Why you should save instead of spend!

[bbuzzard]

As if anyone here needs a lesson about why you should save and invest instead of spend and borrow:

I bought a new $19K car four weeks ago with cash (on the same week I pay $11k to Uncle Sam in taxes). The car gets parked in the garage next the Audis, BMWs and Lexi driven by my peers (and purchased with loans). Of course, I received a few good natured jibes about purchasing such a "cheap" car.

Three weeks later I note that my consolidated account balance is higher than before I bought the car and paid the taxes. I think I will stick to saving and investing and driving "cheap" cars. I love having money work for me rather than working for money.

(On review, I realize this post could be read as obnoxious bragging, but it is really meant in the vein it is written. IMHO, LBYM is the key to happiness and freedom.)

 

[CybrMike]

OR you could have leased a BMW, been out only $500 cash for first months payment, then you would have an extra $19K in your account + whatever three weeks growth would have been. BMW's lease programs are running at about 2.4% interest right now. Should be able to beat that in a MM account.

 

[Bimmerbill]

Ahh, I miss my BMW. It was one of those things I always wanted to buy while I was in college. It was a 1998 528I. I bought it in 2000 as a lease turnin with 24K miles on it.

It turned 60K miles and I got scared of maintenance issues and $200 oil changes.

sniff...

 

[azanon]

From a dollars and cents standpoint, i'd be hard-pressed to conceive of a more financially poor decision than to lease a BMW.  Imagine making a monthy payment that exceeds most peoples car loans who are actually buying their cars, yet none of your payment is going to equity in the car.   You've just imagined a BMW lease.   

I just paid cash for a honda Fit.  Sure i dont have $16,700 making money for me anymore, but in my asset list in Quicken, i entered in $15,700 labeled "Honda Fit" in the property section the day i bought it.    Sure this asset will depreciate, but assuming my math is correct, i think a $15,700 asset is more than no asset (for example, a leased car).     (I penalized myself 1K just for driving off the lot.  Of course it will drop fast the first 2 years of ownership too, as we all know).

 

[Andre1969]

Aren't some BMW leases actually pretty cheap, as long as you keep the miles down?

 

[heyyou]

For retirement, you will need 15 to 25 multiples of your annual expenses.  LBYM puts you way ahead of your lavish lifestyle co-workers who will need to work many more years than you.  Maybe some will luckily sell the Big House for ten multiples, but planning usually beats luck.
Bought a used 80 Ford in 83, drove it to work for 25 years.  Chose it because the straight six engine was known to be durable, and it was. Smaller engine was easy on the clutch.  Stick shift transmission never needed work.  No electric windows, so no repairs needs there.  Lived 6 miles from the job in the city, then moved to one mile from the next job in the small town.  The compounded savings cut years off my work career, but my vehicle wasn't shiny or stylish.
Joe

 

[Nords]

I've spent my whole life trying to figure out how a depreciating asset with zero cash flow can be counted on to raise my net worth. 

Maybe the next issue of "Car & Driver" will explain it.

 

[perinova]

I'll keep building wealth by saving.
I am glad that:
>> There are a lot savers out there to put money in the market (hopefully still will be in the next 40 years).
>> There are a lot of spenders out there to buy the products of the companies I am invested in.
Both needed to prop the market.

 

[LOL!]

One of those Lexi is mine and it cost me less than your new car (and less than most of the other cars in the parking lot). I bought mine used and I also paid cash.

I enjoy the quietness, the smooth ride, the impeccable service, the safety features of my car. I know you will enjoy the features of your car as well. Have fun with the new car smell!

 

[Andre1969]

What was that line from the movie "Christine"? Something about how there's nothing better than the smell of a brand-new car? Better than something, but I can't remember what it was.

 

[perinova]

Looks like differnt philosophies at work there.
Look at the whole cost of your car over 10yr period. Try to minimize it. Introduce a good dose of personal choice, constraints and other coefficients. And you get many different answers.

Repairs have a cost (financial, hassle). Luxury has a cost. Latest model has a cost. Size...

 

[CybrMike]

I disagree. Leasing is simply [depreciation] - [interest rate] = monthly payment.

Either way you have to pay depreciation. BMW's have about a 63% residual value after 3 years, which is one of the higher residuals in the industry.

If your going to buy a new BMW, the interest rate is much cheaper with a lease. Not only that, but you only pay the depreciation, which you'd pay even if you paid cash. Plus, if you own a business, you can write the entire payment off, saving a bundle on taxes.

Obviously not everyone can afford a $500 per month payment, however, my point still stands that if you'd have left that $19k in the brokerage account and let it grow, borrowed the $19K at a low interest rate, you'd be using leverage to your advantage.

I know I know, some people get peace of mind from paying off car, house, etc. I was really just teasing anyways. Congrats on the new car.

From a dollars and cents standpoint, i'd be hard-pressed to conceive of a more financially poor decision than to lease a BMW.  Imagine making a monthy payment that exceeds most peoples car loans who are actually buying their cars, yet none of your payment is going to equity in the car.   You've just imagined a BMW lease.   

I just paid cash for a honda Fit.  Sure i dont have $16,700 making money for me anymore, but in my asset list in Quicken, i entered in $15,700 labeled "Honda Fit" in the property section the day i bought it.    Sure this asset will depreciate, but assuming my math is correct, i think a $15,700 asset is more than no asset (for example, a leased car).     (I penalized myself 1K just for driving off the lot.  Of course it will drop fast the first 2 years of ownership too, as we all know).

 

[cute fuzzy bunny]

No car is a good "investment", buying or leasing.

Best you can do is cost avoidance.

I've never seen a lease, including gap insurance and the fun and games you get to play at the end if you're over mileage or the car has "excessive wear and tear" that beats buying a good quality, low cost car and keeping it 7-8 years.

Of course, if you have to change cars every 3 years, buying is a losing proposition. But you're already sacrificing cost for some material item that you've concluded improves your quality of life. That doesnt make it cheap or a good deal...

Coming from a two person household with three cars, contemplating a fourth, that sounds stupid. My expeditions about to turn 7, is experiencing its usual run of continuous little "problems". Lately its got an air conditioning leak that cant be found, and metal bits in the transmission pan...which of course cant be in any way related to the six attempts made to repair the transfer case a couple of years ago.

I can get a brand new honda pilot, $27.8k sticker, for $22.6k plus tax/license and the rest of the hoo hah. Thats turning into a tough deal to ignore.

 

[73ss454]

Mike,

Don't get caught in the manufactures trap of leasing.  Trying to justify a ripoff (leasing) is not a sound idea.

Depreciation is the killer here, and paying 40% of it makes no sence every 2 or 3 years.  The write offs are the same if you buy or lease.

 

[SolidA]

Love my PAID FOR A LONG TIME AGO IN CASH 1996 Honda Accord (Purchased in 2000 with more than 100,000 miles on it)with 200,000+ miles on it now. It'sa CHAMP and runs like a top with good gas mileage. My son had a BMW that drove him to the poor house with maintenance. He told me next time he'll listen to his mom. There has to be a first time for everything!!!!!

 

[Cool Dood]

I'm kind of curious: why do cars depreciate so much in the first few years? If they're still essentially as useful after three years as they are after one, shouldn't the price be fairly similar?

I'm sure I'm missing some fairly obvious explanation... but then, that's why I'm asking

 

[cj]

Love my PAID FOR A LONG TIME AGO IN CASH 1996 Honda Accord (Purchased in 2000 with more than 100,000 miles on it)with 200,000+ miles on it now.  It'sa CHAMP and runs like a top with good gas mileage.  My son had a BMW that drove him to the poor house with maintenance.  He told me next time he'll listen to his mom.  There has to be a first time for everything!!!!! 

Yeah baby!  Count me in with a 1994 Accord, 135,000 miles.  Bought it brand new.  It probably has another 12 years, 135K miles in it.  Gets 30 mpg in my normal driving.  On long trips it gets 36-37 mpg.  Paid cash for it in 1994.  What's a car payment??

I'm with you, SolidA!

CJ

 

[nun]

I drive a Mazda 626 with 180k miles on it that bought for $10k in 1991. However, I'll soon need a new
car as I have a 30 mile commute to work and I need something reliable. The thing is I'll only need the car for a max of 3 years. So should I lease or spend $5 to $10k on a used car?

 

[laurence]

If you are in a lease (I'll never do it again) and you are thinking of buying the vehicle, call the dealer a few months before and say, "well, I'm not sure if I want to buy this or move on to a different car (from another manufacturer), what can you do for me?".  They gave me a debit mastercard with $2000 on it and knocked my last two lease payments off for buying the car.  Alas, it turned out ot be a lemon....

 

[Andre1969]

In the old days cars used to depreciate so quickly because they restyled them every year to make them look new, and after 3-4 years usually came out with a whole new design that made the previous one look downright outdated.

They don't change the styles so much anymore, and IMO, the new cars don't necessarily make the older ones look outdated. For example, if you compare a 2006 Accord to a 1996, I don't think it makes the '96 look all that old. But compare, say, a 1957 Plymouth to a 1947, and there's light-years of difference! It's like comparing the Jetsons to the Flinstones. But nowadays the automakers are producing more cars than the buying public is really demanding. So a lot of them get dumped into rental fleets, which in turn cut them loose and flood the used car market after a couple years. Plus, all these incentives and rebates that are driving down the prices of new cars are also hurting used cars...especially the domestics. I think most leases usually end after 2-3 years, with the occasional 4-year as well, so that puts more used cars out there in an already flooded market.

The domestics are the ones that are hurting the worst, but they have put enough pressure on the likes of Honda, Toyota, and Nissan to make those companies start offering rebates and holding their prices down, as well. It's not as severe as with the domestics, but the days of paying MSRP or even more for a generic Accord or Camry are history.

Also, while a car can still have plenty of life after 3-4 years, statistically speaking it's going to be more likely to have problems. So I think alot of people just like to trade after a few years before the problems start cropping up.

 

[bbuzzard]

One of those Lexi is mine and it cost me less than your new car (and less than most of the other cars in the parking lot). I bought mine used and I also paid cash.

I enjoy the quietness, the smooth ride, the impeccable service, the safety features of my car. I know you will enjoy the features of your car as well. Have fun with the new car smell!

Nothing wrong at all with a well priced, quality, used vehicle (or is that pre-owned ).

 

[brewer12345]

Yeah baby!  Count me in with a 1994 Accord, 135,000 miles.  Bought it brand new.  It probably has another 12 years, 135K miles in it.  Gets 30 mpg in my normal driving.  On long trips it gets 36-37 mpg.  Paid cash for it in 1994.  What's a car payment??

I'm with you, SolidA!

CJ

Yeah, I own the Subie free and clear and it is a good car, but I am pounding the crap out of it every day on my lengthy commute.  No complaints thus far in 60k miles over 3 years, but I am doing 30k a year now.

Incidentally, I just had the 60k tune-up done, and it was amazing how much of a difference it made.  Runs smoother, gets better gas mileage, slightly better acceleration, etc.

 

[laurence]

Brewer, your post reminds me I wanted to start a thread on that subject, hold on...

 

[free4now]

Cars used to depreciate a lot in the first 3-4 years because after that time they really started falling apart.  These days though good cars are much more reliable and don't really start falling apart until 10-15 years.

For japanese cars, I no longer see much value in buying a 2-3 year old used car over buying new.  The price of the used car is so close to the new car that the new car often makes sense because you eliminate the possibility of getting a poorly treated vehicle.

I think saving money these days comes down to buying less luxury or buying a used car 4-5 years old.

 

[d]

I no longer see much value in buying a 2-3 year old used car over buying new.  The price of the used car is so close to the new car that the new car often makes sense because you eliminate the possibility of getting a poorly treated vehicle

I agree ... seems that everyone is asking for absolutely top dollar for used car ... so that new seems the better deal