the broke/negative net worth area, I would feel stupid if I spent more than 5% of my net worth on a car, or if I spent more than 2% of my after tax income on car/car costs. What do other people think?
1. Would you buy a refrigerator if they gave you 0% for 5 years? What about a garbage disposal? How about a pack of gum? Surely at some level it isn’t worth it to you to play these games. For me, a car falls below that line. If you have student loans at 5% I would hope you don’t buy a car expensive enough that that arbitrage is any significant amount of money. Gotta adjust for risk too. Sure, you can borrow at 0%, but you can only earn 1-2% risk free.
2. For $3K you can fly to Salt Lake, go skiing in Park City for three days, buy a car in my neighborhood, drive it home and still come out ahead. Yes, there is some variation (Salt Lake isn’t actually a good place to buy a big SUV) but it’s not as big as your statement would make it seem because it would be relatively easy to arbitrage huge differences.
3. Not the worst way to pay for transportation. Not sure I buy that the monthly costs to operate are the same though.
4. 2% of an average physician after-tax income is less than $5K. Not sure what you’re suggesting there. I think Ramsey’s rule is fine- no more than 50% of your annual income “invested” in things with motors- cars, boats, 4-wheelers, snowmobiles, airplanes etc. I don’t think you can define it well by Net worth. I mean, if Warren Buffett spent 5% of his net worth on a car I think that would be pretty dumb, even if he can afford to do it.