Some Crazy Car Math

How much of your net worth would you put into a house or a mutual fund that you knew was going to lose 70% of its value over the next 10 years. Not only that, but actually, you’ll have to pay money into it each year just to keep it. The right answer is, “as little as possible.” 

Do houses or mutual funds generally do that? No. But cars almost always do. 

My financial role models are not car people. The richest guy I’ve met in person drives a lexus, which is essentially an even more boring Toyota, albeit with a heated steering wheel. He is in command of $500 million conservatively. His other favorite car is a Tesla Model S. These represent less to him financially than a bicycle does to you or me. These are perfectly fine cars, and he rightly understands that they are a miniscule component of what other people think of him. Maybe this is easier when you’re rich. 

I don’t know where people get the idea that they’re supposed to buy a nice car when they can afford to. All the richest clients of mine have driven at least 2 of their cars for 15 years or more. In fact, I’ve observed an inverse correlation, actually, between the number of cars owned over a lifetime and net worth. The guy who owns 15 fixer-uppers? Generally, not especially wealthy. The guy who trades in his car, or leases a new car every 4 years? Almost certainly broke. 

Cars are a shitty place to put money if you value your freedom or your future at all. To put that another way, cars are a shitty place to put money if you value your life at all. I cannot see why anyone ever would value a BMW more than this basic dignity.

Driving a less nice car, to me, is something of a spiritual exercise in knowing you already have all that you need. There is no real benefit to a nicer car, except for the sake of peace of mind, and maybe some marginal utilitarian value. Peace of mind (which is the point of having money) does not exist for a bmw owner, and especially not for any performance engineered cars (as opposed to those engineered for reliability). Repairs are expensive. Maintenance is expensive. And they break all the time. You never know when the next bill is coming. 

Just get a Rav 4, or if you must, a nicely loaded 4 runner. These will depreciate like any vehicle, hence do not make them a large part of your financial picture, but they will last forever. Whatever you buy, make it last for 15 years or longer.

But seriously, if you can make a corolla work for a long time, that sets you so far ahead financially that people can’t imagine it. 

A car which costs $1500 less per year, and $25,000 less upfront, driven for 15 years, with the savings invested at 10%, gives the owner $152,089 over the life of the car vs the person whose car costs $25,000 more and is paying those added maintenance costs.  That is astonishing, but I’ve checked my math three separate times, the outcome was so incredible, even to me. And that’s assuming the more expensive car buyer doesn’t swap out their car again in years 5 and 10 as they are usually prone to do.

Suppose you do that from 25 to 40. How much extra do you have if that $152,089 keeps growing until you turn 65? $1,647,849. Yes, I’m serious. 

$1,647,849. Think about what that sum of money represents for your life. That’s what you’re giving up when you buy a car that’s nicer than what you need, or worse, trading it out for a new car over and over.

That’s more money than most people have set aside for retirement after a lifetime of working and saving. That single decision, repeated over and over, is worth more than a lifetime of small decisions about budgeting, dining out, tax optimization, etc. In other words, all the things people think you have to do to be rich, that they think rich people are obsessed with, barely matter. 

What does matter? Keeping your depreciating assets as small as possible relative to the rest of your net worth, spending less than you earn, and investing consistently for your future. It really is that simple.