Spend extravagantly on the things you love and cut mercilessly on the things you don’t

Ramit Sethi, I will teach you to be rich

Cars are not things I love or care deeply about so I made a decision a long time ago to spend as little as I possibly can on them. For me this meant, only buying used cars. But maybe you’re different. Maybe a brand new car lights you up. Maybe you’re being smart about it and will end up better off than my strategy in the long term.

Maybe not.

If you read past the catchiness of Ramit’s statement you would find it’s rooted in conscious spending and does not give you a free pass to be frivolous everywhere in your budget. Everything in life comes with an opportunity cost. Your big car payment comes at the expense of your fully funded vacation, fancy shoes, baseball card collection, yoga membership, etc. If you’re not careful, the opportunity costs of coerced spending decisions that provide little value to you (like cars for me) will leave you unfulfilled and broke.

How do you think we were able to pay off our student loans so quickly and everything in between? How might you think we are living debt free and now really putting a financial plan in place to experience the things that bring us immense joy? The past 10 years have gone by in a flash and because of our decision to strive toward living true to our values, we’ve managed to save over $25,000 on car payments alone. You can too. 

Forget about any debt you might have for now. Reflect on this simple financial principle and begin to identify the areas in your life you want to spend more on and those you don’t. If you’re disciplined in the areas that provide little value, you’re better able to spend guilt-free in the areas that bring you joy! If you do this without carrying a balance on your credit card over time, maybe that’s enough for a great financial life.

As for our example, read on for the detailed story in today’s Financial Friday.

The used cars route

Since I started driving, I’ve owned and driven (still driving) a total of three cars. Frank, the 2001 5-speed Focus with no A/C, Shania, Michelles Pontiac G6 that became our only car for a long while, and Frank Jr., the 2012 Ford Focus that allegedly needs a new transmission worth more than the car itself. It’s safe to say, I’ve never placed a lot of value in these machines.

Fortunately, I’ve been pretty lucky over the years. Frank Sr. cost approximately $2,000 and was a gift from my parents while I was still in college in 2010. Shania cost us $4,000 to pay off between Michelle and me when we got serious about our money together in 2014. Lastly, Frank Jr. is a salvaged car we paid $5,000 (bought from a friend) with the partial proceeds of our selling our Des Moines house before moving to Arizona. In 2018, we added a 2009 Ford Mustang Convertible, Beyonce, which cost us $5,000 thanks to the kindness of Michelle’s Dad ensuring that she stays ballin’.

Adding up these purchase costs, we’ve spent a total of $14,000 (not including maintenance) on cars since 2013 and had less than a year of car payments over that time. Subtract that from the typical $39,890 you’ll read about below following a concerning millennial strategy, we end up saving $25,890 over a 10 year period. Which equals about half of our combined total debt when we first combined our finances in 2014.

One way to think about opportunity cost

Opportunity cost should be a big consideration in your financial life. As it relates to car buying, I’ve wrangled up some numbers to illustrate my point.

Let’s assume that Michelle and I followed the average millennial path which implies that you need/deserve a new car every 5 years (i.e. paid off car). If this car has an average car payment of $300 per month over 60 months (5 years) with a measly 3% interest, it would cost me a total of $18,328 in car payments plus interest from 2010-2015.

used cars
Your first car payment estimate. Johnny is growin’ up!

Feeling the pressure we usually do from society, this paid off car without car payments makes it a perfect time to trade it in and upgrade to something a little more “adult-ish” since I’m making more money now.

Instead of getting a similar $17,000 used car like the first time around, I choose to step my game up. Plus, I can get a little bit of trade-in value for my current car. This means that I sell the current car for $5,000 and buy a $25,000 ride with a bunch of gizmos (I don’t really need) and a sunroof! Because of the trade-in value, my loan only cost $20,000 at 3% interest for 60 months.

From 2015 to 2020, I will end up paying a total of $21,562 in car payments and interest with a monthly payment of $359.

Your second new car payment in 10 years

It’s not always individual decisions that have a major impact. Its the small, unquestioned ones that add up over time.

You know the drill – Add the numbers

Time to add these up. If you went the two-car payment route over the past 10 years, you’d have spent a total of $18,328 (1st car) + $21,562 (2nd car) = $39,890 on car payments. Now, subtract the $14,000 we paid by driving a couple of modest wheels from the fancy cars and you get the savings of $25,890 highlighted above.

As the vicious cycle continues for the rest of your days. It doesn’t have to if you ask yourself a few simple questions:

  • How important is the car I drive?
  • Does this monthly car payment add value to my life?
  • What would I rather spend my hard-earned dollars on?
  • How could I test a new path?

If after this exercise you decide it’s in your best interest to follow the car buying model above, then you’ve earned the right to do so free from judgment.

In summary

While I do strongly believe cars are one of the silent killers to any budget, maybe they’re a wanted expense in your budget. Nevertheless, understanding the total cost of car ownership is something you might want to spend a little time learning about.

For those who place more value in other things aside from the car you drive, why are you living outside of your values and paying for a car that will never make you as happy as that trip you want to take, or that job you want but pays less, or that golf membership, shoe collection, CrossFit membership, etc?

Sure you need a reliable car but if you’re racking up debt to live big elsewhere in your budget because of your car expense, do you really need a top tier car with a big payment right now? If cars contribute to your “rich life” then you should buy them and not apologize for it. Be sure to really contemplate if you are tricking yourself into these invisible scripts. But maybe you might want to wait until you’ve nailed down the foundation of your personal finance systems.

Remember that there’s a tremendous opportunity cost that comes with tying yourself up financially to depreciating “assets” like cars. And if the fancy car ownership is not in line with your values, it might be time to consider alternative options.

Don’t wait. Think about this before you get in your car. Sit in there for a minute and think, how much value is this machine providing me? Is it worth the cost?