a) Nobody has ever confused a car with an investment.
b) "Assuming a modest 10% return". 10% after taxes and inflation is not a modest return by any stretch of the imagination and I'd be thrilled if I could achieve that consistently. If he hasn't factored inflation and taxes in then all his sums are wrong.
c) "Here, look, my $4000 student car costs more than $4000 in running costs and depreciation over three years" is not a useful example in the context of luxury vehicles. With luxury vehicles your running costs will be a much smaller fraction of the original outlay. (Although I admit depreciation will still be a big factor. Probably best to get one second hand that's a couple of years old.)
d) It's just a generalization of the general truism that millionaires have often become millionaires because they're frugal.
e) If you've got, say, five million dollars, you can cheerfully drop a hundred grand on a car and it's only a small fraction of your wealth. Not a sensible idea, but not fatal either.
f) In the second paragraph he essentially says "Millionaires often drive cheap cars except when the drive luxury cars". This is not a particularly impressive insight.
The entire premise of his title is dead wrong. "Why Millionaires Don't Have Great Cars" is a failed assumption. The zip code across the river from me (on the southeast coast of Florida) has the highest concentration of ex-CEOs in the nation. By consequence, there are a disproportionately high number of millionaires driving around on the beach side of town. It is a rare occasion that I see one of these people driving a Toyota Yaris. Most of them drive some form of Lexus, BMW, or Mercedes, with lots of Porsches thrown in the mix, and the occasional Ferrari, Masseratti, or other exotic.
Millionaires drive what they want. If they don't "want" a nice car, they won't drive one.
I really, really recommend reading The Millionaire Next Door (I have no affiliation with it. It's kinda old-school, but in no way out of date.).
Almost the entire book is about how luxury goods are NOT consumed by rich people, but by semi-struggling middle class people. (BMW's, Rolex, premium liquor, etc.) (Or at least people who have to go in to debt to consume these things.)
(It's also about how rich people DO live, choose to buy stuff, negotiate, etc.)
Everybody in this thread who's saying, "duh, cars aren't supposed to be an investment," are technically right. And everybody should indulge in things that really make them happy. If cars are your thing, go on, do your thing. It's all good.
But in the Millionaire Next Door, it goes over how cars are an especially precarious purchase for most people, as they just really eat up a lot of money over time. For most people, even non-luxury car purchases require a loan.
Cars might be more dangerous for us than say Rolexes, because most of us think "well either way I have to have a car, might as well get a _____."
Anyway, maybe this article wasn't the most persuasive case, but it is true. Most rich people don't have fancy cars, or probably fancy anything.
(In the Millionaire Next Door, it says we get confused by this because there are a famous outliers who show off their wealth, so we incorrectly associate wealth with luxury, when they're rarely related.)
i think the big issue, is that there is rich and "rich"
real rich can afford to spend $100K on a car w/o really impacting their income too much. i.e. 100K = 5% of their yearly income($2mm/yr)
the "fake" rich, still make $300-400K a yr, but they think they are "rich" rich, so they also buy the $100K car. But for them that $100K is a much higher % of their income.
personally I feel like 5% of your income on cars, is more or less living within your means. If you keep your car for 4-5 years, that's only 1% of your yearly income going towards cars.
Granted if you are a car enthusiast and cars are your only hobby, it's ok to bump that number to 10-15%
Yes cars are extremely expensive. But for many the ability to live within driving distance of work is worth it. I know people who don't have cars. They really miss them. I can drive 250 miles to see my family on a whim. It takes 4-5 hours. Taking public transit requires 7-8 hours, and only gets me within 25 miles of my parents' house (which is pretty good compared to much of the US).
And something like reliability is difficult to quantify. The difference between a $20,000 car and a $4,000 car is often that the $4,000 car is more likely to fail on you unexpectedly. You'll wake up one morning to find the battery dead, or you'll be halfway to work and your brake lines will rupture, or maybe it's just that the door sticks and is a minor subconscious annoyance. Eventually the amount of money you have to sink into a clunker to keep it running will be as much as it would have cost to buy the newer car.
But yeah, anything more than that, unless you need the car to impress clients, is pure luxury. If I had to blow $50,000 on a luxury, it would not be a car.
Anecdotally, for the first time in 6 years I don't have a car and I'm loving it. I'm living about 10 minutes walk from the CBD. To visit anyone I'd fly anyway, and the airport is only 15 minutes away by bus.
Walking everywhere is much more satisfying, and not having to worry about breakdowns, oil changes, registration - not to mention the cost - is very nice. On the occasion that I decide to take a road trip, I can rent a car, for a small percentage of the annual cost of ownership.
It probably helps that I live in a dense, pedestrian friendly city though (Wellington, New Zealand).
I'd love to not need a car. I live in a very pedestrian friendly area myself and rarely drive anywhere except to commute to work (oddly, while I live about a 5 minute walk from MIT and lots of tech jobs, I work in the suburbs).
But, since I do have one for commuting, I have to admit that it comes in handy other times as well.
Also anecdotally, a friend of mine is buying me dinner because I'm driving her to a wedding this weekend.
The market for hitmen is currently saturated, so even if he works overtime and does a few extra hits on the side under the table, he still isn't going to make enough to move into the more expensive, more central neighborhoods.
Plus, there's all those fees to keep your contract-killer's license up to date.
I prefer 7-8 hours on a train with a laptop or a book compared to 4-5 hours of driving. Driving is either boring (freeway) or annoying (cities), whereas I can usually either be productive or relax on public transport.
I prefer to be able to read a book or use my laptop than drive, but I'd rather spend those extra 4 hours with my family. If it was 6 hours instead of 8, it would be more worth it. But 8 hours is essentially an entire day of travel. I could drive home, visit, and drive back in the same day if I wanted to.
And it's not just the elapsed time, either. I have to be at the train station at a specific time (preferably having purchased the ticket in advance), and then need to do the same thing for the return trip. I have to pack everything I want to bring in baggage and make sure not to lose anything. With a car, I can decide to go home and be there 5 hours later with no other planning at all. A few changes of clothes may already be packed inside.
Not to mention that when I get to the destination, I'm stranded and dependent on people, because there's essentially no public transit where my family lives.
Believe me, I am not a car person. I avoid driving whenever possible, the bicycle I bought a few weeks ago already one of the best purchases I've ever made. But for me, it's worth having a car, and I often choose to use it.
I'm the opposite. I enjoy a nice 1:00 - 3:00 drive occasionally because it lets my mind wander and think while keeping my body and the lower parts of my brain occupied. In an odd way it is a lot like taking a hike, only without the fresh air but with climate controll.
My strategy is to own a few $500-$1200 cars (might be different in your area) that work buy might not look very nice. When one breaks down, drive one of the other ones until the best one is fixed. Of course, sometimes they sit in my garage or driveway broken for months at a time. But it's always a learning experience (and a little time away from the keyboard).
Also, I'm not going to be impressing any clients with any of my vehicles.
That would be a huge pain for me in Cambridge. Parking is a major expense and hassle here. And by this point, I don't really care to learn much more about cars. There are tons of things I'd rather be doing than auto maintenance.
quick notify ferrari, lamborghini, porsche, maserati, aston martin, jaguar, bentley, audi, cadillac, morgan, rolls-royce, bugatti, TVR, volvo, spyker, saab, land rover, lotus, bmw, mercedes, lexus, lincoln, maybach, pagani, gumpert, koenigsegg, acura, infiniti, weismann, mosler, ascari, mclaren, ssc aero,..that they are in the wrong business.
First of all a luxury car is not an investment. A person doesn't buy a Ferrari, thinking it'll appreciate, they buy it to show off their wealth, and at a certain point, the 200K for a Ferrari is only a small portion of someone's income. And since high end cars tend to hold their value really well, they don't depreciate as much as regular ones.
Second of all, the lost opportunity cost is just the cost of owning a car. Live a little, you don't get to take the money with you when you die.
Finally, there are only a few types of millionaires who don't own a nice car. 1. those who lease the luxury car with their companies. 2. those who are always traveling for business, and who pay the $30K/yr to belong to those super car rental clubs. 3. those who see a car as just something to take you from point a to b.
Owning an expensive car is actually not as bad as the author suggests. Once you get beyond around $80K cars depreciate at a much slower rate than other cheaper cars. One reason for this is that the more exotic a car is the lower the mileage it is likely to carry becomes. Another strong factor is that when you are paying more than $80K for a car you are paying a lot for the brand of the car and this is likely to be evaluated later at an emotional rather than mechanical level. A 5 year old Aston Martin is still an Aston Martin, whereas a 5 year old Honda is basically a commodity to be evaluated on its mechanical merits.
In terms of this argument the worst car to buy would be something like a BMW 5 Series - its not expensive or rare enough to ensure it would be evaluated on its emotional appeal when you are selling it - but it is still pretty expensive.
Yeah, to extend the authors point it's probably worth making a clearer distinction between the cost of owning a car versus the cost of using a car.
If you have a $150,000 sports car that you drive four times a year and keep it covered in a secure garage most of the time, the yearly expensive probably won't be great.
They may depreciate slower, but the insurance and maintenance costs are a heck of a lot higher in absolute terms.... I'm sure they more than make up for the lesser depreciation.
Cars aren't investments.... bottom line. You buy an aston martin or ferrari because you want one and can afford to treat yourself to one..... not because you've somehow rationalized it's resale value into some kind of pseudo investment - if you think that way you probably won't keep your millions very long.
I love it when somebody makes an intelligent distinction in an overarching argument. Thanks.
Especially when it's something I can use to talk my husband out of his delusion of getting a BMW as our first car, when we'll drive it 10 hours a month. In Europe, where BMWs are twice as expensive... and four times as common.
BMW's are twice as expensive in Europe? You lost me there. I currently on vacation in Europe, and you won't believe some of the deals (on both brand new and used) BMW's I've seen.
In Austria, a Toyota Yaris (different name) costs 15,000 - 16,000 euros. That's around $19,000+ even with the weak euro right now. A BMW X3 SUV starts at 41,500 euros. That is $52,000 now but, before the colossal euro drop, it would have been more like $62,000.
Last I checked, a Yaris costs $12k in the US and an X3 starts around $37,000.
So you're right, it's not double, but it's close enough for me. Especially as soon as the Euro gains its strength again, or the US dollar drops down.
That amount of money for a car is ludicrous to me. When I spent 10 hours a week in the car, I had a Toyota Matrix and it was perfect. When I plan to spend 10 hours a month in a car, it's beyond ludicrous. :)
EDIT: If you're looking at export deals, you might be looking at prices without the 20%+ VAT and additional luxury taxes.
Regarding the X3, I agree with Jeremy Clarkson that it's pointless: http://www.youtube.com/watch?v=u2LLMxlkT-Y It's not really good off road, and as a car it's worse than a normal car.
Personally I'd rather have a used luxury car than a new Yaris. Instead of a Yaris for 16k you could get a used BMW 3 series for about half. For instance this http://suchen.mobile.de/fahrzeuge/showDetails.html?lang=en&#... Even though it's older than a new Yaris it's more comfortable.
Even a BMW 7 series for about 10k (in Austria). http://suchen.mobile.de/fahrzeuge/details.html?lang=en&i... A 7 series uses more fuel, but if you are not driving much, fuel costs aren't a big part of total costs. Insurance and service costs would be higher though.
I suspect a BMW 1-series hatchback, which is much more comparable to the Yaris is also much closer in price. Perhaps that would provide a good compromise for you.
I suspect the utility your husband sees in the X3 has little to do with a car's supposed function of transporting people and property and much more with its value as a status symbol. Unfortunately for him, displays of wealth tend to hinder one's attempts to accumulate wealth.
I wasn't comparing the two cars' price points with each other, but comparing their price points with their US price points. Neither of those cars, actually, were ones either of us wanted. I just had seen ads for them recently.
And trust me, it's not a status symbol to my husband. Nobody is impressed by BMWs in Austria. They're common as dirt. Even all the cabs are Mercedes sedans, or the occasional Prius.
I refuse to get a BMW because we'll drive, like I said, maybe 10-15 hours a month. It costs the same to buy a car as to rent one each time, if we get a cheaper but reliable VW. So how nice the car is to drive doesn't really matter.
I don't know how it is in the EU, but in the US it makes very little sense to buy a new luxury car. Many people who like luxury cars also like owning the newest one. This means they lease and/or buy them and only keep them for 1-2 years. If you look in the used luxury car market you can find great deals. So great in fact that I'm amazed anyone buys one new, but that's what people like to spend their money on I guess.
Any time I've looked at leasing a car, it's a bit more expensive than what it would have cost me if I had purchased the car, used it for a couple of years, and then sold it.
With the lease, I'm paying a premium for not having to worry about being able to sell the car afterwards... it's certainly simpler.... but I'm not at all sure that it's cheaper in the end.
I'm from the US. Here's why I previously bought a new car (the high-end trim level Matrix, not luxury though):
I wanted a low mileage car because I had owned several high-mileage, but reliable, used cars, and calculated that I spent at least $200/mo over the year on routine repairs and maintenance.
A low-mileage (sub-30K) late year model, otherwise identical used car cost only $2,500 less than the new car.
The interest rate on a no-downpayment loan for the new car was 0% for 12 mos and 3.9% after. The interest rate on the no-downpayment loan on the used car was 13% from the start.
On the new car, I wouldn't have to pay for the first major service for about 18 months. On the used car, it was coming up in a matter of months. (The 30k). Not to mention it would soon need new tires, brake pads/rotor turning, and it was the half-life for the struts and major transmission services, too. (That's $1000 right there.)
You have no idea how the used car was treated in the breakin period and early oil changes, etc, and by only 30K miles, the damage won't have shown itself the way it will have by 80K miles. So when buying a low-mileage used car, sometimes you're actually making a greater gamble.
As you can see, all the logical points added up to buying the new car. It would actually cost less because of the financing and repair bills I would be less likely to pay during ownership.
Additionally, I was able to buy it right away, without having to hunt around, because the first few used ones I found with the trim level I wanted were safety cone yellow. Ugh.
Moral: BUYING USED ISN'T ALWAYS A SMARTER DEAL.
I love splurging on things, but not when the splurge comes back to haunt me month after month. ;)
EDIT: I agree with you about the luxury car, period, and also I wouldn't buy one used. That's why I'm trying to talk my husband out of a BMW, period. IMO the cost difference between a low-end BMW and a high-end VW isn't worth it.
Where are you banking that your used car loan is 13%?! The one I have now is 6% and bank rate lists current used car loans for 48 months at 6.38%. You need to find a new bank :) I really hope you're not using dealer financing...ugh.
I agree that buying a used car does take a bit of leg work. The last one I bought took me almost 3 months of looking. At the time I bought my last car the dealership wanted $33k for the base trim new. I bought the 1 year old version with 12k miles and higher trim level for 24k. The car was a 4-Runner, not exactly luxury, but a nice reliable car. I'm looking at Range Rovers now and the price difference between new and 1-3 years old is amazing.
I also get a mechanic to check out any car before I buy it. Luckily I have multiple mechanics in my family.
Oddly enough I have bought 1 new car in my life and it was the car that gave me the most problems. I had it in the shop every other week because of some computer/vapor exhaust issue. When I finally sold it, the engine light had been on for about 3 of the years I owned it.
No, it's not. If you're steadily earning a 10% return on your investment, year over year, you are doing amazingly well and should stop doing whatever day job you have now.
Statements like that generally assume that that's an investment adjusted against inflation or devaluation......looking at the interest rate alone on a currency is meaningless without the rest.
I find it difficult to believe that a Ferrari would consume 100x on all of fuel, fines, insurance and licensing costs.
But I would rather consider your choice of car beyond basic requirements as consumption, much like food. I'm sure one wouldn't consider fine cuisine a good investment either under these circumstances, but that doesn't justify living off ramen your whole life.
True, but I bet the servicing costs are terrifying. I once saw an ad for a used Ferrari that featured the words "engine-out service". That can't be cheap.
I know that, what I don't understand is the connection to the article, which is about cars. If you're very rich, joining a supercar club rather than buying a supercar probably makes great financial sense. If you're on an average income and want a 'normal' car, I doubt renting would work out cheaper than buying.
"Leasing can be beneficial if you want the newest model car, plan on getting a new car every two to three years, plan to drive fewer miles than the lease limit and plan to take very good care of the car... If you plan on driving the car for more than four years you are probably better off buying."
And for those with money to burn, here's a George Best quote:
"I spent a lot of money on booze, birds and fast cars. The rest I just squandered."
It depends on where you live. In the States or outside a fair-sized town, there's (so far) no alternative to owning your own car out of sheer necessity. In the city, especially here in Europe, it's a different story. The usual rule of thumb is the cheapest car costs you _at least_ 300 €/month (taxes, depreciation, not counting gas money)!
When my son was born this made it easy for me to decide to buy an Xtracycle (http://www.xtracycle.com) for my bike instead of a car. The Xtracycle covers 95% of my transportation needs and 300 € buys a lot of trips by taxi whenever that's necessary.
Still, the point of the article as I see it is that most people underestimate the cost of their car. That's a small problem. The big problem is that our societies underestimate the external cost of private car ownership. When you figure in loss of life and health through accidents, noise, and pollution, loss of usable space in inner cities through car-only streets and on-street parking, and general loss of quality of life - the private car becomes the most expensive mode of transportation ever invented.
>The usual rule of thumb is the cheapest car costs you _at least_ 300 €/month (taxes, depreciation, not counting gas money)!
These prices are hardly uniform across all of Europe. I live in a smallish city in the Netherlands and you can probably own a car for 60 - 100 €/month here.
They're not, that's true. Be sure to count all your car-related expenses, though. Even minor repairs quickly cost over 1.000 € and you'll be racking up a lot of those over the life of the typical car (if you have an older one). For a new car, depreciation runs even higher.
The one thing worse than car ownership? Taking a loan out to buy the car: http://www.itulip.com/forums/showthread.php?t=634&pagenu... . I'm shocked at how we allow people to take 5 year loans for cars that depreciate 30+% over that time.
I live in Texas where a car is required, and bought a "new-to-me" year old used subaru a year after graduating college, with a couple years of warranty left on it. It was mentally better than paying to maintain my previous car, which needed thousands of dollars in repairs. I do all the easy maintenance (oil/coolant/filter changes) myself, and hope to have the car overall for 10 years.
No, the worst thing is buying the car new. When you drive off the lot a car gets hit with immediate depreciation. The first year captures a lot more of that 30%. If you simply buy cars that are 1 year used you save a ton on the deprecation to the point where a 3-5 year loan at 6%ish never puts you underwater if you put a little money down.
Underwater? Viewed as an investment any car puts you underwater immediately - it's a net loss.
If you borrowed money and are also paying interest on the vehicle, that's just MORE cost... I don't get the rationalization.
Yes, a new-ish used car is a better value for money deal than a brand new car - but if you have to borrow money, you are probably better off convincing your ego to let you buy a cheaper model rather than borrowing money from the bank to purchase something.
The general definition I use for 'underwater' is if I were forced to sell my car today would I get enough money for it to pay off the bank? Nowhere did I mention viewing a car as an investment.
There is no rationalization. Of course it's more cost but there is also cost associated with reducing the amount of cash you have on hand. With that said, a car is the second biggest purchase most people make. It would be great if they all had the thousands of dollars to buy a reliable car with cash, but many don't.
Personally the last car I bought was used and I got a 6% 5 year loan. I typically make double payments on cars so the loan is almost over less than 3 years in. I did the math the other day and accounting for interest I've done much better by buying the car on credit and leaving the rest of the money in my various investments. Over 2-3 years 6% isn't much to begin with so it's pretty easy to beat with other various investments.
The author makes a good point, similar to those made in the excellent book "The Millionaires Next Door." My wife and I have make it a habit of saving for new big ticket items like cars to avoid debt payments and it makes a difference: both in saved interest payments and fewer purchases. I have worked just part time my whole life making a good but modest living while my brother owns two optometry offices, has lots of income, but not so great investments and buys a lot of "toys." It seems really strange to me that I am ending up with more assets than he has when I took it easy in my career and had fun.
I think the real title should be "why millionaires don't have great cars while they are becoming millionaires." When they are rich, they can and do by nice cars.
Found this very interesting, and especially so since I've been evaluating the financial efficacy of owning a car a lot as of late.
I own a Green 98 Subaru Forrester with about 150k on it that my father gave me on my college graduation. It's been a heap of problems, due mostly to its age, but I've come to realize that owning it is actually not a bad value (it is of course not an investment, but a consumable product). The problem is one of cash flow.
My Forrester recently had a wheel bearing go out on the rear passenger side, and it was going to cost several hundred in parts and labor to get it fixed. Since the car is so old and I'm tired of fixing it, I decided to just let it sit for a while and try out not having a car.
I started using a car sharing program (CityWheels), which requires you to pay for each time you use one of their cars. Although the cost of operating a rental car is higher and the use case is less flexible, it's not a terrible deal.
What it has made me realize though, is that for the cost, owning a car isn't a bad deal if (like me) you live outside of a huge city, there isn't a lot of public transit, and you want to get around. As I mentioned above, it's cash flow that gets in the way of realizing the value.
When you own a car, you pay for gas, insurance, incidentals and repairs, and it's the last category that really gets you. Figuring up the cost of ownership, I pay about $.27/mi to drive the Subaru compared to ~$.40 for the City Wheels car, but the CityWheels car feels like a better deal because I pay everything up front. If I need to drive 30 miles, I have to pay the $12 now. If I drive my car 30 miles, I sometimes don't have to pay at all (if I don't need to put gas in it). But then, about 2-3 times a year, I have to pay $400 or $600 all at once, and it makes me resent the thing.
I've heard it said that more millionaires own Toyota Camrys than any other model, and it makes sense: as some of the commenters above mentioned, paying for reliability and quality is worthwhile, but paying for an Aston Martin should not be viewed as an investment, but as a consumable.
It's hard to put a value on the freedom to, at a moment's notice, get up and go wherever you please, without having to rely on anyone or anything. It's what continues to attract people to individual transport.
I dont understand the comparison of cars with investment.
Car is a utility which makes life better, hence expenditure. You invest to make money to spend on utilities which make your life better. :)
I have a fairly nice car. Have owned it for 7 years now. While there have been minor problems like scrapes on the rims, trim peeling, etc., the engine, transmission and all the real guts of the car have performed flawlessly the entire time. The car has been paid off for 4 years.
I feel I could drive this car for another 5 years at least. That would be at least 12 years without purchasing a car and 8 years without making a car payment.
My car was expensive, but I feel it was engineered so well that it can last. Quality cars last a long time.
This is definitely my approach as well. I have a BMW and take exceptionally good care of it - and feel that this is the best way to deal with the fact that cars depreciate. Get a really well built car and use it for a long time. Due to the "lemon" problem it is not possible to sell a car second-hand at its proper value if you have maintained it well. But this isn't actually a problem if you don't mind driving a slightly older car. My BMW has 60K on it and I expect to drive it for at least 6 more years.
This is complete bull. Owning anything that depreciates in value is not a smart investment idea.
Most wealthy people don't go around in a Prius. Even if they own one, they will always get a "safer" car for their family (at least) such as a Volvo, Benz or Range Rover.
Sometimes it's a good idea to own a "desirable" item rather than go with the masses with a commodity. When it's time to sell your old convertible, you'll find a buyer. The old sedan is basically scrap metal.
One thing this argument ignores is social signals.
If you're in sales, as one example, you may want an expensive car. This lets clients subtly know that you are doing very well, and can serve as a form of trust for some people.
If you have a small penis and no significant other...
Most of the wealthier people I know have reasonably nice cars. Maybe not Zonda/Lambo nice, but Audi, BMW, MB, Infiniti, Lexus and Cadillac are the norm.
a) Nobody has ever confused a car with an investment.
b) "Assuming a modest 10% return". 10% after taxes and inflation is not a modest return by any stretch of the imagination and I'd be thrilled if I could achieve that consistently. If he hasn't factored inflation and taxes in then all his sums are wrong.
c) "Here, look, my $4000 student car costs more than $4000 in running costs and depreciation over three years" is not a useful example in the context of luxury vehicles. With luxury vehicles your running costs will be a much smaller fraction of the original outlay. (Although I admit depreciation will still be a big factor. Probably best to get one second hand that's a couple of years old.)
d) It's just a generalization of the general truism that millionaires have often become millionaires because they're frugal.
e) If you've got, say, five million dollars, you can cheerfully drop a hundred grand on a car and it's only a small fraction of your wealth. Not a sensible idea, but not fatal either.
f) In the second paragraph he essentially says "Millionaires often drive cheap cars except when the drive luxury cars". This is not a particularly impressive insight.