At my previous workplace, we watched Glengarry Glen Ross (a classic movie on the difficult life of salespeople) each year. One of my favorite lines was when a hot shot salesperson (Alec Baldwin) was lambasting several poor performers. The line was.
“You drove a Hyundai to get here tonight, I drove an $80,000 BMW. That’s my name”
I drive a Hyundai, and it is so uncool. It’s 13 years old, but I drive it because it’s a cash cow. That is, for every day I own that car versus a newer, more expensive car, my net worth is climbing. You’ll actually see in this article how my jalopy has increased my net worth (or, more appropriately, kept my worth from decreasing) by over $30,000 between 2015 and 2020.
For a good laugh, here is the full speech from Alec Baldwin. There are some priceless lines. Language warning!
How an Old Car Made Me Thirty Grand – Calculating Cash Flows
To calculate just how much I’ve saved since I bought my 2009 Hyundai in 2015 (I’m writing this in 2020), I’m going to compare my actual purchase to the cost of leasing a BMW 328i for six years (which means two three years leases). My Hyundai cost $10,000 in 2015, while the cost of lease the BMW is $379/month with $4000 down ever three years. After six years my lease is up, meaning I have no car. Kelly Blue Book estimates my Hyundai’s current value as $4,134. Lastly, I’ve spent about $300 a year on repairs for my Hyundai, so I’ll add that to my cost of ownership as well. Here’s the series of cash flows from 2015-2020. I encourage you not to try and read the table if you get bored easily or are not numerically inclined.
2015-2017
2018-2020
All considered, my old Hyundai has cost me $7,666 since I bought it, while my hypothetical BMW cost me $34,907 – a net savings of $27,241.
Invested Savings
If you’re familiar with my writing, you know what happens next. I’m going to take my dollars savings and invest it. In practice, I don’t tell myself I’m going to invest my exact dollar savings from having a car payment, but I can contribute more to my Roth IRA and 401k with my higher cash flows. Once you take this into account and use a hypothetical earnings rate of 8%, your total savings from buying the Hyundai increases from $27,241 to $33,107. This estimate is conservative, as it takes into account the exact timing of the cash flows too.
Other Considerations – Repairs & Maintenance
The newer the car, the more expensive it is typically to maintain. This is because older car parts are more readily available and in surplus (rather than only scarce OEM parts for newer vehicles). Now for repairs, which refer to critical components actually failing, new cars generally have warranties, so you don’t assume that risk owning new vehicles. For my purposes here, I assumed the lower cost of maintaining used cars washes out their higher cost of repairing actual component failures.
In my personal case, I was fortunate to find an older vehicle with very low mileage. Even today, my 12-year old car only has about 60,000 miles on it, the same mileage as the typical five-year-old vehicle. This means that I still don’t need to worry about the major repairs often associated with older vehicles (transmission, engine, driveshaft, suspension failure). Therefore, for peace of mind, I’d highly recommend anyone looking for a used car to seek out one with a relatively low mileage (I bought mine in 2015 with 30,000 miles on it).
Also, Older (or Cheaper) Cars Don’t Lose Value as Quickly
If I pitched an investment to you that was guaranteed to fall 16% each year, would you like it? Of course not, but that’s how quickly new cars lose value. Cars are wasting assets, and one of the key tenets to building long-term wealth is to minimize spending on wasting assets (cars, electronics, furniture) while opting for assets which increase in value over time (real estate, stocks, bonds). Now of course, I’m not going to suggest you purchase a junky car that is uncomfortable and unsafe. Just know that vehicles don’t build wealth.
To lessen the impact of a car losing its value on your overall wealth, you can buy an older or cheaper car. See below the hypothetical difference in depreciation between a $50,000 car and a $10,000 car over 5 years with a 16% annual depreciation rate.
Because older/cheaper cars don’t lose value as fast, the $10,000 car saved you $29,089 over five years versus a $50,000 car.
The Bottom Line: Strike A Balance
Unless you want to live the austere FIRE (financially independent, retire early) lifestyle, I don’t suggest you buy a such an awful and cheap car that it’s unsafe and/or driving gives you anxiety. However, this article illustrates how buying a 6-year old car (my old Hyundai) in 2015 increased my wealth by over $30,000 versus leasing a BMW coupe. It’s all about striking a balance, which is part of the WELLthy lifestyle. So, when you see me cruising around not in style, know that I’m increasing my net worth by $96 a week. I’m happy to be uncool for that