[Editor's Note: What a year it has been for the discussion of automobile purchases on this site! Three posts already and now this one! And it isn't like it is a subject I had never written on before.
- 2012 Quit Buying Cars on Credit
- 2012 Drive a Beater, Get Rich
- 2013 May I Please Finance My Car
- 2016 How to Buy A Car
- 2016 How To Get Rich by Driving a $5,000 Car
- 2016 Our Experience Buying A Brand New Car
At any rate, between the How to Buy A Car and the How To Get Rich By Driving a $5,000 Car I received this guest post from Craig S. Daste, Jr., an attorney who happens to be married to a doc. He will be doing the “Pro” portion and I'll write the “Con,” although long-term readers obviously won't be surprised by what I write in the Con section.]
In Defense of Physician Vehicle Spending by Craig S. Daste, Jr.
This is a bit of a counterpoint to the post titled How to Buy a Car. My wife is in her last year of residency and I feel it is important for her to have a newer, larger, reliable vehicle. We have two car notes despite the fact that we could buy with cash. I know I’m spending a few grand extra per year on vehicles which we could be putting away for retirement or otherwise, and as such we’re borrowing against our futures, but I have peace of mind knowing she won’t have any problems getting around town with her rotations and that I don’t have to worry near as much about me or her being injured in a collision. She has no time to deal with taking a car into the shop and I have no desire to try and make substantial repairs on my own to save money. Just for safety’s sake I believe it’s easily worth a premium of a few hundred dollars a month (particularly considering the cost of things like disability insurance), and she and I get to enjoy nicer vehicles in the process.
Spending money on a new or quality used vehicle offers the physician several undeniable benefits: 1) reliable transportation for an individual whose time is inherently valuable, 2) safety and protection during a daily dangerous activity, 3) lowered level of stress with less uncertainty and worry, 4) limited exposure to large, unforeseen repair bills and 5) less frequent and less expensive maintenance costs. Budgeting a little extra for quality transportation goes hand in hand with the mentality of a financially savvy physician who goes to great lengths to reduce risk by using proven methods and quality equipment for treatments, obtaining adequate malpractice and liability insurance and using various financial vehicles to insure his or her income and life.
First and foremost, and most obviously for a medical professional, having a vehicle break down can lead to thousands of dollars in opportunity cost. A single breakdown per year could easily wipe out any savings by driving a beater car. A broken down vehicle can mean having to wait on a tow, riding to the dealership with the tow-truck driver, renting a car, taking a cab, etc. (and then having to do this all over again when it’s time to pick the car up from the mechanic). Missing a shift, missing a procedure, lost goodwill in having patients wait for hours more than usual in a waiting room, can cost the practitioner thousands of dollars or tens of thousands of dollars or more. And more importantly, missing a child’s baseball game or piano recital is something that a doctor will never get back.
No amount of life insurance, disability insurance, umbrella coverage or otherwise will prevent you from being killed or injured in an auto accident. Auto accidents are among the leading causes of accidental death and injury in the United States. The difference in safety between a cheap beater car and a quality new vehicle can easily be a trip to the ICU or even the coroner’s office vs walking away from the accident. The newest cars have the latest safety features from advanced airbags to superior crumple zones, and even features like cross traffic alert, lane keep assist and collision mitigation to keep you from having the accident in the first place. Larger vehicles, big sedans and large SUVs, tend to be the safest places to be on the road, and this is backed up by statistics and the laws of physics. Many luxury and semi-luxury brands offer further safety features and have models with zero fatalities as attestation to their effectiveness.
Aside from accidents, breakdowns on the road or at work can leave you in a dangerous situation, and being stranded is something a successful physician should seek to minimize as much as possible. Generally, having to pull over on the highway with traffic flying by can be a frightening experience. And more often than not, hospitals and clinics are in a bad part of town, and shifts can start and end at all times of the day and night. Finding yourself stuck in the parking garage downtown at 2:00am is problematic at best.
Wrenching on an old car might be a great hobby for a pensioner with a penchant for British sportscars, but for a practicing physician it’s one more source of stress and loose thread to tie up in a mountain of tangled strands. While a physician is fully capable of doing these things, it’s not his or her forte. Diagnosing a transmission whine or a driveline clunk doesn’t assist a patient or develop the doctor’s skills. While it’s definitely possible to spend a few grand on a reliable old car, chances are just as good that you’re purchasing someone else’s headaches. And when you have to take those headaches to the mechanic, there’s a good chance you the physician will be sized up as an easy mark with a big wallet. Instead of buying something cheap which will cost you thousands in dollars and time, consuming your happiness, and rattling and squeaking everywhere you go, spending the extra money on the front end and enjoying a safe, warrantied, reliable, comfortable and clean car is by no means an unwise decision.
Owning reliable car doesn’t have to be expensive. A brand new, fully warrantied large sedan like a Honda Accord or Toyota Camry can be bought for about $20,000 or leased for under $250 a month. Certified pre-owned cars can offer similar warranties and like-new quality for a fraction of the cost of buying new. Even maintenance costs are far less, since new cars offer near-zero maintenance over the initial years of ownership, often included with the purchase price. A new car comes with new everything, new filters, new battery, new tires, new seals, new rings, new belts, new bulbs, new washer fluid in the tank. For the doctor who leases, trades a car in on something new every few years or even buys something a couple years old on the same schedule, he or she will never have to research what tires to buy, shop around a timing belt service, or become an expert on replacing an automatic transmission, because he or she has sold that car long before any of those things come up.
A doctor would never choose to use old, unreliable equipment in the OR. So why should the equipment a physician uses to get from patient to patient be any different? Likewise, the smart investor knows the importance of protecting his or her income and insuring his or her life, so why should that investor choose to embark upon the by-far most dangerous daily activity in an old, mildewed rust bucket? Spending a little extra money on quality, reliable transportation is a sound financial investment which is easily affordable for virtually every physician.
Oh boy. Where to start? I guess I'll start with a few disclosures. I have driven a sub-$2,000 car. I have also driven a $60,000 car. Our most recent purchase was a brand new decked out huge land yacht known as a Toyota Sequoia. In fact, sitting in my garage right now is a 2005 Toyota Sequoia and a 2016 Toyota Sequoia. (Yes, we are trying to singlehandedly kill the planet.)
The next thing I will do is admit defeat. Drive whatever you want. While driving nice cars will keep a middle class family from ever becoming wealthy, a high income professional family, especially one with two working high-income professionals can certainly drive whatever they want and still eventually become financially independent. A $30K or even $60K car, even one bought on credit, even two bought on credit during residency, probably isn't enough to overcome them financially if they do everything else right. If you're going to make a half million bucks every year for three decades, you're going to have to churn Lamborghinis to really screw things up with cars alone.
Don't Justify Bad Financial Decisions
That said, I think it is important to avoid justifying bad financial behavior. Just call it what it is. It is a splurge. I've got two in the garage and one in the driveway. The one in the driveway costs me over $300 to fill it's 67 gallon tank with premium at the lake. Then I pump 4400 lbs of water into it and drive it around the lake full throttle just to see how big of a wave I can make behind it. However, in the Pro section above, Mr. Daste is mostly engaging in justifying poor financial decisions, and I'm going to call him out on it.
Buying On Credit
Mr. Daste says he bought two cars on credit despite having the cash to buy them (although perhaps he is saying he has enough cash to buy a less expensive car.) He never really gives a reason for this. Perhaps he feels he is arbitraging the difference between his investment return and the cost of the credit. Let's look at what that arbitrage is really worth. Let's assume they're pretty nice cars, maybe one is a $30K car and the other is a $20K car, so $50K total. Let's say the note is at 2%. Let's say he can get 6% after-taxes and fees and totally ignore the risk. So that's 4%. 4% of $50K is $2K a year, and less in future years. That's better than a kick in the teeth, but it isn't going to change their lives by any means. Maybe they hit financial independence a month earlier if they do that their entire life.
Borrowing From Future You
Mr. Daste notes that “I’m spending a few grand extra per year on vehicles which we could be putting away for retirement or otherwise, and as such we’re borrowing against our futures.” I have borrowed from Future Me before and it turned out that Future Me didn't appreciate it. In fact, he considers me a jerk for making him live somewhere for four years that he didn't want to live and deploy across the world for long enough that his children didn't recognize him when he came home. Future Me is also upset about that whole life policy, the stupid home purchases, and that dumb mortgage refinance. I bet Future You doesn't appreciate you spending his money either.
Reliable, Inexpensive Cars
I have to laugh when I see people talk about how inexpensive cars are unreliable. Cars are ridiculously reliable. If you think cars are unreliable, go buy a boat. When it comes to reliability, I'll take a car with 250K miles on it over a brand new boat anytime. Remember, I drove a sub $2,000 car for four years and a $4,000 car for six years, not counting the sub $3,000 car I drove for three years and the two sub $8,000 cars we drove for 6 years. Did we occasionally do some work on them? Absolutely. Was it ever something where I would have considered any of them unreliable? Not a chance. That $1,850 car needed two (used) tires, windshield wipers, and a battery over the course of four years. That's it. I was stranded a grand total of one time for about 6 minutes while waiting for someone to come along to jump it. Reliability is not a reason to buy an expensive car, especially on credit. That's just justification.
Safety is Overrated
Life is dangerous. None of us get out alive. Granted, most readers know I'm a bit of a risk taker. Driving probably isn't the most dangerous activity I do. That said, safety features are primarily a way for auto manufacturers and dealers to sell more cars. Take our fancy new $60K Sequoia. It has safety features rivaling those of a nuclear submarine. It has anti-lock brakes, a dozen airbags, trailer sway control, blind spot indicators, back-up camera, a sonar, and even a really annoying beep when we don't put our seat belts on. But the truth is that we are clinically (not just statistically) no more safe in that car than we are in the 2005 Sequoia. Think of the multiplication problem here. You have to multiply the likelihood of you being in an accident by the likelihood that this particular accident is one such that without that particular safety feature you die or are injured but with it you are just fine. It is infinitesimal! Besides, I have a feeling a lot of these features are much less reliable than we think. Consider the guy who was watching a movie a few months ago while the Tesla drove itself.…
If you really want to increase your safety, move closer to work and put down the phone. The difference those two changes will make is at least 100 times the difference that buying a fancy new car will make. Buying a car for the safety features is just justification.
Mr. Daste's next argument is that a fancy new car reduces your stress. I assume he is tying this into the reliability argument above. But as we can see, inexpensive cars are also extremely reliable. I think the best way for me to reduce my auto-related stress is to avoid having an auto note personally. Perhaps he is referring to the stress of having to repair a car from time to time. As an emergency physician, some say I have a stressful job. I don't think it is too bad, since the sicker you are the easier you are to care for, but I can assure you that the stress of dropping a car off at the mechanic and sharing a car for a day or two (or renting a car) once every couple of years is so far down my stressor list that it can be safely ignored. Do my own wrenching? As I told me dad when I was 16, “I'm going to make enough money someday that I don't have to work on my own cars.” I don't even change my own oil any more. Maybe he is referring to the stress of not having a warranty to pay for repairs. Again, as a high income professional if the cost of an auto repair is causing a financial stress, you are screwing your financial life up severely. Let's take a really expensive repair, such as a transmission on a big SUV. That'll be $4-5K. How big is your emergency fund again? That's probably not even half of it. Buying a car for reduced stress is just justification.
A Tale of Two Sequoias
We have now owned an 11 year old car and a brand new car for about 4 months. Same model, same trim package. They have equal reliability and create equal amounts of stress. Guess which one has been in two minor fender benders? That's right, the fancy new one. Plus, I feel worse every time the kids slam the brand new doors into neighboring cars (including our other Sequoia in the garage.) Still anecdote? Of course, but it's a pretty good case control study for us!
Okay, I will give him this one. I agree that someone making $50K a month can throw away $250 or $500 a month without significant effect on his financial life. That's called a splurge- when you buy something you can afford because it will make you happier. But this idea that a “certified, pre-owned car” is somehow special has been pretty much debunked by Consumer Reports. Their conclusion?
“We think it’s fine to buy a noncertified car and bank any savings. Choose a reliable model and a vehicle that receives your mechanic’s approval. If you choose a CPO, be sure to read the fine print on any warranty that is offered to determine whether the vehicle has been certified by a manufacturer, dealer, or third party.”
If you're rich, drive whatever you want. If you're not rich, drive whatever you want. But realize that what you drive will affect the rate at which you move from non-rich to rich in significant ways, especially if you don't have a mid six figure income. If you have a mid five figure income, it will prevent you ever becoming wealthy. Don't justify what is, in essence, a splurge as a smart financial move.
Dr. Dahle makes a lot of very fair points. He also misses a few. But I think in many ways we’re very similar. Without repeating myself too much…
First, those Sequoias.
This was a response to the transmission-plagued Dodge Durango that the editor has praised previously. Getting rid of that rusty Chrysler product in favor of the used Toyota Sequoia and buying the wife a new one feels like he took my advice, though obviously it was independent. Even that 2005 Sequoia would make Mr. Money Mustache cry, since a 2005 Camry would save a ton of money on purchase price and running costs. And then I think we both agree it’s justifiable to spend more money on the cars your kids ride around in.
Justification & Credit
Yeah, it is little bit of a splurge, but a car is a real product that provides a real benefit. Driving an older car to avoid the extra couple grand we spend on depreciation could easily cost the same amount in maintenance and unforeseen repairs. I wouldn’t go so far as to say it’s a smart financial move, but spending more money on a newer, bigger, more reliable vehicle provides a real additional benefit, though admittedly this justification becomes a slippery slope where you’re trading your S-Class Benz in every year. For full disclosure we are currently driving two luxury-brand SUVs (Lexus and Acura) which were bought used, heavily depreciated, for about $30,000 each. Neither was a CPO but were both under warranty at time of purchase.
As to buying on credit, I have put a little extra in retirement, but it’s primarily for us to have more liquidity. Our notes are at 1.49% and 1.79%, and any savvy physician with good credit should be able to obtain those rates or better. Right now while we’re starting our family, possibly moving across the country for a fellowship, etc., it’s very nice to have extra cash in the bank. But I must admit I’m often tempted to write the check to pay one off.
Again I’ll point to the professional’s fascination with products like life and disability insurance here. And the auto insurance statistics illustrate that there is in fact a dramatic difference on claims for personal injury, bodily injury and medical payments between larger, more expensive vehicles and smaller, cheaper ones. Agreed though, difference between a 2005 and 2016 Sequoias is probably nil.
Stress of Breakdowns and Maintenance.
Luck is Anecdotal
The very frugal car buyer can keep a used car going seemingly forever with supposedly little to no work. His Mitsubishi Montero has magically lasted for 18 years with no problems, and so should your Kia Sorrento. But the reality is that old cars break down and aren’t designed to last forever, and despite some people’s luck, most old car drivers will be faced with unforeseen breakdowns and annoyances. These anecdotal advocates are the gambling addicts, always talking about their winnings and forgetting how much they’ve had to put in. One might downplay how he had to get his engine rebuilt, as if a project that puts his vehicle in the shop for weeks is somehow as routine as an oil change. He also is willing to endure a lack of luxurious amenities such as air conditioning, windows that roll down, interior that doesn’t mildew or an exhaust that doesn’t sound like an air raid signal. This beater driver is unphased by a check engine light or an SRS warning flashing on the dashboard, so long as the car runs and drives. And more often than not, this guy owns or has access to other unused vehicles when his usual beater is out of service, be it a second beater, a weekend toy like a Corvette, or, more often than not, the stay-at-home wife’s car (which coincidentally is a much nicer, newer, more reliable car than the frugal buyer’s own car).
By comparison, many residents and attending physicians only have one car and they need it to run reliably every day. A new or newer car is virtually maintenance free, far less likely to have an unexpected breakdown, and provides other substantial benefits during ownership.
This is too long already, so I'll keep it short. I just want to point out three things.
# 1 There is a big difference between buying a fancy new Sequoia with cash when you are a multimillionaire and buying a brand new car on credit as a resident because “I just have to be able to get to the hospital and a 10 year old car is just too unreliable.”
# 2 I am not Mr. Money Mustache. Despite my love of cycling and all things financial, I am quite comfortable spending 5-8 times his annual spending and spending way more on a car and gasoline just to keep my head off the ceiling. My philosophy isn't to live like a resident forever, but to do it while you are a resident and then for a few years afterward to jumpstart your way to financial independence. After that, I recommend you enjoy “the good life” however you want to define that. I define it like this:
A life free from financial worries, a career where you make a real contribution to society, a few luxuries along the way, the ability to help others financially throughout your life, and a comfortable retirement at a time of your choosing.
# 3 The linked to chart shows that large cars do better than small cars in accidents, but there is precious little data that shows a new car is significantly safer than a 5 or even 10 year old car. You can buy a big beater just as easily as a small beater, as my old Durango demonstrates.
What do you think? Is there a reasonable justification for a resident to buy a new car on credit? Why or why not? Comment below!