By Dr. Jim 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!
I drove a old white toyota camry for 16+ years.. even 2-3 years into attending-hood and I purposely tried to kill the car! It wouldn’t die… ?! I would take it in for oil changes and recommended to fix some other things every time.. and I didn’t do it but it still kept on running. The OLDEST, CRAPPIEST car in the physician’s garage amongst BMWs, Lexus’s, Tesla’s.. etc. I finally gave it away to my brother in law.. and did the stupid thing and bought a BMW. But I did learn the error of my way and paid it off like all the other debts I had. One by one. Driving a nice car is great.. no problems and perhaps even getting one is fine too as long as there’s a financial plan. A good budget. Perhaps even a milestone of rewarding yourself as long as you’re heading the right direction of positive monthly cash-flow.. debt payoffs.. maxing out retirement accounts.. then I think its ok to go get yourself a nice car.. even if you didn’t payoff your student loan or home mortgage. Life is ultimately short… and while financial freedom and fat retirement accounts are great.. we should also balance this against the unpredictability of life.
I admire your ethos but I don’t know if I buy the specifics in this case.
Let’s say you buy a new Camry with no extras cash for $22k and you drive it for 7 or 8 years. That’s $3k a year without trade ins, dealers, few repairs, more nonsense. Buy something 3 years preowned and you can cut the price to $2k a year. A new or used Altima is about 2/3 the price respectively, new and used, of a Camry or Accord.
I value my time at $150-$200 an hour. Repairs, trading in for another car, etc. isn’t worth the time or hassle.
I’m all for the $20k car, the $15k car, and even the $10k car. But not the $5k car. At some point the marginally increased savings aren’t worth the marginal increased annoyances.
Taking 1 day of call extra per year to have a new or nearly new car versus beater is worth it.
The problem happens when you make the 1 day of call argument for 50 things in life. At that point all the money is gone before you even realize it.
Sure, I agree with that. That said, transportation is only one a few essential things, not fifty. And when you’re talking about a $5k car vs a $12k car it’s not so much a question of aesthetics and luxury as much as a question of nonsense in the form of repairs and needing to turn it over.
So, it’s not so much a question of, can I afford it? It’s a question of added time and hassles versus working slightly more.
Wow that is a great point. I couldn’t have said it any better. My wife and I have had a total of 4 cars between us in the last 15 years and we shared both of them.
First car I bought was a $10k civic that had 27k miles on it… Drove it for 7 years ish…put lots of miles on it …. Destroyed the transmission twice but that thing was awesome … Wish I’d never sold it …. But when I died … I went cheap and got a $6k Kia spectra that was a few years old, never had major problems but every year it would fail inspection and I would have to get a number of things fixed on it… And it added up in money and time … Not having a car a week out of the year because a sensor was bad was frustrating … Admitidly it might be less frustrating now since we could afford uber or car rental now
Also in between those We Bought a Prius new and it’s getting close to 10 years 200k miles and still going strong without any major repairs… Bonus points to the fact that in our area we are grand fathered into use the hov lanes with only the driver and the great gas mileage … I’d rather have a simple semi old car or brand new car and keep them forever then get a new car every 20-50k… And risk dealing with the frustration of the little things constantly breaking in a $5k car
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The best part about having a cheap car is not having a loan payment. We keep our fixed expenses every month as small as possible to prevent feeling like we have to work to live. We have one cheap car (3.5k) and a 15k suv. If we need to impress/fit in, we take the SUV. If we need to take a road trip, we take the car.
I’m normally a devoted WCI acolyte, but I’m not gonna give up my BMW 535xi for some crappy car. The luxury and comfort are worth every single penny. Turning on the seat and steering wheel warmers on a cold Chicago morning? Pure heaven. Not to mention, of course, it’s the ultimate driving machine.
Yes and you can do patient notes while a tesla drives you home… So it’s basically paying for itself plus it has the highest safety ratings and no required maintenance 🙂
Or you can watch Harry Potter movies instead.
https://nypost.com/2016/07/02/tesla-driver-killed-in-autopilot-crash-was-watching-harry-potter/
I’m not giving up my nice car either. But I did manage to defer buying it for a few years. And became rich in the meantime.
I’ve rented very nice cars on vacation before. I was very tentative when first driving it out of the airport garage. I was always awestruck by how nice they were. But then a strange thing happens. By day 2-3 I acclimated to the car. It was no longer something special, but rather just a car to get me from point A to B. Traffic wasn’t any better. I wasn’t any happier than I had been when in my own car or renting a regular car. This concept that some people call hedonistic adaptation is quite real. I don’t buy the “worth every single penny” statements. There is a point of diminishing returns where each penny spent leads to less and less return.
That diminishing return doesn’t take nearly a big of a bite if you drive that BMW for a long time.
I agree. Cars have become increasingly utilitarian in my life. Maybe I should have bought that Toyota Truck with big tires in high school. That was probably where my joy of driving a fancy car would have been maximized. But that beater Subaru wasn’t too bad off road.
“Traffic wasn’t any better…………….”
I’ll chime in with this. My joy of driving derives from the beautiful traffic-free scenery. My particular vehicle adds little.
old post i know but i like re-reading comments.
man i gotta tell you i do NOT experience this. we bought a 2013 Lexus rx450h last winter and every time i get into it i feel like i’m settling into a badass spaceship.
I mostly notice the quality of my cars when I go rent one. Just like I notice the quality of my bed or house when I stay in a hotel. It used to be that renting a car or staying in a hotel was a step up. Now it’s generally a step down.
I just paid off my $250K dental school loan 4 years out of school and my reliable 1997 Camry played a meaningful role in that achievement. My expectation is that my 4 year old will drive that car to high school at which point I will have to buy at “new” $5000 car.
WCI, I would love to see this same article written about pets. So few people know or are willing to accept the long term costs of pet ownership. There are a lot of could be millionaires wandering in and out of Petsmart and Veternary clinics everyday.
My 6 year old lab had 3 operations in one year. $10k. Yeah, it put a hitch in my mortgage obliteration plan. Add on his food, the training cost, the cost of my time training him, boarding, driving him to boarding, etc, I could see retiring earlier! Then again, I could also drink natty light and get all my other calories at McDonald’s.
For me, the dog and good food is worth every penny. At some point, you have to enjoy life! Luckily, I’m not a car guy, so that hasn’t applied to me.
Yes pets are expensive and may interfere with early retirement. MMM is against them. That said I think pets probably correlate with happiness just like experiences do rather than expensive objects. I am willing to trim costs in my life but not my pets.
I also put pets in the experience category, not the things category. But, I totally understand how some people might view cars as an experience, even though I don’t. To each his/her own. As our personal goal is not to have some huge pile of cash at death, we feel it is fine to spend on what we want within reason. Thinking about the expensive items, whether experience or things, in terms of not just current cost but future value lost has helped us make better decisions for ourselves. Also, clarifying our wants vs. needs, especially before we could afford the wants, helped us financially as well.
I have learned that reasonable people often simply disagree on this topic which is totally fine. Like everything else, people are free to spend their money on what they choose; cars, dogs, whole life, etc (I am joking animal people so please stay calm).
My issue is when I hear one of my Medicaid patients tell me they were just about to take care of their credit card debt or move to a safer neighborhood but then little Zeebo had kidney stones so he needed a $1500 vet visit and special medicine/diet that cost double his normal food and medicine. And just as bad, in my opinion, is the negative $300K net worth doc saying, “Oh yeah I was just going to max out my IRA and knock down that high interest student loan but Molly my English Mastiff needed hip surgery and Poopsy the cat has arthritis so I just put a $1000 in my IRA for now.”
That is not good. It is easy for us to sit here a bash on the BMW guy but we don’t take that some tone for the devasting financial toll pets can take those in all income brackets. Some of this is probably because they are sentient beings and that brings out lots of emotions that cloud our rationale thinking because Poospy is “part of the family”. This is totally fine if pet owners acknowledge that phenomenon and are fully aware of the costs. Often they are not. Often poor financial choices are made as a result of those emotions without an acknowledgment of the long term financial cost to your actual human family (your kids education, your own retirement, etc).
I love this post about cars and the same post needs to made about pets because they can have a major effect on long term wealth accumulation. It is hard for blog writers to take on this unpopular topic because there are a lot of animal people out there and the animal people get really loud when the costs are brought up and it is suggested that maybe it is hypocritical to condemn car leases yet turn over a new Pug or three every few years.
I wish the car and the animal people the best of luck and hope both groups are knowingly and willfully accepting the costs of their decisions.
I think if you talked to vets that plenty of people react to the $5000 potential surgery bill by saying put the pug to “sleep”. Yes people should understand how much they spend on pets and other things as well. I get much more enjoyment from my dogs than I do my car.
Me, too. I love my dogs, and I get great joy from them and much additional exercise and time outdoors walking them two or more times each day. That said, when the current pair has, er, “moved to the farm in Illinois”, I am not sure that I will replace them.
I have said that also and then I found a homeless puppy? Not interfering with my quest for financial independence since I already am.
Agreed. Total luxury. But I’m drinking a $200 tequila as I type this…if forced to choose, I’d give that up to pay for Fido. Who, incidentally, was the only creature who greeted me tonight when I got home from hospital.
Pets, like kids and cars, can be really expensive depending on what you are willing to spend on them. But if you think getting 150+ comments on a car post is impressive, wait until what you could see with one about pets. Pet owners can get even more riled up than “car guys.”
I’ll be waiting for the blog post, “How to Get Rich by Taking Fido for a Long Walk in the Woods”
My series of Honda Accords served me well throughout my career. The latest, a 2009 with 160,000 miles, MAY go to my son during his second year of college. With my early retirement and 8 digit net worth …… maybe it is past time to I treat myself. It is difficult to change one’s ways …….. but learning!
8 digits? Holy cow! What did you do before early retirement??? I have a 6 digit net worth… In the negative 🙂
LOL Nothing magical …… I have lived the WCI financial blueprint …… persistent financial discipline!
Would you consider a guest post? It can be very inspiring for others starting out to read about those of us who have gone down what seems to be the financial path not taken by many of our colleagues.
Well you must have had some pretty strong offense to go with your strong defense! Even the best defense (must frugal) is going to struggle to reach 8 figures without a serious earning potential. At least well above your average doc.
My strong offense was the practice of Anesthesia. I had many partners ….. some earned more and some earned less. The glaring difference was the day to day financial discipline and commitment to the plan.
I’m applying to anesthesia programs right now. Hope I can be aggressive on both sides of the money game.
Take a high paying salary, a fat savings rate, smart investing and run it out for 30 years and see what you get. Let me demonstrate.
Let’s say you make $400K and save 40% of it. =FV(8%,30,-160000,0,1) = $19,575,338.88 Even if you adjust the return down to 5% for inflation, it’s $11M. And that all assumes one earner in the family.
The real difference between you and the new car folks is perspective. Most people are arguing about finance cost, fees, points, arbitrating your cheap loan payment by investing elsewhere. All (sort of) valid points, but far behind recognizing the basic truth of personal consumption.
How you buy anything is how you buy everything.
Someone who buys a $5K car doesn’t buy a $2M house. They don’t feel the need to wear designer clothes, eat $250 dinners on a regular basis and take $10K family vacations several times a year. It’s a consistent lifestyle choice. The biggest problem with leasing or financing a new, expensive vehicle is that person will continue to make equivalent choices in many, many other areas when it coming to buying things throughout their entire life.
And that’s why all those (sort of) valid earlier points make little difference in the end. If driving a used vehicle is so incredibly painful, embarrassing, seemingly necessary, whatever the excuse – then it’s pretty easy to project what the rest of someone’s personal finances look like for years down the road. The number of financially independent people I know personally with shiny new cars is zero. Not because they can’t afford to buy a new car with cash, but because they long ago lost the desire to own one. That’s what got them to financial independence in the first place.
Very wise comment
This is true for those that arent or havent yet actively taken a full time interest and commitment to their finances. They have a lot of upside to just sitting down and learning, and controlling behavioral/social errors or realizing where they come from (worrying about perceptions of others).
After you’ve done that, it no longer applies as much. There is a best use scenario that fits with each type of person at their stage, and that goes along with their ultimate end goal. Someone who wants the freedom to do missions and pro bono work around the world will have a different strategy than someone trying to build themselves into an estate problem for example.
Granted this is not most people. Though dcI know plenty of very wealthy people and financially independent ones with fancy cars and houses, they are simply at a whole other magnitude of wealth where those purchases dont qualify as fancy/shiny.
In this particular rate/return regime, long term gains favor using leverage wisely, whether or not you need it. Actually using it wisely is the hard part of course. This mindset is great for those at the beginning of their journey, but strike me like those that say, “dont ever carry a credit card, just use cash” “wealthy dont use credit cards”, etc….which while helpful for those without self control or a plan are neither reality nor best use of available tools in the world.
Excellent comment.
I was just noticing yesterday on my walk from the far end of the parking lot to the hospital that mine was quite clearly the least valuable of the 100 or so cars I walked passed. I’m hoping for 1 more year out of her…
*past. WCI, I need an edit feature.
The forum has one.
Coincidentally, I had the exact same realization at Walmart about 6 months ago. Given median incomes in my area, I couldn’t help but think that most of those people spent the majority of a year’s salary on their car purchase.
how many americans are on the lease treadmill; monthly payments forever
buy a certified Toyota or Honda and keep it till it dies
and find a good local private mechanic; not a chain
when my child was getting bar mitvahed a photographer showed up in a big Mercedes-NOT HIRED
humility please
totally agree with the last reason- daily reminder.
commitment to build wealth and become financially independent is made up of lots of small, daily decisions in the right direction. lifestyle creeps “creeps” because it is so incremental and seemingly small/daily as well.
having a 5k car does provide a undertone of financial humbleness, which grounds us to focus on more important things like true happiness and FI 🙂
I agree almost completely with the WCI. In 2012 I was driving a 1996 Chevy Corsica and my wife (the resident at the time) was driving a 2003 Kia). After a transmission issue on the Corsica, I felt it was time to buy again. We bought a 2006 (only a 6yr old car) Honda Civic. That was our “new” car and would be our family car. It was the safe one for the baby that would be born (Jan 2013). Today, my FP WITH OB wife still drives the Kia. The thing is rusting out. Our intent is to drive it into the ground and then get a new vehicle. The 10yr old Civic is still in pretty good shape (the worst thing was a run-in with a tank of a raccoon that crushed the front into the radiator).
When the Kia goes, my wife will take over the civic and we will get a new vehicle. This is the part where I don’t fall 100% into the advice. We now have two kids. We are hoping the Kia lasts at least 3 more years. When our oldest is 5 or so, we will get a minivan. This will be used for our long trips to grandma (5hr drive) as well as hauling, carrying kids and friends around, etc. For both safety and fuel economy I am looking at Honda Odyssees and Toyota Siennas. The problem is that a) they are very hard to get used b) the relist price is darned close to new car price. For these reasons, we are thinking we will go new. It won’t be that much more money. We will get cars with thousands of miles less. We fully know the history and can be guaranteed we won’t have a lemon (if it is, we can take it back, etc), and being new, it will hopefully last us 15 years or more to get both boys to college. It isn’t a lease or trade in for a new vehicle. So for these reasons, yes we will buy new, but otherwise, we do the 5K or 10K car thing. And my wife does OB (and there have been a few rush ins and transfers to other hospitals with NICUs)
Anyone here have a partner who is not as committed to the cause? I’m fine driving a beater but my wife is going to be harder sell. In the interest of marital bliss, I think I’m going to just go out on a limb and say I should drive the 5k beater and she gets the 25k new car and our networth meets us in the middle?
My daily commute cost $600. It’s a Trek bike. I bought it new when my Civid died. Added benefit of getting exercise when I go to work.
“What about the snowy Rexburg, Idaho winters?” You may ask. I got a $2,000 Trek Farley fatbike last winter and rode it everyday. Only slipped on the ice twice.
Maintenance costs of bikes are far less than cars, too. I guess you have to live closer to the hospital, but not really.
I guess $2000 is a lot for a bike. But not for a car.
Depends on your point of view and how good you are at rationalizing things. You have exercise, then you can justify based on insurance and future avoided hospital bills, etc…(just forget to think of possible injuries of course). I spent a good 5 years or so with a bicycle thats worth more than my car.
In the end its fine, pay for things you enjoy and be frugal else where.
I think my frame was a touch over 2k. The pedals were 1k themselves (power). Everything else was reasonable, maybe 3.75k total.
The formula for how many bikes is n+1. The limit is always s-1, s being the number your spouse kills you or leaves you at.
Being frugal in a car but not in a bike is a huge cognitive-dissonance: As much as a 25k car is not 5x better at taking you from A to B than a 5k car, a 2K bike is not 20x times better at taking you from A to B than a $100 Walmart bike. If anything is worse for exercise, because it would be lighter and you will make less effort to pedal than on a cheap bike.
Every other reason to justify an expensive bike are the same as those reasons people use to justify expensive fishing poles, expensive watches, expensive golf gear and so on: luxury, not necessity.
The issue with that reasoning is a $100 bike is no fun to ride, so you simply don’t do it.
Fun to ride? there’s no such thing! you just don’t jump in your bike and laugh the whole trajectory no matter its price! If you want to have fun, listen to funny podcast on your $100 ride and laugh harder knowing you are not a comsu-cker that paid 3K for a bike. They all pedal the same.
Fun to ride he says… the amount of rationalization people’s do to justify its expensive purchases never cease to amaze me. It doesn’t matter if you have hundreds of millions in your bank and are set for life. wasting money is wasting money.
Ooookay…..moving right along.
If you haven’t experienced the pleasure of riding a $5K bike, I would suggest you don’t know what you’re missing. But if having money in the bank rather than spending it on stuff and experiences that improve your life, that’s your right. I’d prefer not to die the richest guy in the graveyard in order to deprive myself of something I’d enjoy.
My year to date cost of bicycle commuting is somewhere around $150-200. That includes a couple Uber rides when on home call where they didn’t give me enough time to ride all the way, a tube and tip to the bicycle repair guy, a new rear tire (to of line gatorskin Continental), and one bus ride. My wife’s car is 14 years old (not a beater though) and only cost around $100 per month including insurance, fuel, maintenance. It is a sports car so I figure since it has really low miles for age so is on a flat portion of depreciation (from 2015 to 2016 the KBB went up $600, don’t know why?..)
Back to the bike. My commuter is a bike my father-in-law pulled out of a dumpster. It is a 70’s-ish model Claud Butler. I threw on a rack for my panniers and it has been going strong for almost 3 years now. I spent ~$100 and a Sunday afternoon switching out the drive train in late 2015. Despite the tall frame and narrow tires (23mm), it has got me to work through every snow storm.
I don’t commute for the cost saving; that is the cherry on top. Having 2 hours every day of exercise (28 miles) and mental free time has changed my life.
What about the additional calories you have to eat? 🙂
23mm in the snow? You’re crazy, but seriously, get some 25mm at least, they should fit, though you have an old bike so dont know the clearances, and it also is a nicer ride.
Do you have to ride through a bunch of traffic or are you just trying not to sweat when you ride? Thats always my biggest issue with riding to work, its incredibly inconvenient as far as being hot (100-110 in summer) and dressing for clinic. My house is just off the central bike path for ease of use and so I can occasionally ride to work, sometimes I’ve even jogged the 5 miles. I try to mosey on the way in for the above reasons and do a small workout on way home. Just so impractical with the sweat, sunscreen, etc…and work attire.
I’m sure I eat more so that probably does contribute in a not insignificant way. I could switch to 25 mm without issue and might as the current tires are getting a little thin as winter approaches. I try to ride trails but definitely go on busy streets a good portion of the way. Most days I go at a moderate pace to work and bike hard on the way home. The beautiful thing about Denver is that it is generally cool and dry in the morning even on the most hot days.
I could’ve sworn I already read and posted a reply to this article before realizing I had done so on another WCI classic: “https://www.whitecoatinvestor.com/how-to-buy-a-car/”
I agree with the premise of what WCI says. I couldn’t actually bring myself to drive a $5K car though.
On a middle class income, I guess I would force myself to.
For a high income professional, I think it would be perfectly reasonable to “splurge” on a new $15K – $20K car and drive it 10+ years to build wealth.
I am fortunate enough to be in the “loosen the pursestrings” portion of attendinghood and my wife and I both lease cars (GASP!). Expensive ones to boot ($50K+, I realize the term expensive is very relative when it comes to cars. Not quite at the point of dipping into the 6 digit vehicles yet)
We like getting new cars every 3 years. We understand this makes absolutely no sense financially (even though we claim the leases as a tax deduction). 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.
That being said, a couple of items to note for the extravagantly wasteful leasing couple:
– we save 50% of our gross income although not all of it goes towards retirement (401K + Roth IRA + taxable account + additional mortgage paydown + 529 + HSA)
– student loans have been paid off for both of us (my wife isn’t a physician), net worth is > 2 million
– if we needed to, we have enough in the emergency fund to not only pay off the lease on both vehicles, but to also purchase both vehicles outright. The total to purchase both vehicles is < 15% of annual salary - no other debt aside from low interest rate mortgages, both mortgages are about to be paid off in the next 12 - 24 months (50K left on #1 which is a rental property, 200K left on our primary home) - we don’t splurge much elsewhere (primary residence is < 50% of annual income, we don't go out to eat much now with a young child, we don't travel at all now with a young child, we don't own any fancier motor vehicles like boats/planes nor do we plan to)
Sounds like you know what you are doing and can afford it. More power to you!
Your situation falls into the category of “spend your money on whatever brings you the most happiness.” It’s the “not rich yet” crowd that needs to be paying a bit more attention to what they’re driving.
Even newer cars aren’t guaranteed to be reliable. I bought a 6-month-old Jetta with 8K miles, and for the next five years it broke in a major way every three months like clockwork. I hated that car… but it still beat the leased BMWs my co-students and residents were driving.
That can happen with any car is rare but it happens. It happens less with certain makes over others. I am assuming you ran a car fax report and it hadn’t been totaled, and had a mechanic look it over…there is not too much else you can do. That being said generally a 6 month old 8k mile jetta would have been a safe bet, you just got unlucky
It always astounds me when someone is driving something that costs half their annual salary, and I see this all the time. Spending too much on a car seems to be a right of passage in the US. I have only purchased new fancy cars (and by fancy I mean like Honda Civic fancy) since residency, although I aim to keep them for 15 years. With 2 cars this means spending an extra 20k every 7.5 years.
Back of the napkin estimate, this costs me only about 500,000k over 45-50 years.
Crap, now that I write this out maybe I need to rethink my strategy.
**shakes fist at WCI for being so sensible and and exposing my flawed reasoning.
Something not mentioned is that an older less luxurious car is also less likely to be the one stolen or broken into when you visit someone who lives in the city. . . I think of this whenever I park in a row of high priced cars in South Philly.
Didn’t you buy a boat?!
Yeah, with cash, and no debts outside the mortgage. I don’t think that is contradictory to what he’s saying here.
Yes. For cash. After I was a multi-millionaire. Same way I bought a recent brand new expensive car.
If you are rich, buy whatever you want. If you are not rich yet, I would suggest more moderation and perhaps even a $5K car for a few years until you are rich.
The important overall message is the have a financial plan that involves an adequate savings rate and sound investment strategy and then reliably putting that money away. What you do with the rest doesn’t seem to matter as me. Sometimes I pay a little more for organic produce. We have pets that cost quite a bit of money. Sometimes I go on nice international vacations when a local camping trip would also be fun. And sometimes I think that buying an expensive car or leasing can be just fine as long as you are saving. The key is saving first and spending the rest rather than spending first in a non thoughtful way and then trying to save what is left over as that is much less likely to be successful.
There is nothing magical about car buying strategy. It all costs money, the only question is how much. I treat a car like the consumer good that it is and buy what I can afford while still meeting my financial goals.
Amen.
One of your BEST posts. I have driven very OLD Lexus bought with about 20K miles on them. I drive them about 100K miles, sell it and use proceeds to buy another like vehicle. The age of car makes it cheap, the low miles makes it a value. The money I have saved on car payments and insurance is huge. I drive a nice, luxury car and love my car but I don’t worry if I ding it or someone tears the leather. It’s an old car. Still awesome. Calculating all repairs and costs assoc with my cars, including insurance, I have paid about $200 a month for my car. That. Is. Awesome. I feel so great about my choices and the only regret I have is selling one of my “old cars” too early.
5K seems a little too cheap to me, but buying a 40K car when a 12K brand new or lightly used one seems like a reasonable compromise. Now I buy new that I can afford and keep it a long time, the deal is I can afford it.
I am in my 21st year of private practice and have noticed that the longer I have worked and the more money I have accumulated, the less I am interested in owning luxury vehicles. I did dally with more expensive cars early on, always used, always paid cash, and never felt much joy of ownership after the first week or two.
I am hoping that my current car (2011 Prius with 51,000 miles–purchased new with cash) is the last car I own. I look forward to the era of autonomous vehicles that you summon when you need them!
As somebody that visits the IIHS and NHTSA websites with great frequency, I have to object to the idea that 10 year old cars are anywhere close to as safe as newer cars. ESC only became standard in 2011 and has reduced one car accidents by like 30% of something. 10 years ago a high percentage of cars only had two air bags. Currently, 6-10 air bags is the minimum standard.
Add blind spot monitoring, improved survival in small-offset frontal crashes, back up cameras (though I don’t personally like this feature. I just look before I back up and check out surroundings before entering car), automatic braking, etc, etc.
I contend that the best deal for a highly-paid person such as a physician is to get a 2 or 3 year old car that has lost 30-40% of its cost through depreciation and is still under warranty. It gets the most bang for the buck. Checking out edmunds true cost to own calculator which has a large data set, used cars aren’t as cheap as they seem. They *are* cheaper, by a fair amount over newer cars, but maintenance will eat up a lot of the benefit.
WIC has responded to this by saying that he has had very good luck with his cars but his sample size is like N=5 or something. Plus it’s not crazy to get a 16,000 three year old car that was 36,000 new if you’re making 140,000-250,000 net a year. Personally I’ll spend 16,000-23,000 on a lightly-used entry level luxury car when I finish residency shortly. Not having other big expenditures like eating out at $50 dollar a plate restaurants, boats, golf membership, and the like will help.
Nothing wrong about having your personal material interests. We could focus on almost anything. Some people spend 2,000 on a high-end gaming rig for example.
What kind of car are you driving that loses 30% of its value in 2 years? I agree a car like that offers a lot of bang for the buck, but that’s a very high depreciation rate. Not to mention going from $36K–>16K. What car is that one?
Hyundai Genesis
I bought a 2012 in January 2015. 40k miles. depreciated from $36k to $17.7k (cost me $19k taxes and everything). Quiet, comfy, 330 hp and a marked improvement to my commutes in Dallas.
Volvo S60 new: 38,000
I saw a one-year Volvo S60 premier with 13,000 miles for 23,000.
It drops a ton because it has been sold in its current iteration since model year 2011. The Hyundai Genesis and Lincoln cars drop a ton also.
Sorry I lied. Just checked and there is a sale in which the “premier” trim is free. They have to do this since the new S60 is coming out in 2018. It’s 35,000 new now. So 23,000/35,000=0.657.
34.3% depreciation in one year. Three year old versions were 16,000 from a new price of about 34,000.
https://www.ncbi.nlm.nih.gov/pubmed/17994485
“RESULTS:
Fatal single-vehicle crashes involving cars are reduced by about 30-50% and SUVs by 50-70%. Fatal rollover crashes are estimated to be about 70-90% lower with ESC regardless of vehicle type. A number of studies find improved effectiveness in reducing crashes when road conditions are slippery. There is little or no effect of ESC in all multi-vehicle crashes; however, there is a 17-38% reduction in more serious, fatal multi-vehicle crashes.”
Sorry, I was wrong. ESC (electronic stability control) was made standard on all new 2012 cars and not 2011.
So buy a $5,000 car with ESC… this isn’t rocket science. My 2004 mazda had it.
It’s not just ESC dude. A lot of other safety improvements have been made.
It seems you have OCD over “car safety.” I’m sure we both agree that being on the road is the most dangerous thing most people do. Certainly many docs can afford to buy many expensive cars. But rather than suggesting one needs to buy new cars and say that “it’s not ESC dude,” drive less, don’t drink and drive, don’t drive at times people are going to be drinking and driving, obey most traffic laws and speeds, avoid poor conditions, don’t drive in New Jersey, and you will more than account for this lack of new fangled safety equipment that some scientist with lack of statistical understanding is telling you that you must have lest lest you and your 3 children and their grandmother will be lost.
Good suggestions, but won’t save you from the other driver who’s texting when they slam into your vehicle. Highway fatality rates have increased rapidly the last few years after decades of decline. Being concerned about safety doesn’t mean someone has “OCD.” And, as noted previously, ESC is a significant contributor to the increase in car safety, so common sense to make sure it’s on any used car one is considering buying.
No I’m not. I don’t stay up at night over this crap. If I *really* cared about safety I’d get a Volvo XC90 or a Chevy Equinox. They have fatality rates that are infinitesimally small. My dream car is a midsize luxury care with perfect crash test ratings…but it’s nothing compared to a mid or large SUV.
Definitely not OCD bruh.
I also never said that a new car is needed. Getting a two or three year used car gives you almost all the benefit at a small price premium. This fits in with our “value” philosophy in Asian culture.
I drive 10,000-12,000 miles a year so very little too. My suggestions are just very easily implemented measures to reduce chances of dying or becoming para/quadriplegic.
It’s like how some people (yours truly) always lock their doors. I don’t stay up at night thinking about this; I just do it as a reflex. Just as when I go outside I always (almost) have my keys on my person. Good process means mistakes aren’t made. In medicine. In life.
The relative numbers seem huge, but the absolute numbers aren’t quite as impressive and may not be worth YOUR money. If it is, then fine, go to Milwaukee instead of Cancun and buy the newer car.
I go to Tahiti and rid a bike. 🙂
I’m a reformed BMW owner. My 5 year old Beemer broke down (and stranded my partner) more often in a year than your beaters have broken down in 5 years. I basically followed your advice – drove beaters into the ground (including a 1971 Datsun 510 that took 2 quarts of oil for every tank of gas) until I was well on my way financially. Now I buy nice cars, but I stick to reliable Japanese models.
Car free and pretty happy here. I make do with a monthly bus/train pass and a monthly car share rental that runs me $100/month. I’d love to ditch the pass and use my bike (Lemond Tourmalet) but the commute would be treacherous (very few bike paths/shareable roads between my home and my job) and the bike doesn’t have eyelets. I’ve had my eye on a surly disc/long haul trucker for years now but I’d rather spend the ~ $3000 (bike, panniers, racks and clothing) on student loan payments, retirement contributions, investments, etc. Once I pay off these loans, I’m going to buy my bike as a gift to myself. I’ll have earned it.