Hello, fellow dividend dudes and dudettes,
We are now beginning this journey together to achieve financial independence through passive income. We cannot discuss passive income without discussing personal economics. Hopefully, thus far, you have gained valuable information about your finances, from major home purchases to those nagging “Hinder me” expenses. As we begin to evolve with this train of thought, You will ultimately start to think twice before purchasing once. Hell, maybe three or four times!… Remember, the more we think about purchases before purchasing, the less likely we will make that dumbass impulse purchase. The fewer purchases we make, the more fresh capital we can unleash toward our “real investments.” This thought process, metaphorically speaking, should turn our financial investment portfolios into a money machine that will run well into the future.
As the title of this post suggests, we now must discuss automobile purchases. Besides your home, an automobile purchase is the second most expensive purchase we will make in our lifetimes. Most of the time, the dumbest purchase we will make in our lifetime. I once overheard a friend boasting about his new shiny purchase. Ford Motor Company equipped his new purchase with a leather interior and the best trim package available at the time. Wow!! It was sparkling, polished, and damn it smelled fantastic! The purchase may not have been the smartest decision financially one could make, but he told everyone how “he got a good deal with equity” on his purchase because of a trade-in! Man, I sat and pondered at that famous expression, “trade-in, good deals, equity and cars,” with a meek appearance. Those words shouldn’t intermingle together, much less verbalized in the same sentence in an open forum for others to hear.
At that instant, the minute hand on the clock seemed to stop, my eyes opened, and I realized how stupid people are! I’m not the only one either! Next time when you are racing around town in your shiny car, paying those endless bank notes, look to the right and left at that red light. You will see BMW, Jaguar, Mercedes, Tesla, etc. with many aftermarket upgrades. I don’t bet often, but I will make a bet here. I bet many of these cars belong to people who make less annually than what the vehicle is worth! But I guess if they are building equity in that BMW, why not? (joke)
Now, like we have discussed previously in many posts, there are hinder-me and help-me expenses with every purchase. An example of an automobile payment would be a “Hinder Me” cost if you bought a car/SUV/truck, and the price or payment is not as reasonably low as possible to achieve the same result.
An example of “Hinder Me” Car Expense:
You need to buy a car for transportation to and from work.
Instead of purchasing a used low mileage Toyota Corolla several years old, you go out and buy a brand stinking new BMW 6 series (MSRP $70,000)
A Corolla will perform the same function as a BMW 6 series to commute around the city. Why spend $70,000 when you can achieve the same goal (commuting) for under $15 grand. Are you trying to keep up with the Jones? Are you trying to be someone you are not? Are you trying to play the rich game and keep up with the Jones? Listen, if you are still working a 9-5, everyone knows you are not wealthy. Please stop pretending.
As you can see, The Beamer is a “Hinder Me” expense because the BMW 6 series payment is not as low as reasonably possible. A corolla payment is as low as reasonably possible. Remember this!
Now, let’s dive into my coworker’s situation above; First, Ford is a terrible brand to purchase because it loses value far greater than its Toyota, Subaru, and Honda counterparts. Second, you will always get screwed when trading in a car. You are better off selling the car privately. Third, you should look at the overall price of a vehicle compared to your earnings. We will discuss this later.
Let’s look at the depreciation data below….
Quoted from Forbes:
Top 10 Vehicles Having the Lowest Five-Year Depreciation:
1. Jeep Wrangler (off-road SUV): 30 percent
2. Jeep Wrangler Unlimited (off-road SUV): 31.5 percent
3. Toyota Tacoma (midsize pickup): 32.0 percent
4. Toyota Tundra (full-size pickup): 35.9 percent
5. Toyota 4Runner (midsize truck-based SUV): 36.5 percent
6. Porsche 911 (sports car): 37.2 percent
7. Honda Ridgeline (midsize pickup): 38.1 percent
8. Nissan GT-R (sports car): 39.4 percent
9. Nissan Frontier (midsize pickup): 39.5 percent
10. Subaru WRX (sports car): 40.0 percent
Top 10 Vehicles Having the Highest Five-Year Depreciation:
1. Maserati Quattroporte (luxury car): 72.2 percent
2. BMW 7 Series (luxury car): 71.3 percent
3. Nissan Leaf (electric car): 71.0 percent
4. BMW i3 (electric car): 70.9 percent
5. BMW 5 Series (luxury car): 69.2 percent
6. Acura RLX (luxury car): 69.2 percent
7. Ford Fusion Energi (plug-in hybrid): 69.1 percent
8. BMW 6 Series (luxury car): 69.0 percent
9. Jaguar XJL (luxury car): 68.9 percent
10. Chevrolet Volt (range-extending electric car): 68.1 percent
Now, as a savvy investor, there are other factors you need to consider in addition to depreciation data. Here is a simple list you should consider when purchasing a car, whether new or used. Most of the time, it’s better to buy an automobile slightly used but not always (depending on finance rates).
1.) Purchase Price (always compare to KBB) Use link here to determine fair market value: https://www.kbb.com
2.) Financing (Interest rate)
3.) Maintenance costs
4.) Depreciation Rate
6.) Safety rating
7.) Car insurance rate
Let’s assume you are in the market for a commuter car. Highway/City driving. Let’s assume you are interested in a Toyota Camry, but you are leaning toward a new BMW 330i sedan. Let’s see the breakdown…
As you can see from the chart, the Toyota Camry is a way smarter choice. It is a safer, cheaper, more reliable car due to lower maintenance costs. It may not kick the Beamer’s ass with horsepower, but it does in almost every other category.
The only category that the Beamer is better significantly than the Camry is the depreciation rate. It appears the three series BMW depreciates at 40 percent at five years compared to 49 percent at five years with the Camry. Does this category matter? Let’s do the math.
- You would save $755 over five years on the Camry (just in maintenance costs)
- Plus another 16,280 off the sticker price.
- Plus another $1,856.25 in interest
The Camry would have saved you approximately 19,000 dollars. As you can see from these calculations, the Camry is the best option. The 19,000 dollars properly managed could grow even larger if invested correctly. So does depreciation rate matter? It does, however, not exclusively.
Don’t “Keep up with the Jones”! Keep your emotions out of automobile purchases; don’t overpay for logos or names! Use the checklist above to see the actual expenses before making a purchase. Try this approach before your next Big car purchase. Research, research, research. Never make an impulse buy. Remember to Think Twice; before buying once!
Let me know your thoughts? Subscribe and comment! Stay tuned for more posts!