Frugal Millionaires on Cars and Marriage

Here's an excerpt from the book The Frugal Millionaires: 70 millionaires anonymously share their ideas about money to help each other and you. Today we're seeing what the millionaires have to say about cars and marriage. There's lots of good advice here -- as you would expect. After all, these people are doing pretty well financially.

FYI, these are some representative tips from The Frugal Millionaires. There are over 800 tips in the book. The frugal millionaires are only referenced by their initials. The author signed a confidentiality agreement that the millionaires' identities would never be disclosed in exchange for them saying whatever they wanted. If they chose not to have their initials used they were given the initials AFM which is an acronym for Anonymous Frugal Millionaire.

BUYING/LEASING/SERVICING A CAR

JLL – Always pay cash. Always buy the car with the least options and the smallest engine. It will significantly reduce your depreciation costs which, until the recent surge in gas prices, were the highest cost component to owning an automobile. Wait until the end of the month and negotiate like hell. To save even more money buy higher deductible car insurance.

AFM – Buy a car that makes you happy and matches your goals. If you have the money – buy it for cash. Treat it well, service it, invest in it. The car I bought 8 years ago is in excellent shape. In about a year I plan to invest in getting the engine rebuilt so I can get another 100,000 miles out of it. If I hadn’t taken care of it I’d be making another $35K “investment” instead of one about 1/6th of that.

WAL – Buying a lease-return vehicle is the best purchase. If you are fortunate you can find a car with some warranty still on it. Plus, you can buy a luxury vehicle at a realistic price, which the original owner took the depreciation hit on.

AFM – Only get your car worked on at the dealer while it’s under warranty or if the car requires special tools that independent dealers can’t get. Regular service that is done elsewhere in a timely/less expensive fashion should not affect your warranty as long as it is documented.

MARRIAGE

(All the frugal millionaires were listed as AFM’s in this section to protect their marriages.)

AFM – Marry for love first, and then for a similar approach to money. And marry someone who looks at money the same way you do or you won’t have either love or money in the long run.

AFM – Protect your assets that you take into the marriage and the growth of those assets during the marriage, and until it ends. Hopefully it won’t ever end, until one of you passes on. Start the pre-nup process at least six months before you intend to get married. Have it signed three months before you get married. Make sure that your fiancé has equal or better legal representation than you do.

AFM – Strangely, marriage as it relates to money is the hardest when the goals are seemingly 100% similar; that is, the two people have some level of frugality, so there’s no argument there, and also similar goals on saving money. But then neither thinks their approach to spending money is the wasteful one. It would almost be better if one was a miser and the other spent like crazy…which might lead to a quick divorce, oh well. The hard part is trust; that is: my spouse trusts me to make the big life changing financial decisions, and arguably I’ve done well, but like all people I’ve made some big mistakes. Then I trust her to make the daily decisions and for her to spot all her wasteful ways. Arguably her pissing away a few hundred dollars too much on clothing is nothing compared to some of the bonehead financial moves I’ve made. But that’s super hard to keep in perspective when it’s spending vs. investing.

AFM – A divorce lawyer once told me that the finance person where your significant other bought their last car knows more about your significant other’s finances than you probably do! Know as much as you can about how someone saves and spends their money before you get married…and what they might do with yours.

Comments

[Dave]

I'm not sure I agree with the "always pay cash" rule. I recently just purchased a car -- it wasn't lease-return but I did get it for $1500 below invoice. Anyway, I opted for 36-month financing at 1.9%. The way I figure, that's an interest rate that's below inflation. If I can get a CD or other investment vehicle that pays as little as 3%, I'll come out ahead.

[Jeff Lehman]

Hi Dave,

I think you might want to consider that you have to factor in more than just the 1.9% interest rate you got (that you feel is below the inflation rate). (The economy is deflating at the moment, actually).

Let's say that Car N (N for New) is $21500 and your get it for $20000. Financing is 1.9% for 3 years. You put 10% down. Your payment is approximately $574.83.

Car U (U for Used) is the same car but 3 years old with a year of warranty left on it...and maybe some extended warranty if it's a certified pre-owned car). You buy it for $11000. Financing is 6% for 3 years. You also put 10% down. Your payment is approximately $336.31. (FYI - Your sales tax and registration are also lower on the used vehicle.)

Your new N car will lose 40%-50% of it's value in three years. That's anywhere from $8000-$10000. You have to take that into consideration when looking at the entire picture.

The difference in payments for three years between N and U is $8586.72. So much for the inflation advantage. (My point that it's not always about the interest rate alone.) And you will lose at least $8000 in depreciation over three years. (If the used U car depreciates at the same 40% for the three years you own it you "only" lose $4400 on it...or $3600 less.)

I'm not trying to make you feel bad about buying your new car. I hope you enjoy it for many years (like 10!). But these discounts and lower interest rates are just a lure to get you to buy a new car that will cost more overall and depreciate more (in terms of actual dollars) than a good used car. This is why the frugal millionaires love good, used cars, and partly why they are millionaires.

Jeff

[Dave]

Jeff, you raise a fantastic point and I don't disagree with you at all. We would have been better off financially if we had purchased a 3 year used car vs. a new car off the lot. But my point is that given the choice between (a) purchasing a new car with 100% cash down (i.e., "always pay cash") vs. (b) purchasing a new car with 1.9% financing, I felt we were better off with choosing the financing. You are correct that we are currently in a deflationary environment. However, I don't think that is permanent. My suspicion is that with the government throwing trillions of dollars of new money into the economy, we will soon be inflationary, not deflationary.

As for purchasing the car used, like I said, you are 100% correct that financially we would have been better off. I knew that going into the purchase. I'm not the type that buys new for the "new car smell." But purchasing used also has non-monetary transaction costs. First, there's the time and energy it takes to find a good, used vehicle, do the research on it to make sure it is in quality condition, visit the seller's location, and test drive the vehicle. Second, with any used car, you are purchasing the risk that something might be wrong with the car that you don't know about, and you lose the years of warranty that comes with a new car. (In your example, a 3 year warranty vs. 1 year warranty.)

Also, while the average car may lose 40-50% within 3 years, we purchased a Honda CR-V, and all the research I've done indicates that the depreciation is closer to 30% (or about $6,500). I.e., see here: http://www.internetautoguide.com/cost-of-ownership/09-int/2008/honda/cr-v/index.html. Since we purchased for $1500 below invoice, or $3000 below MSRP, the cost savings we could have achived had we purchased new is probably closer to about $4,500 give or take, not $8000. (These are just ball park figures.) Of course had we purchased used, our used car may have depreciated around the same amount over the course of those 3 years.

So all in all, based on my calculations and assumptions above, I think we did lose money by purchasing new, but probably only closer to $1-2,000. For me, this was worth the savings of time, energy, and also the peace of mind. I always buy cars with the expectation that I will never resell it but basically drive it until it dies, so for me this was a good investment.

[Wizard Prang]

This is nothing new.

I highly recommend "The Millionaire Next Door" by Thomas J Stanley, available at all good libraries (...and a lot of rotten ones!).

[kitty]

I am with Dave. I think the comparison is between apples and apples - purchasing a new car for cash if you have money or purchasing a new car with a low interest loan if one of the following is true a) you can earn higher interest on tax free fixed income AAA investments or CDs now or b) you believe that we are likely to get inflation and higher interest rate sufficiently soon to earn more money on fixed income safe investments.

Regarding depreciation. As Dave said - the most cited numbers don't apply to Hondas or Toyotas. Also, the numbers refer to trade-in value, but a) if you plan to drive the car for a long time, the only amount you care about is what you'll get for it if it is totaled; this amount is the replacement value based on blue book and comparative sales b) even if you want to sell, selling privately most often will net you more than the trade-in.

Here are my numbers as related to the Toyota Corolla that I bought new in 2003 and totaled in 2006:
2003: new, $16300 out-the-door
2006: check from insurance - $13359 - includes refund of taxes

So we have 18% loss in 3 (!) years. Plus with the new car you get extra 2 years warranty and you know what you are getting. Why would someone even sell a 3 year old car if it is good and hasn't been in an accident? Sure there could be legitimate reasons, but there could be problems. Even if there are no problems, 4 years from now your new car will be 4 years old. 4 years from now a 3-year old car will be 7 years old. One needs to factor in repair costs during this time as well...

[Jeff Lehman]

OK, Let me try to make some sense of what everyone is saying...

First of all, Dave, new cars don't cost $20,000. They cost $20,000 plus what ever the sales taxes and finance charges are over time. Then they depreciate like a brick falling to the bottom of a lake. Finance charges and depreciation are real costs.

If you buy a used car for cash (say $11,000). It costs you that plus sales tax.

Regarding Kitty's comment...People oftern turn in leases after three years. Then dealers will CPO certify them (Certified Pre-Owned). That typically gives them an additional 2 years of warranty and up to 100K miles. So let's say you bought a 3 year old used car with 36K miles that was CPO'd with a warranty up to 100K miles. That's three years of warranty with more miles than the original warranty. SOunds good to me!When you buy that CPO car from a dealer it's no different than buying a new car from the same dealer. It's the same process with less of a financial screw job!

Kitty, there is nothing wrong with buying a used car. Don't let anyone scare you into thinking they aren't a legit purchase. Dealers sell a lot of used cars and frankly they make more money on them. Anyone who tells you that used cars are bad has a hidden agenda to sell you something new.

I guess my other point was that if you have to finance a car in order to buy it then it's better to buy a used car that you can afford to pay cash for and not be in debt.

But there will always people who think new is better...and even worse, that having a never ending lease payment is just fine. I'm not one of those people and my bank account appreciates that.

To Wizard Prang I would strongly suggest that you read The Frugal Millionaires to get an updated perspective. (Don't spend a dime on it if you don't want to - ask your library to buy it.) I'll note that in The Millionaire Next Door the authors analyzed the cost per pound of the cars that millionaires drive. When was the last time you bought a car and said to the dealer: "Whaddya got for $7.50 a pound?" ;) Seems like research overkill to me!

Jeff

[Dave]

Jeff,

You make some very good points - like I said earlier, I'm not disagreeing with you - but you don't really address the main points of my comments. I stated earlier that at the end of the day I probably spent about $1-2,000 more. If you include the finance charges, it would be closer to $1200-$2800. But again, if you are suggesting that a $20,000 Honda CR-V could be purchased for $11,000 after three years, that is simply erroneous. Also, like I said, there are transaction costs and risks associated with purchasing used (including repair costs). Finally, you have to take into consideration the purpose of the purchase. I plan to drive my CR-V forever, so after 7 years I'd rather have a 7 year old CR-V than an 11 year old CR-V. That's the difference between replacing a transmission and not.

[kitty]

Jeff, your point about returned leases is a good one. But your example about a new car costing 20K and a used 3-year old car for only 11K may apply to a GM SUV, but it doesn't apply to Hondas and Toyotas.

Out of curiosity I looked it up: 2009 EX Sedan is around 19K (DX - 15K and LX - 17K); EX includes all options one may want. I was able to find on the web used 2006 Honda Civic EX sedan in range of 15-17K, depending I guess on condition and mileage (as I said EX includes all options, there is little if anything you can add). Sure you can bargain it down, but the 19K number is MSRP, so this applies to both old and new. Similarly, you have to add taxes to both. So the difference is between approximately 19K for a new Honda Civic and 17K on a good quality/low mileage 3-year old Honda Civic. I'd rather pay only 2K more and have a new car.

"Don't let anyone scare you into thinking they aren't a legit purchase. "
I was talking in general. As to me - a) I am not planning on buying a new car for a while unless something happens to my 2006 Civic b) I am not poor or inexperienced or easily swayed by a salesman. I always know exactly what I want and how much I want to pay for it, and I bought my last 3 cars for cash... Actually, I lost more than 10 times the cost of a new car last year, but this is beside the point.

[kitty]

Oops, my math is faulty. I lost less than 10 times the cost of a new car, maybe between 5 and 8 times... This is off topic, though.

[Jeff Lehman]

Great comments everyone... I see everyone's point on the value of Hondas. When I bought my BMW Sportwagon it was 3 years old and I paid $22.5K for it (it was $50K when new). There are some car exceptions...and it sounds like Honda's are it!