Author Topic: I WIll Teach You To Be Rich by Buying a New Car???  (Read 9356 times)

Lagom

  • Handlebar Stache
  • *****
  • Posts: 1258
  • Age: 36
  • Location: SF Bay Area
I WIll Teach You To Be Rich by Buying a New Car???
« on: November 06, 2012, 01:25:45 PM »
So this is a very old article, and I don't mean to pick on Ramit (OK, so maybe I do!), but after my moment of clarity that was discovering my first patch of money peach fuzz, things like this are almost too much to bear:

http://www.iwillteachyoutoberich.com/blog/cost-vs-value-why-i-bought-a-new-car/

I was researching comparitive costs of used vs. new to use in convincing some friends and family when I stumbled accross this article. Funny thing is, I might have nodded along with much of it only a couple years ago. Today, all I can do is cringe.

N

  • Handlebar Stache
  • *****
  • Posts: 1378
  • Location: Chicago
  • You must change your life. -Rainer Maria Rilke
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #1 on: November 06, 2012, 02:40:41 PM »
one thing that is illogical is when people say they dont want to buy a used car, they need to buy a new car, but then they will drive it forever. at some point, your new car will become a used car. then you will still be an owner of a used car. why not cut to the chase? :)

(speaking as a reformed "new car buyer" :)

N

JJ

  • Stubble
  • **
  • Posts: 117
  • Location: On the road, Australia
    • A Philosopher and A Businessman
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #2 on: November 06, 2012, 05:33:51 PM »
I don't get the love of "new car smell".  All I can think of is off-gassing of toxic plastic fumes.
The major logic flaw in the whole article was glaring - comparing a brand new car with a crappy old used one.  3 year old used is not crappy used.  Don't waste your time reading unless you want to get irritated.

N

  • Handlebar Stache
  • *****
  • Posts: 1378
  • Location: Chicago
  • You must change your life. -Rainer Maria Rilke
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #3 on: November 06, 2012, 07:29:36 PM »
I know!

I dont see anyone on MMM, MMM included, advocating driving death traps around for shits and giggles.

TomTX

  • Magnum Stache
  • ******
  • Posts: 3585
  • Location: Texas
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #4 on: November 07, 2012, 04:49:46 AM »
Um, he is claiming that somehow insurance on a used car will cost $50/month MORE than a new car? Color me extremely doubtful.

When an asset is worth more and is otherwise similar, it typically costs proportionately more to insure.

Matt K

  • Bristles
  • ***
  • Posts: 332
  • Location: Canada
    • Krull Photography
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #5 on: November 07, 2012, 07:08:08 AM »
one thing that is illogical is when people say they dont want to buy a used car, they need to buy a new car, but then they will drive it forever. at some point, your new car will become a used car. then you will still be an owner of a used car. why not cut to the chase? :)

(speaking as a reformed "new car buyer" :)

N

The answer on that is simple: If I buy a new car, I know exactly how it has been treated its whole life. If I take care of it, I know it has been taken care of its whole life. If I buy used, I am trading that knowledge and security for a lower price.

The question is: at what point is a lack of maintenance (that you can't readily identify when buying the car) going to affect you, and how much cost will it really incure? The logic in this strategy isn't flawed, only the math. The simple fact is, the chance of something going wrong is low, and the price difference is almost certainly going to be much lower than the amount saved by going used.

Take for example, my previous car, a 2004 Mazda 6 I purchased at the end of 2005 for 2/3rds its original value. Aside from being larger than I needed, it was a pretty great car. It had all the options I wanted: moar powaaaar V6, stick shift, sun roof. And it lacked the things I didn't want: leather and annoying touch screen. But what it also lacked was rust proofing by the previous owner. So while all the regular maintenance had been done (by the dealership) for its first two years, it was never rust proofed in an area that suffers nasty winters and uses a lot of road salt. I rust proofed it as soon I got it, but the damage was done.

So, when the car was 7 years old (but still had less than 100,000 miles on it), it still looked fairly new (save a few small rust spots forming on the wheel wells), and drove better than many cheap new cars, it started to have mechanical issues related to underbody rust. The oil pan developed a rust hole and started leaking. A number of other big repairs came up (which I've forgotten now). In the end, I put close to $4k in repairs into the car that I felt I wouldn't have had to had it been rust proofed when it drove off the lot the first time.

So the math goes like this:
I sold the car for $7k (Canadian, for those South of the Border who think these numbers look way too high).
I purchased it for $22k (after tax).
It was $35k (after tax) when new.
My purchase cost fo the car over the 5 years I owned it was $15k. I had an additional $4k in exepenses that I'm guessing I wouldn't have incurred had I been the first owner. Comparative cost: $19k for five years.
If I owned it until it was 12 years old and nothing else had gone wrong, comparative cost would have been $26k for 10 years of ownership.
Had I purchased it new, and kept it until it was ten years old, comparative cost would have been $35k for ten years of ownership.

So the math says that it would have taken an additional $9k in repairs (that it would not have required had I owned it for the first two years) over the next five years to cost as much as having simply bought it new. Which is pretty unlikely, I will admit.

If I'd keep it until death (lets say 15 years old), used it would have cost me $2k per year over 13 years, new would have cost me $2.3k per year over 15 years.

What the numbers don't say is just how frustrating it is to have a car that keeps breaking down in ways that feel premature. Which was why I sold it. Hopefully it is treating the kid who bought it pretty well.

Posthumane

  • Bristles
  • ***
  • Posts: 306
  • Location: Alberta
    • Getting Around Canada
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #6 on: November 07, 2012, 12:12:27 PM »
Matt, I see that your math works the way it does in your case, but you left out an important caveat. Rust proofing and the presence of rust are things that you CAN check for when buying a used car. In fact, I would argue it is one of the easier things to check. Not trying to say that you made a bad decision, but the caveat is that you can avoid issues like that if you can thoroughly check over the car for major issues. Now, in order to do so you have to either know a fair bit about cars and have experience working on them, or know someone that does and is willing to do that work for you (either a paid and trustworthy mechanic, or a good friend who's willing to help). I guess what I'm saying is that I agree with you that you can lose out a bit by buying a used car if you have unforeseen issues, and therefore have to be very choosy in buying one if repairs are something that will cost you a lot or cause you heartache.

Lagom

  • Handlebar Stache
  • *****
  • Posts: 1258
  • Age: 36
  • Location: SF Bay Area
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #7 on: November 07, 2012, 12:47:52 PM »
I will say that I can see the argument for buying new (although not if you are considering a Mercedes like our friend Ramit!) under the following conditions:

1.   You have a long commute and are unable to change that fact. Anti-mustachian, but I can accept that this might happen to some for various reasons.
2.   You buy a high mileage, reliable car, with a low sticker price. Im thinking Corollas, Scions, Elantras, etc.  NOT luxury cars, no matter how efficient they are.
3.   You pay cash.
4.   You drive that mofo into the ground. Im talking 200k+ miles minimum, barring an accident.

Im too lazy to run numbers, but I could see that working out to being a decent ROI. Of course, a true mustachian would not put enough annual mileage on their car for a new car to ever make more sense. After all, at 15k miles driven/year, my new car lasts ~13 years. At 5k miles/year, I can get a far less expensive car with 135k miles on it and achieve the same lifespan (assuming 200k miles at time of the vehicle's death/retirement).

Paul der Krake

  • Magnum Stache
  • ******
  • Posts: 4608
  • Age: 11
  • Location: USA
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #8 on: November 07, 2012, 01:39:34 PM »
I don't get the love of "new car smell".  All I can think of is off-gassing of toxic plastic fumes.
The major logic flaw in the whole article was glaring - comparing a brand new car with a crappy old used one.  3 year old used is not crappy used.  Don't waste your time reading unless you want to get irritated.
I don't get the excitement for the new car smell either. I love the smell of an old car, driving into the sunset on a hot summer night with a tune coming from a crackling radio...

AdrianM

  • Stubble
  • **
  • Posts: 158
  • Location: Queensland , AUS
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #9 on: November 07, 2012, 02:01:32 PM »
I stopped reading after I read the line "While used cars are a good purchase for some people" If you are going to make a big call such as "I WIll Teach You To Be Rich by Buying a New Car" stick to it, don't leave a loophole to back out if you get called on it.


kisserofsinners

  • Bristles
  • ***
  • Posts: 381
  • Age: 40
  • Location: San Francisco
    • Monkey wants a house
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #10 on: November 07, 2012, 05:44:04 PM »
Um, he is claiming that somehow insurance on a used car will cost $50/month MORE than a new car? Color me extremely doubtful.

When an asset is worth more and is otherwise similar, it typically costs proportionately more to insure.

It will absolutely cost more, as your insuring something of higher value. Further, if it's a lease the loan carrier insists on extra coverage.

kisserofsinners

  • Bristles
  • ***
  • Posts: 381
  • Age: 40
  • Location: San Francisco
    • Monkey wants a house
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #11 on: November 07, 2012, 05:52:42 PM »
So i think i'd say that used cars are best for almost all people.

I have recommended leasing a car to exactly one person. He's super smart cognitively, but not so much physically. It's all well and good to assume that anyone is capable of working on their car. That is simply not true. This guy outsourced his car care to me (something several peeps have done, i'm good at this stuff and don't mind helping out. When my friend went in to buy something more reliable, i was he only one advising a lease. I wouldn't if he didn't make really good money ($150k, single), commute 40 min to make that money, and have zero aptitude with a vehicle.

Buying the car was terrifying for him. With a lease it's not your car. I know it's very anti-mustasian and all, but if he can and is willing to make that choice it's better for him.

Sometimes this place gets a little intense about things we assume are always good. To me it's far more important to look at all your info and make the choice that is correct for you. Nothing is universal.

Lagom

  • Handlebar Stache
  • *****
  • Posts: 1258
  • Age: 36
  • Location: SF Bay Area
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #12 on: November 07, 2012, 06:31:05 PM »


Sometimes this place gets a little intense about things we assume are always good. To me it's far more important to look at all your info and make the choice that is correct for you. Nothing is universal.

I totally agree. But in this case, we have a personal finance blogger talking about how to "get rich" and claiming that sometimes buying new can be a sound financial decision (even if it's a Mercedes!??). That's simply not true. That said, I make decisions all the time that are not optimal to my financial state. The difference is that I don't try to justify those decisions by saying "well for some people these are actually a smart choices." Similarly, when I drink that 3rd or 5th glass of wine, I don't try to pretend that the antioxidants make it a sound decision for my health.

Jamesqf

  • Magnum Stache
  • ******
  • Posts: 4047
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #13 on: November 07, 2012, 07:50:49 PM »
Um, he is claiming that somehow insurance on a used car will cost $50/month MORE than a new car? Color me extremely doubtful.

When an asset is worth more and is otherwise similar, it typically costs proportionately more to insure.

It will absolutely cost more, as your insuring something of higher value. Further, if it's a lease the loan carrier insists on extra coverage.

Huh?  Insurance on a used car (or a new car that you buy for cash) has nothing to do with the value of that car, since by not carrying a loan, you're freed from the lender's requirement that you purchase collision & comprehensive insurance.  You only need to carry liability, the cost of which depends on your personal risk factors (age, sex, driving record &c) and the risk factors for the particular model car you bought.

So right there you have a pretty major savings from buying used rather than new.

Matt K

  • Bristles
  • ***
  • Posts: 332
  • Location: Canada
    • Krull Photography
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #14 on: November 08, 2012, 06:22:04 AM »
Matt, I see that your math works the way it does in your case, but you left out an important caveat. Rust proofing and the presence of rust are things that you CAN check for when buying a used car. In fact, I would argue it is one of the easier things to check. Not trying to say that you made a bad decision

Absolutely. But it was one thing I didn't check for (or rather, knew of, but wasn't sufficiently concerned by - there was no visible rust on the car at the time). This just illustrates that the more you know about cars, the better deal buying used will be. But it also illustrates that something you are unaware of, or underestimate, can come back and bite you. The math in my case showed that even with underestimating the impact of rust-proofing, buying used was still a cost savings.

I wouldn't say I made a bad decision, since it was a good car and I learned a lot from by owning it. But it was not the best decision I could have made, nor was it a decision I'd repeat.

Posthumane

  • Bristles
  • ***
  • Posts: 306
  • Location: Alberta
    • Getting Around Canada
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #15 on: November 08, 2012, 09:57:59 AM »
It's all well and good to assume that anyone is capable of working on their car. That is simply not true.
Agreed, some people simply do no grok vehicles and won't be able to maintain a used car on their own. I know a number of people like that. I think in those times, investing the time to find a good, trustworthy mechanic to whom you can outsource that work is the best use of resources, since even with a new car you will need that service after a few years.

This just illustrates that the more you know about cars, the better deal buying used will be. But it also illustrates that something you are unaware of, or underestimate, can come back and bite you. The math in my case showed that even with underestimating the impact of rust-proofing, buying used was still a cost savings.
I certainly can't argue with that. Even if you do know a lot about cars there are things that can hide from you, or that you simply underestimate. There is definitely some risk to buying used cars (though to be fair, there are risks with buying new cars as well, since it seems every model year has some different reliability issues and not necessarily less than previous years for any given model).

By the way Matt, on a completely unrelated note, I'm enjoying going through your photoblog. The Gatineau area is beautiful in the fall, though I only get out there once or twice a year on business unfortunately. You must be one of the last of a dying breed still shooting with film.

kisserofsinners

  • Bristles
  • ***
  • Posts: 381
  • Age: 40
  • Location: San Francisco
    • Monkey wants a house
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #16 on: November 08, 2012, 11:44:13 AM »
Um, he is claiming that somehow insurance on a used car will cost $50/month MORE than a new car? Color me extremely doubtful.

When an asset is worth more and is otherwise similar, it typically costs proportionately more to insure.

It will absolutely cost more, as your insuring something of higher value. Further, if it's a lease the loan carrier insists on extra coverage.

Huh?  Insurance on a used car (or a new car that you buy for cash) has nothing to do with the value of that car, since by not carrying a loan, you're freed from the lender's requirement that you purchase collision & comprehensive insurance.  You only need to carry liability, the cost of which depends on your personal risk factors (age, sex, driving record &c) and the risk factors for the particular model car you bought.

So right there you have a pretty major savings from buying used rather than new.

[/i]

I was not clear there, sorry. It's hard for my to even imagine buying a new car for cash. That is just weird in my brain. Paying cash for a car is not in the same area as the desire to buy a new car. Good eye. :)

kisserofsinners

  • Bristles
  • ***
  • Posts: 381
  • Age: 40
  • Location: San Francisco
    • Monkey wants a house
Re: I WIll Teach You To Be Rich by Buying a New Car???
« Reply #17 on: November 08, 2012, 12:08:07 PM »


Sometimes this place gets a little intense about things we assume are always good. To me it's far more important to look at all your info and make the choice that is correct for you. Nothing is universal.

I totally agree. But in this case, we have a personal finance blogger talking about how to "get rich" and claiming that sometimes buying new can be a sound financial decision (even if it's a Mercedes!??). That's simply not true. That said, I make decisions all the time that are not optimal to my financial state. The difference is that I don't try to justify those decisions by saying "well for some people these are actually a smart choices." Similarly, when I drink that 3rd or 5th glass of wine, I don't try to pretend that the antioxidants make it a sound decision for my health.

I hate Ramit's title too. It makes him sound like a jerk, but if you've read his blog you know his definition of "rich" is his own. It get's exhausting getting re-pissed every time i read it, so i kind of gloss over that part now.