“Worthless” Hunks of Junk
April 10, 2015My daughter and I were talking about cars recently.She borrowed mine to “allow me” to drive hers for a few days to see if I could figure out what was the source of a noise coming from her car. After driving it for two days, I couldn’t figure out the noise but I was able to fill up her empty gas tank, check her fluids and inflate her tires.
I know her car very well because it was mine for a very long time. When I got it to 300,000 miles, I gave it to her. I’m hoping for it to see 500,000. She’s hoping it dies today so that she can get a cute Jeep that is more her style.
During our conversation, I was flipping through articles about cars so that I could give her my theory on car buying. One of the first articles on the home page of Yahoo was this article about the best cars to get to 200,000 miles. I reminded her how lucky she was to have one that got to 300,000 and is still going strong.
(“Going strong” was a subject of debate. It’s not very stylish or even slightly attractive at this stage. It looks like a car with 300,000 miles on it.)
She reminded me that I had it when it “got to” 300,000 and now it’s hers to ride out the final days. I countered with the final days perhaps being several, if not many, years, and the the price was $0 to her. I had to buy my first car with money earned washing dishes in a seafood restaurant. I would have been happy to have a car, ANY car, given to me at that point. But, according to her, I also walked to school 10 miles uphill in both directions.
My theory on buying cars is very simple. Cars (at least 99% of them) are depreciating assets. Eventually they all become worth $0 and end up in a junkyard somewhere. They are NOT investments, but that is meaningless to a 19-year old who wants to look good behind the wheel!
Since cars are depreciating assets, we should spend as little on them as possible while buying something of high quality so the article was interesting to me to help see what the writers view as high quality cars. My approach is to buy a high quality car, 3-5 years old, with 40,000–60,000 miles on it and drive it as long as it is not a huge liability from a repair standpoint. I can usually find a great car at a very low price and drive it for a decade or so. At 19, my daughter had only seen me drive two cars until I gave her mine and picked up a bargain on my new (60k miles, 10 years old but a great car!) ride. This keeps my cost of transportation very low.
In comparison, I talked with someone earlier this week who has two car payments, each between $500-$600 per month…for 6 years!!! (Their take home pay is $3,500 and their car payments are $1,100 on top of a $1,800 mortgage payment!) Overspending on cars is one of the most common things I see from people who are in financial distress.
What are some guidelines? Lenders will approve, as in the example of the couple I just mentioned, virtually any amount if you have a good credit score. Sure, that may be a bit of an exaggeration, but not much of one!
According to this Consumer Reports article, all debts should be under 36% of your gross monthly income. This is standard in the financial world. I fear that using these long established numbers has led to so many people living paycheck-to-paycheck and being beholden to their monthly payments. It’s “the American Way.”
Sellers of big ticket items like houses and cars tend to sell their products on the affordability of monthly payments rather than total cost. If you use the 36% of GROSS income rule, you may find yourself feeling stressed and one paycheck away from disaster. A much safer path is to spend less than 1/3 (33 1/3%) of your NET take-home pay on all of your debt payments. (Include rent if you don’t have a mortgage.) Partner that low level of debt payments with a direct deposit into your savings account and you should be well prepared for when that cute car needs brakes and tires, which my “new” car did last week.
The questions I posed to my daughter and now to you are: How much are you willing to pay for something that will ultimately be worth nothing? Do you want to build long term wealth that can allow you to buy really awesome cars later in life with cash or would you prefer to sacrifice your future for something that looks awesome in photos on Instagram today? For me, the answer is obvious. She’s still pondering her answers…