| Author |
Message |
    
Tom Reingold
Supporter
Username: Noglider
Post Number: 11806
Registered: 1-2003
| | Posted on Friday, January 6, 2006 - 8:20 am: |     |
One new trend of bizarre personal money management is spending an increasingly large percentage of income on buying cars. I just saw an article on a new SUV called a Toyota FJ. Toyota are aiming the car at young men earning a median income of $55,000. The vehicle costs about $25,000. That's more than half the buyer's annual income! When I bought my first car, I was 26, earning about $30,000, I bought a used car for $4,000.
This trend is not unique to young people. |
Smarty Jones
Citizen
Username: Birdstone
Post Number: 146
Registered: 10-2005
| | Posted on Friday, January 6, 2006 - 8:42 am: | |
Tom, I'll add to this in that most people don't liken their Auto purchase to their annual income, and they look at it like an annual payment, as they would a home. This is unfortunate, because the home provides you with a tax write-off, and the asset appreciates almost 100% of the time over any extended period, so over-buying in home-land isn't a disaster.
In car land, people try and approach it the same way which is wrong because the asset DEPRECIATES 100% of the time, and there's no benefit on your taxes to have a monthly car payment. The majority of the US should be buying used cars, at levels determined by their ability to pay in cash.
(Another way of thinking about it is that if you viewed your purchase as an outright purchase, you would be SO less inclined to trade it in 3 years later, knowing that it took you 2 years of 100% of your after-tax salary to pay for it.) |
Bob K
Supporter
Username: Bobk
Post Number: 10192
Registered: 5-2001
| | Posted on Friday, January 6, 2006 - 8:54 am: | |
Most people aren't rationale about cars.
I get a car allowance and we use it to lease our main vehicle. The cost is like two to three percent of our gross income. About every ten years we need a new second car and usually buy an el cheapo econobox for cash. Works for us, but we ain't driving Mercedes or Bimmers.
Technically, it would probably make more economic sense to buy instead of lease, but since this isn't a major expense and we like having a new ride every three years we ignore the economics.
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kevin
Supporter
Username: Kevin
Post Number: 573
Registered: 2-2002
| | Posted on Friday, January 6, 2006 - 9:38 am: | |
I bought my first car from a listing in the Want Ad Press for $900. I drove it for 4 years and sold it for $3500. Being that it only got 9-10 miles to the gallon, I spent quite a bit of money on the gas to drive it - not to mention the $1900/yr "under 25" insurance that I had to pay for those 4 years as well.
Autos don't always depreciate.
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LilLB
Citizen
Username: Lillb
Post Number: 1160
Registered: 10-2002
| | Posted on Friday, January 6, 2006 - 9:50 am: | |
I don't think this is anything new; My first car I bought 15 years ago was about 1/2 my salary at the time and I bet there are plenty of people buying 30k cars who only make 60k.
But, how is this any different than buying a house that's way above what you make? We buy houses that most of us couldn't afford to pay for outright, but we assess what the payments would be like and determine what we can afford based on that.
It all comes down to whether we can make the payments on something or not... |
Smarty Jones
Citizen
Username: Birdstone
Post Number: 148
Registered: 10-2005
| | Posted on Friday, January 6, 2006 - 10:00 am: | |
LiLB- This is VASTLY different than buying a house you can't afford, see my post above.
Bobk- General rule of thumb: Buy things that appreciate. Lease things that Depreciation. I have no problem with people Leasing cars.
kevin- Don't you think your situation is a touch extreme? 40MM new cars will be sold in US this year. My bet is that 39.9 MM of them depreciate 20% by year end. |
Walker
Citizen
Username: Fester
Post Number: 243
Registered: 4-2003
| | Posted on Friday, January 6, 2006 - 10:09 am: | |
A car loses 25% of its value the second you drive it off the lot. |
Ligeti
Citizen
Username: Ligeti
Post Number: 538
Registered: 7-2002
| | Posted on Friday, January 6, 2006 - 10:13 am: | |
Financial experts will tell you that the worst possible investment is a new car, hands down.
In an instant, the thing depreciates by 1/3 as you drive it off the lot.
Reject new cars. |
Smarty Jones
Citizen
Username: Birdstone
Post Number: 150
Registered: 10-2005
| | Posted on Friday, January 6, 2006 - 10:18 am: | |
Think about that one for a second....would you have bought your lovely Maplewood house for $400,000 if you new for a fact it would be worth $320,000 right after your signed the documents? Further, the value in year two would be $260,000, year 3 $200,000, year 4 $100,000 and worthless by year 5?
With cars at almost 10% the value of a house (and if you have two cars, this might equal 20% of the value of your house) this becomes an eye-opening excercise. |
LilLB
Citizen
Username: Lillb
Post Number: 1161
Registered: 10-2002
| | Posted on Friday, January 6, 2006 - 10:47 am: | |
I suppose I don't look at a car as an investment, so I don't have the same expectation as I do a house. A car is something that we purchase, part necessity, part want - but that describes a good portion of the things we spend money on.
I guess I just have different expectations than you do about this one. Comparing a car purchase to a home purchase seems like comparing apples and oranges. They are both significant purchases because the amount of money that we spend in a lifetime on them, but I don't see how we can have the same expectations on appreciation/depreciation of a car purchase and a home purchase. I'm not making improvements to my car over the years like I do my home, other than necessary repairs. All I do is use the car, which wears it's components down over the years.
A car is just a mode of transportation -- of course you want to choose one that fits your needs/style, but it's a means to getting where I need to go. It's like paying for a train ticket - it's a necessary mode of transportation for me, but I don't get a return on my investment of a train ticket other than the use of the train. OK -- maybe a car is a little more than that, as I do expect it to have some value when I sell it or trade it in for a new one when the time comes, but that's how I view a car -- a mode of transportation, not an investment that's going to appreciate in value.
That said - it does boggle the mind how quickly and drastically a car's value depreciates the second you drive it off the lot. I suppose it is what it is, but it is a little crazy...
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Tom Reingold
Supporter
Username: Noglider
Post Number: 11810
Registered: 1-2003
| | Posted on Friday, January 6, 2006 - 10:59 am: | |
That depreciation is good for people like me who only buy used cars. If you get rid of a car when it has little or no value, it means you've gotten the most out of it.
People who decide how much to spend based on what they can afford are not thinking about opportunity costs. Think of the Hawaiian vacations they could be taking. But much more significant is the compound interest they could be earning in retirement and college savings accounts.
I have often bought a little "more car" than I needed. As one financial advisor said, if you're buying a luxury car, pay cash. If you can't, then it's a luxury you can't afford.
Also, lots of people end up being "upside down" in their cars, which is owing more than it's worth. Ouch!
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Smarty Jones
Citizen
Username: Birdstone
Post Number: 154
Registered: 10-2005
| | Posted on Friday, January 6, 2006 - 11:01 am: | |
The only reason I compare the cost of cars to house is because of the absolute high dollar amount. On a "net" basis (ie the total cost of car purchases less car sales) throughout an American's life, Auto expense eclipses the cost of College, home, and Appliances. Unfortunatley, the Auto companies exploit the avg american's blaise attitude to this single most expensive purchase. |
kevin
Supporter
Username: Kevin
Post Number: 576
Registered: 2-2002
| | Posted on Friday, January 6, 2006 - 11:54 am: | |
Smarty, Tom's original post references both a new car and a used car. I wanted to point out that if you are smart with what you purchase, you can sometimes sell a vehicle for more than you paid for it - even after driving it for a few years.
Also, I agree that most new cars are bad investments, your first post in the thread said, "...the asset DEPRECIATES 100% of the time". Not a true statement. Some investors purchase and flip for profit a short time later the high end or exotic cars. It's like what has been going on in new housing and condo developments.
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Arsenal
Citizen
Username: Arsenal
Post Number: 49
Registered: 8-2004
| | Posted on Friday, January 6, 2006 - 4:46 pm: | |
What amazes me is the hidden used car effect. I am sure everyone remembers all the deals the car companies have provided over the past couple of years to move their merchandise? Well, the used car market should be flooded, all those 2 and 3 year leases expiring,and the prices should be the cheapest ever seen. However, all these cars are naturally shipped abroad to other parts of the world in order, I guess, to keep the domestic 2nd hand market at reasonable prices. I'm not talking about 1990's vintage, but more recent ones such as 02's and 03's. Just food for thought. |
sportsnut
Citizen
Username: Sportsnut
Post Number: 2250
Registered: 10-2001
| | Posted on Friday, January 6, 2006 - 5:29 pm: | |
Tom I know you've mentioned what the financial advisor told you once before on these boards and I meant to comment then but I forgot. I don't necessarily consider it good advice. One of the appeals of leasing is the low monthly payment. In some cases it makes sense to lease a car if you are disciplined enough to take the money that you would have used as a down payment and invest it. In theory if you can make more money investing the money you should invest it.
Same theory applies in buying a luxury car. Let's say you're wealthy and you can easily afford a $70K car. Purchasing that car with cash is not necessarily a good idea. Assuming a 5% interest rate on a loan. I would put as little down as possible and invest the rest on the theory (or hope)that you could earn more than the interest on the loan plus any depreciation. Of course it makes sense that the longer you own the car the lower the effect of the depreciation. I would think that is much more sound advice.
Of course as you stated the best advice is to buy a used car and finance it.
I agree with LilLB that cars are a necessity not an investment and while you always try to minimize the cost of these necessities there is nothing wrong with indulging yourself once in a while. The people I feel sorry for are the one's who are not financially saavy and fall for the low monthly payment scam (rather than the cost of the vehicle). |
Tom Reingold
Supporter
Username: Noglider
Post Number: 11819
Registered: 1-2003
| | Posted on Friday, January 6, 2006 - 5:37 pm: | |
I agree with all that, sportsnut. Your advice is for the smartest people, and you provided the proper warning to that effect.
People usually do things to lower their payments not invest the remainder but to buy fancier TV sets. That's the idiocy I'm speaking of, and I'm sure you're familiar with that.
Actually, buying a car flat out with cash can be a good plan, especially if don't normally invest much in securities. That is, if your cash is in the bank, it's not earning much interest, so you're better off putting it into the car than paying interest on the car. This what my wife usually does. Her last three cars have been used Honda Civic hatchbacks which are pretty cheap in the used market.
I bought a used car this past March, and she convinced me to make a bigger downpayment than I would have made, so we mixed our two approaches.
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The Libertarian
Citizen
Username: Local_1_crew
Post Number: 1211
Registered: 3-2004
| | Posted on Friday, January 6, 2006 - 5:59 pm: | |
i bought a brand new jeep wrangler this year that i really shouldnt have. but i love it, its my baby, and NONE OF YOU WILL RUIN IT FOR ME!!! |
Innisowen
Citizen
Username: Innisowen
Post Number: 1250
Registered: 3-2004
| | Posted on Friday, January 6, 2006 - 6:05 pm: | |
Don't have to ruin a Jeep Wrangler for anybody.
The first 10,000 miles anyone drives, the Wrangler will take care of its own ruin.
Happy Repairshop stopping. |
The Libertarian
Citizen
Username: Local_1_crew
Post Number: 1212
Registered: 3-2004
| | Posted on Friday, January 6, 2006 - 6:20 pm: | |
Bah! i ignore your bitterness and spoil sport behavior. |
Case
Citizen
Username: Case
Post Number: 966
Registered: 2-2005
| | Posted on Friday, January 6, 2006 - 7:01 pm: | |
Before buying in Maplewood I was renting out in Morris county. Plenty of BMWs and even a few Porches in the parking lot of this (all rental) complex.
I guess its whatever you want to spend your money on. |
Innisowen
Citizen
Username: Innisowen
Post Number: 1252
Registered: 3-2004
| | Posted on Friday, January 6, 2006 - 7:37 pm: | |
Ignore what you want, Libertarian. But for god's sake, go buy a real vehicle. |
The Libertarian
Citizen
Username: Local_1_crew
Post Number: 1216
Registered: 3-2004
| | Posted on Friday, January 6, 2006 - 8:36 pm: | |
you can bad mouth me, my wife, my home, or even the good ol' US of A, but do not bad mouth MY JEEP!! |
Innisowen
Citizen
Username: Innisowen
Post Number: 1258
Registered: 3-2004
| | Posted on Friday, January 6, 2006 - 8:39 pm: | |
I don't have to badmouth it. I just wouldn't want to be where I need a dependable 4WD and only have a Jeep at my disposal. On the other hand, disposal and Jeep are two words that do pair very well. |
The Libertarian
Citizen
Username: Local_1_crew
Post Number: 1218
Registered: 3-2004
| | Posted on Friday, January 6, 2006 - 8:48 pm: | |
bah! every report states how well built and maitenance free they are.
MY JEEP RULEZ! |
Innisowen
Citizen
Username: Innisowen
Post Number: 1259
Registered: 3-2004
| | Posted on Friday, January 6, 2006 - 9:04 pm: | |
They may well be maitenance free (whatever that is) but hardly maintenance free.
Let it rule, if you will. Jes' don't let it ride. |
The Libertarian
Citizen
Username: Local_1_crew
Post Number: 1222
Registered: 3-2004
| | Posted on Friday, January 6, 2006 - 9:10 pm: | |
you are talking out your hat. you can never ruin the joy that is my jeep. NEVER! |
Innisowen
Citizen
Username: Innisowen
Post Number: 1260
Registered: 3-2004
| | Posted on Friday, January 6, 2006 - 9:18 pm: | |
I would never dream of ruining your joy. I'll let the Wrangler do that by itself.
Verbum sapientibus (without undue emphasis on the first syllable of the second word). |
The Libertarian
Citizen
Username: Local_1_crew
Post Number: 1225
Registered: 3-2004
| | Posted on Friday, January 6, 2006 - 9:27 pm: | |
la la la cant hear you la la la |
Innisowen
Citizen
Username: Innisowen
Post Number: 1261
Registered: 3-2004
| | Posted on Friday, January 6, 2006 - 9:37 pm: | |
Can't hear you either, but have enjoyed the mutual attempts at non-interaction.
regards. |
Lydia
Supporter
Username: Lydial
Post Number: 1568
Registered: 5-2001
| | Posted on Friday, January 6, 2006 - 9:43 pm: | |
It's nothing new that people who can't afford it buy new things.
When I was a kid my mother noted that rich people drove old cars, and poor people had the new cars.
When you don't have to wear your money on your sleeve you are confident enough to drive any old thing.
A million years ago I was a "guest" on the Kennedy "Compound" - everything was old-fashioned, the cars were old, the kitchens were old, the people that led us around the compound were old...it was pretty neat.
There was a privite golf course -- I was driven around in a station wagon with hay in the back for the dogs.
I wish I could remember the name of my guide, he was in Kennedy's cabinet, but I was young and he was painting his porch.
Back to the topic...new cars are not necessarily an entres to old money or power.
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algebra2
Supporter
Username: Algebra2
Post Number: 3931
Registered: 5-2001
| | Posted on Friday, January 6, 2006 - 10:03 pm: | |
GOOD GOD LYDIA - MUST YOU ALWAYS NAME DROP?
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The Soulful Mr T
Citizen
Username: Howardt
Post Number: 1236
Registered: 11-2004
| | Posted on Saturday, January 7, 2006 - 2:36 pm: | |
My first car was a 1967 Pontiac Bonneville wagon. $500. Lasted almost two years. I'd say I got my money's worth. |
Peter
Citizen
Username: Peter
Post Number: 160
Registered: 7-2004
| | Posted on Saturday, January 7, 2006 - 3:25 pm: | |
Many of you have this all wrong. You should spend as much as you can on your car, and as little as possible on your home. Remember, you can sleep in your car, but you can't drive a house. |
Innisowen
Citizen
Username: Innisowen
Post Number: 1275
Registered: 3-2004
| | Posted on Saturday, January 7, 2006 - 3:29 pm: | |
And given the state of indebtedness of many Americans these days, sleeping in their cars may not be so much a future option as a probable necessity. |
fiche
Citizen
Username: Fiche
Post Number: 64
Registered: 3-2002
| | Posted on Saturday, January 7, 2006 - 3:58 pm: | |
I hit a patch of ice on the "S"es a few weeks ago. I bounced off the divider and went back across the two lanes and wound up in the woods. Aside from a few sore muscles, I am fine. I had a brand new Saturn and think that the safety features in the car saved me from significant injury. I would never buy a used car. Safety features get better and better every year. If I had my druthers, I would get a new car every year.
BTW, I had onstar and was able to summon help immediately.
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Smarty Jones
Citizen
Username: Birdstone
Post Number: 156
Registered: 10-2005
| | Posted on Saturday, January 7, 2006 - 9:47 pm: | |
Most safety features are marketing BS....Avg american lists Volvo and some other cars as safest cars on the road. But look at the US insurance actuarial list (ie bean counters looking at fatalities/injuries per vehicle and adjusting for driver age/type) and the top cars are VW Passat, Pathfinders, all Mini Vans, and a couple $70k+ Mercedes (methinks that's just because people drive them pricey cars niiiice and slow). More people die in Chevy Malibus (by a HUGE margin) than in any other car. I think it was like 250 fatalities per/100k accidents in a Malibu vs. 5-10 fatalitie per/100k in the Passat.
All that safety crap people buy into about Volvos does nothing to actually keep you safer...just makes you feel special writing your monthly check payment.
As to the financing of cars, I disagree entirely. It's never wise to finance a car, as your ROR you would need on your investment portfolio is extremely hard to achieve to offset the loss of your interest on the financing. When people run the numbers, they compound the expected returns on their investment portfolio, and they don't typically compound the Negative returns on their financing, which makes a big difference. Further, the time horizon (3-5 years on typical loan) is no where near long enough to achieve historical expected stock market returns. Unless your Money Market/Short term Rates are greater than your financing costs (which it never will be) this isn't a good plan.
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Scully
Citizen
Username: Scully
Post Number: 108
Registered: 8-2005
| | Posted on Sunday, January 8, 2006 - 2:42 am: | |
I'm no financial wiz but here's my take on car buying...
Save up enough money (or take a lump sum from savings - this WILL hurt) to buy a car (as modest a model as your self image can live with) cash. Then 'pay' what would have been car payments into a mutal fund (I'm no big risk taker, I favor index) and keep the car as long as you can.
The next car can be bought cash or close to it. And it's nice to think that instead of paying out YOU are getting the interest. Keep repeating and no more car loans.
Of course this probably wouldn't work if your tastes run to the expensive models. I'm in year five of what I hope will be a ten year relationship with a Saturn sedan. I'm looking forward to possibly getting a hybrid or bio-diesel next time if anyone has any opinions on THAT (another thread?) |
jab
Citizen
Username: Jab
Post Number: 507
Registered: 3-2003
| | Posted on Sunday, January 8, 2006 - 10:18 am: | |
At the firm where I worked until a few months ago there were a number of first- and second- year attorneys who drove BMWs, Volvos, and SUVs and lived with their parents. I still don't get that. And people really paid attention to what other people drove. I'm so glad that I work somewhere else now where that does not happen (not that I cared when people used to scoff at my Toyota). |
Smarty Jones
Citizen
Username: Birdstone
Post Number: 157
Registered: 10-2005
| | Posted on Sunday, January 8, 2006 - 11:26 am: | |
Scully, methinks you are a lot smarter then you let on to be....that's right on. I think I'll do that the next time around!
Needless to say, for anyone who can truly afford it, none of my blathering applies...
Jab, if those people really thought about the purchase they made, and how it represents a 5% downpayment on a $1,000,000 house (which is totally fine these days), they'd think differently about their choices.
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sportsnut
Citizen
Username: Sportsnut
Post Number: 2251
Registered: 10-2001
| | Posted on Sunday, January 8, 2006 - 5:42 pm: | |
What is compounding negative returns? Are you assuming that people won't be paying down principal? Otherwise I don't understand that comment.
As to your comments about safety I think you can look at the number of fatalities in a number of different ways, not the least of which is who is going to be driving those cars. I think its a stretch to assume that a car is safer just because fewer people die in them without knowing the types of crashes that are involved. |
Lydia
Supporter
Username: Lydial
Post Number: 1572
Registered: 5-2001
| | Posted on Sunday, January 8, 2006 - 6:04 pm: | |
I'm with Scully -
Buy a car with cash - if you can't afford to pay in cash for your dream car then keep going down the line until you can shell out the dough without a loan.
My car is paid off 100%, it's a bucket of bolts, and it occasionally needs a costly repair. On the upside, it's safe, highway-worthy and chicks dig it, no one is going to steal it even if I leave the keys in the ignition and the driver door open for 3 hours in a parking garage.
Yes, I really did that
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Smarty Jones
Citizen
Username: Birdstone
Post Number: 159
Registered: 10-2005
| | Posted on Sunday, January 8, 2006 - 8:09 pm: | |
My point is that people do the equation all wrong. I can put this in simpler terms. If financing a car and re-investing the money made any sense, than it would hold true that it also makes sense to take out a Consumer Loan (easy to find identical rates as auto loans) and invest that money. That is exactly what you are doing when you finance a car, and invest the cash that you otherwise would have used to pay for the car.
As for the way to look at the data, I'm sure you are right about many ways to look/tease out the info. What I posted was just one way (acuarial data) of doing that. |
sportsnut
Citizen
Username: Sportsnut
Post Number: 2252
Registered: 10-2001
| | Posted on Monday, January 9, 2006 - 7:33 am: | |
Smarty not to beat a dead horse but there is a significant difference between borrowing money to purchase an asset such as a car vs. taking out money to purchase stock etc. At the end of the car financing you own it, its yours to do what you want. You can choose to keep it or sell it. In theory the car will always have some value, even after ten years you can still sell the car for something. Additionally, the car has helped you during this time to earn income by transporting you back and forth to your job. The car is insured against loss so that if its wrecked you can still collect something. Borrowing money to purchase stock is different, there is no insurance against your losses. Your stock can depreciate to zero then your left with nothing but debt. If you fail to make the payments on your car you can still sell the car.
In the right circumstances financing a car is a great way to purchase. Back in 2003 I purchased a new car with .9% financing. It was a no brainer almost free money. I put very little down and financed the balance. Over a period of five years I'll pay about $500 in interest, the $25K or so I saved has been sitting in our fidelity account ever since earning around 3 to 4% (pre tax).
The bottom line is that in some cases it makes sense to pay cash and others it pays to finance. For most people paying cash is not an option, for others who are not financially saavy financing is not a good deal. Most people are sucked into the "low monthly payment" trap, which is why leasing became so popular. Leasing is generally a bad deal, but as with everything else in the right circumstances it can make sense.
I guess the point of this thread is the worrysome tactic of spending an ever increasing percentage of your annual or monthly income on a car and that is a problem. Once people get over the hump of deciding whether a car is too much for them they then need to focus on cash flow most think of one or the other, but not both.
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Bob K
Supporter
Username: Bobk
Post Number: 10204
Registered: 5-2001
| | Posted on Monday, January 9, 2006 - 7:41 am: | |
Sports if you financed a car for five years during most of the time you were "under water", meaning you owed more on the vehicle than it was worth. If you had a total loss you would have had to write a check to the finance company to make up the difference between the ACV (what you get from the insurance company) and the loan balance.
There are insurance products to cover this, which the F&I guy at the dealership may have mentioned. This coverage is usually thrown in on leases.
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sportsnut
Citizen
Username: Sportsnut
Post Number: 2253
Registered: 10-2001
| | Posted on Monday, January 9, 2006 - 10:30 am: | |
Bobk that is true in some situations as well. I am all too familiar with "gap" insurance. Because of the interest rate we paid I'd say that the break even point of our loan occurred very early on since most of our payments were being applied to prinicpal and we don't put many miles on our cars. We're right at the halfway point now in the loan and the FMV of our pathfinder is (if edmunds can be believed) as high as 17K and as low as $15.5. We owe less than both of those figures.
Many people don't put this much thought into buying a new car. They just see the monthly payment and off they go. Whenever you go in to buy a car (or lease for that matter) you should know what the payments on the car will be before they do. Then and only then can you get a good deal.
BTW, I'm not trying to be a PITA about this just pointing out that there are many different scenarios out there that may work for some. But the news of the original post seems to be a continuing a trend which I think is going in the wrong direction. I think when my wife and I started looking for a home six or seven years ago I remember that the guidelines said you should spend no more than 25% on your housing, now I believe that number is as high as 33%. |
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