All those who live in Western democracies are under constant pressure to acquire certain things. We’ve already talked about the question of buying or renting a house. But the housing dilemma isn’t the only one. Another important point in life is the purchase of a car.
Humans do not make rational purchases most of the time. By the way, this is why luxury brands exist. What society sees is what matters. A nice suit, a huge house, beautiful wife and a sport car. If you are hypocritical enough to say that car is just a means of transportation, well… I believe in your words only if you are the owner of this car below.
If you think that I am being politically incorrect, that I am stimulating a superfluous and unfair world, I have two answers for you: First, turn down this post and look for another site. This post will not make any sense to you. Second, I didn’t create the stigmas of society. I really believe in the power of car status for the people. And I rely on facts for that, take a look.
According to the U.S. Census Bureau, the average household income was $74,000. After pay a 20% effective tax rate, remains just $ 59,200. According to car-buying site Kelley Blue Book, the average price of a new car in America is $33,000.
Who spends ~ 45% of his gross salary on the purchase price of a car?
Who spends about 55% of the net salary on the purchase price of a car?
Only those who value the status of one. And people attribute value to what society has also valued.
We all want that Lambo, Ferrari, BMW and Mercedes. But this sound like a trap. Buying a car can be a shot in the foot. The walk of financial independence will be difficult with a sagging foot, just as the costs bleed your pockets. Let’s start.
When you buy and drive a new car, he instantly loses ~20% of its value. You look at it normally, but if you buy a stock and it drops 5% on the same day, you feel agonized. However, the stock tends to appreciate in the long run (unless you buy a piece of junk). The car NEVER values in the long run.
The standard for car depreciation is that all cars, in general, lose about 15 to 20 percent of their value each year. So, for example, let’s just say you bought a used car that after one year is worth $15,000. This particular car loses 20 percent of its value each year. So, after its second year in your possession, the car would be worth about $12,000. The next year, the car would be worth 80 percent of that two-year, $12,000 value, or $9,600.
Look at this car. He will be our example.
Well, $ 30,000 to buy a 2013 Mercedes-Benz SL-Class SL 550 – with a nice discount of $ 19,694. This price is VERY below the US national average. Nice deal, right? Let’s consider that the car is at a discount because it has minor problems, so let’s include them in the cost of repairs.
This vehicle has 3 years, after all its model is 2013 and we are writing this in 2017. Let’s say that I will stay with this beautiful Mercedes for just 4 years.
We use a range of possible depreciation rates: from low to high. Using the average depreciation, we have $ 14,340 that seeped through the hands like sand. Basically in 4 years, my $ 30,000 car is worth ~ 50% the starting price.
But this cost is not cash. Depreciation squandered the value of my patrimony, but it is not necessary for me to withdraw 15,000 from the pocket. I’ll feel the power of depreciation just when it comes to selling. I’ll talk about this soon.
2. Maintenance costs
Well, here are all the maintenance and repair costs, following the manufacturer’s directions. Taxes and fees are included. Uncle Sam is your partner too, whether you like it or not, so get ready.
Taxes & Fees includes state and local taxes, license, title and registration fees, and other fees. Maintenance & Repairs includes oil changes, tire rotations, battery inspection and other changes recommended by the manufacturer.
Remember the discount? We do not forget to include repair costs here. There is no free lunch, my friend. Don’t forget we are talking about a Mercedes and not a hipster minivan. The account after the 4 years: $ 46,652. Ouch!
3. Opportunity cost
Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. Stated differently, an opportunity cost represents an alternative given up when a decision is made.
When you buy a car you lose the opportunity of investing your money in assets that will likely grow and pay you dividends in the future. Buying too much car is like negative compounding! Let’s take this scenario: instead of spending $ 30,000 buying this Mercedes, you bought $ 30,000 AAA Bonds, with an annual interest rate of 2% (worst possible interest scenario).
Now let’s say you took a little more risk, and invested in a mix of corporate bonds, treasuries and junk bonds. Rate of 5%.
In both cases you have finished the 4 years with more money. Now let’s advance in time, and analyze how you stay after 4 years with this Mercedes.
Innitial amount: – $ 30,000
Maintenance costs: – $ 46,652
Selling price (after accumulated depreciation) + $ 15,660
TOTAL: -$ 60,992
In the first and second scenario with bonds you left with more money than you entered. You did not have to invest any extra money. Zero.
In the car ownership scenario, you got the nice $ 60k duty shot. That means you have not only lost all your startup capital, but you are also subsidizing your luxury car with your salary. It’s a nice hole in your pocket that drains your money.
In other words, you are a slave and your landlord is a piece of metal, plastic, oil, and gasoline. No big deal, we’re in the 21st century, right?
4. The Rule of Thumb
The rule of thumb is simple: if you are worried about how much you will lose on the car sale or spend on his maintenance, you do not have the financial capacity to have it.
If you’re worried about paying $ 46,652 in repairs and maintenance over the next four years, that means $ 46,652 makes a difference in your life. The same for the depreciation! If you are worried about a $ 15,000 devaluation after 4 years, this means that this amount directly interferes with your life.
You’re leveraged, my friend. Disarm this bomb while the clock has not reset.
As a general rule, I suggest that your car should not be 5% of your net worth. If you have $ 500,000 your car should be up to $ 25,000 . If you have $ 10,000,000 then you can have a beautiful asphalt monster of $ 500,000.
If you get the national average of $ 74,000, you probably do not have a respectable net worth. I suggest you do not spend your hard-earned salary on a car. It will be like a shackle and you will live more stressed than an NYSE broker from the 1980s.
We all want to have cars that look like a spaceship sliding on the asphalt. But remember that the car can be a dredge draining your money. It’s hard for you to be a Uncle Sam partner, imagine with another partner – made by plastic and metal – draining what’s left.
Assuming a liability greater than 5% of your net worth is a fetter. But if you assume a liability that consumes more than 50% of your annual salary then you are insane. It’s like walking in a minefield in Yugoslavia. You can thank for leaving unscathed, but you can also fly. And landing in an unpleasant way.
I have a tip for those old-fashioned guy: ask a colleague to staple a billboard on his forehead: cars are passive and inevitably devalue in the long run. So you’ll remember when the commercial with beautiful Swedish girls disrupts the neural connections of your rational side (yes, I admit how these damn advertisers are good at catching us in the weak spot).
The journey to financial independence is not easy. If it were, everyone would be independent. This way is full of traps. Today you disarmed one more, little Rambo.
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