Master the BIG Stuff – Transportation

Next up on the Master The Big Stuff Series we will tackle transportation. If you missed the first post of this series on housing, check it out here.

You’ve Just Won a BRAND NEW CAR

How many of you have seen a commercial during the holidays or Super Bowl with a brand new car out on the driveway with a big ole ribbon on top and the spouse comes running outside with their little puppy so surprised and happy? Everyone. Everyone who watches tv knows what I’m talking about. 

This is marketing at its finest. I’m sure we all think we would love that but is that the most practical way of spending your money? Will that REALLY bring us happiness? Lexus sure thinks it will, but chances are someone from a developing country would think we are NUTS if you told them you just dropped $30,000-75,000+ on a vehicle (we don’t even know what high end vehicles cost these days).

Let’s be honest here – a car is a mode of transportation. That’s really it. It’s a way of getting from point A to point B. But in our developed society we see it at a status symbol.

There is an unspoken judgement aimed towards those who don’t have a car and instead take public transit or families who only have one car. Judgement based on the type of car someone drives sounds ludicrous. We form opinions on people by the way their car looks.

Most people don’t bat an eye to bring their cars into the repair shop to spend a few hundred dollars to fix minor exterior scuffs that do not harm the interior mechanics as we want our cars looking goooood. We have car washes to keep our shiny metal clean and pristine and to show the world that we care about our appearances and status.

Personally, I don’t really care what other people think of me or my vehicle. Our cars gets washed two ways: by Mother Nature when it rains and a few times a year in my driveway by hand with a bucket of soapy water and an old rag in the Spring to get off salt that has accumulated over the winter and again towards the end of Summer to get off all the bugs. 

New Vs. Used Vehicles

1. Sammy the Spender

Sammy feels the need to keep up with the Joneses and not only did he see his neighbors new car but he also overheard his coworker talking about her new car and he felt the need to treat himself to a new car as well. He works hard, he deserves it, the treat yourself mentality kicked in. Though his current car was only 6 years old, he went to the dealership and bought a brand new car off the lot for $35,000. They were offering a promo of 0% interest for the first 5 years, AND it has the latest technology, it was too good to pass up!  Plus the dealer was willing to give him $6,000 for the trade in of his old car so he only needed to take out a loan for $29,000 to finance this new car! Sammy is feeling on top of the world, what a great deal…!

1. Sally the Saver

Sally buys used reliable low mileage cars with cash, and drives them for 10+ years until the timing makes sense to sell it and she buys a newer used reliable car instead. She sold her old car for $2,000 and over the course of those 10 years while she was drove it, she had saved up another $5,000 as she didn’t have monthly car payments to deal with. She was able to buy the same reliable used car but a newer version that only had 60,000 miles on it for $7,000. 

So let’s crunch some numbers. 

Say Sammy really wanted to pay off that $29,000 car loan in 5 years while the interest rate was still 0%. That comes out to a monthly payment of $483/month for 5 years. At the end of the 5 years he now has a paid off car that he can to sell to another Sally of the world for $10,000 (because your brand new car depreciates the moment you drive it out of the lot) before he goes out and buys another overpriced new car again. Because new cars are best, right? 

During that same 5 year period, Sally bought her used car for $7,000 with cash upfront that she had previously saved and then invested that same $483/month that Sammy was spending on car payments into the stock market over those 5 years which earned 7% interest on average. At the end of the 5 years she has an older car that she could sell for $2,000 AND $34,579 IN HER INVESTMENT ACCOUNTS! This can more than cover the additional $5,000 she would need to buy her next used reliable car for $7,000 that she can use for the next 10 years.

To compare the two, after 5 years Sammy put in $29,000 and has a paid off car worth $10,000. Sally put in $7,000 and has a paid off car worth $2,000 AND $34,579 in her investment account. Sammy would have to take out a loan again if he wanted to get another new car at that point, as I don’t know of any new cars that cost $10,000. Sally could use the $2,000 from her car sale and take out $5,000 from her investment earnings and purchase another used reliable car for $7,000 and still have $29,579 in her accounts. If Sally kept that remaining $29,579 in her investment accounts which continued to grow at 7% on average annually, after 30 more years, that account would have $240,077 in it without having Sally contribute another penny from her end. Thank you compound interest! And that’s only a 5 year comparison, imagine if you did this car comparison for the average adult drivings life!

“Leasing” Should Be An FI Swear Word

And this example doesn’t even factor in the costs of leasing a car! At least Sammy had a $10,000 trade in value at the end of those 5 years. If you’re leasing a car for say $300/month for two years what do you have at the end of those 2 years? Nothing. And $7,200 out of your bank account. You could have bought a clunker for $1,000 to use for 2 years while you saved $300/month to then buy a $7,200 used car like Sally that would last over 10 years. Seriously, that’s all it would take to get you in Sally’s starting situation (save $1,000 and then save $300/month * 24 months = $7,200 for a used reliable low mileage car). Yes of course there will be some maintenance costs to owning an older car vs leasing but nothing to the tune of consistently spending $300/month like you were when you were leasing. 

Our Real Life Senario

Court’s Story:

Growing up, my parents always bought new cars. In fact they bought me my first car for my 16th birthday and you guessed it, it was brand new. #spoiled. I know. Report me to the FIRE police. To this day my parents will only buy new. So I did not learn the value of buying used cars from them, I learned it from Nic. In fact when I tell my family that I’m buying a used car I hear ALL the reasons why I should be buying a NEW car instead. 

My parents bought me a brand new Toyota RAV4 back in 2001. At the time of course I was pumped, but now that I’m in my 30s I realize how foolish this purchase was. I really wish I could have told them to send it back, get their money back, and to make me buy a used car with my own dollars from working part time after school and over the summer (to their credit, I did work throughout high school and college). That is our plan for our children. 

Of course I realize how thankful I am that my parents did this for me. I drove the Rav from 2002-2015 and put 120,000 miles on it.  When we were getting ready to move to Canada, I sold it to one of my roommates for $4,000 USD. I converted that sale to $5,000 CAD, and bought Nic’s grandmas 2009 Pontiac Vibe that had 60,000 kilometres (~37,000 miles) on it.

About a year later in 2016 I was in a bad car accident – the other driver blew past a stop sign and totaled my car, luckily I only ended up with a broken elbow and whiplash afterwards. Insurance paid me out $7,200 for that car and I then bought a 2009 Toyota Corolla with 70,000 kilometers (~43,000 miles) on it for $7,000 and that’s the car I am currently driving today and it recently passed the 100,000 kilometers (~62,000 miles) mark. She is a gold Corolla… with manual crank windows…. very fitting for an 80 year old grandma like myself…her name is Carol and I love her.

So, I have yet to put in any of my own money towards a car payment in my life as the original sale of the RAV4 has fueled the costs of the used cars since then. That’s 18+ years of no car payments. For that, I am extremely grateful to my parents initial purchase and I am also grateful for my wife to show me that there is nothing wrong with used cars. Yet, I still think it was a poor financial decision on my parents end.

Nic’s Story:

I have a different story. I drove a hand me down manual ’90’s Honda Civic Hatchback in high school in the early 2000s, then later upgraded to a rusty minivan. There was no practical way for me to use a car in college, but I bought a used Honda Accord with 175,000 miles on it for $7,000 USD when I graduated and was working in Boston after using public transit for a bit to save up for that car purchase.

The Accord was also sold when we moved to Canada (we practically sold everything we owned at that point but that’s for an entirely separate post), for $1,300 USD with over 260,000 miles on her. When we moved, I bought my brothers 2006 2-door manual Honda Civic with 200,000 kilometers (~124,000 miles) for $3,500. I sold that car for $2,000 because the need for 4 doors was imminent with a baby on the way and the plan to teach Court how to drive a manual car backfired as she’s a wuss and was petrified of driving a manual unless it was on a highway, and even then, she wasn’t an anxious wreck. I purchased a used 2011 Chevy Equinox for $8,700 in cash with 80,000 kilometres (~50,000 miles).  We thought we’d want a an SUV for our growing family but we quickly realized this vehicle was too big for us.  We sold the Equinox for $8,800 and instead bought a used 2013 Subaru Legacy that had 160,000 kilometres (~100,000 miles) for $6,000 (seller was looking for a quick sale so we got a good deal).  She as winter tires worth $2,000, heated seats, and remote start with a 2 mile radius.  She’s our fancy car.

 

There you have it. We currently have used, older, reliable cars that have been paid for with cash and should last us for years.

When we transition to early retirement we’re considering selling one of these cars to become a single car family. We can take the proceeds and throw it into the market to let compound interest do it’s thing to fund our future car purchases. We likely can sell Carol for $5,000 and the Subs for $7,500. We can take the proceeds from the sale of one of these vehicles and throw it into the market.  If we assume it grows 7% annually while we continue to drive our other car, we will have enough to fuel our next car purchase.  The difference between the growth from the sale of the first car sold + the sale of the second car sold years down the road vs the next used vehicle we purchase will remain in the market to keep funding our next car after that which should last us again for another 10 years. 

Where we live in Canada, everything is spread quite far apart and unfortunately public transit is not adequate to get around so it’s not practical for us to be car-less.

I sure am glad my mentality has shifted to buying used instead of new (thank you Nic and the FIRE community), it definitely isn’t what I was told growing up. 

As a parent, we are planning to have our child(ren) work throughout high school and university to help pay for a reliable used car if they choose to want to drive a car at that time. Hopefully public transit continues to become more and more efficient, car sharing becomes more mainstream, and the Uber’s of the world continue to make not needing to own a car more and more appealing. And who knows, teleportation may exist 15 years from now let alone driver-less vehicles.

What has your car buying experiences been like? Are you a new, used, or lease car person? Or are you a total badass and don’t have a car?! 

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We believe in stacking up life hacks to keep your enjoyment levels to the max without depleting your bank account.  Here are some ways to further educate yourself and save thousands of dollars over your lifetime by making some simple adjustments:

• Investing Newbies: Check out our free Investing 101 Series.
• How much are you paying for your phone plan?  Canadians, learn more about Public Mobile, and see how we are paying $3/mo for our cell phone plan.
• How much are you paying for internet?  Canadians, learn more about the various Independent Service Providers out there to see who services your area so you can lower your monthly bills.
• How much are you paying for home insurance?  We were able to reduce our rates by 25% by switching over to Square One Insurance.  If you live in BC, AB, SK, MB, and ON, check out Square One for your home insurance, landlord insurance, and/or tenant insurance.  Use this link to receive an extra $15 off your quote.  (Note that you must use this link to start the process to get the $15 off even if you prefer to pay over the phone.)
• How much are you paying for your monthly utility bills?  See how you can likely save on this monthly expense.

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