Getting Started #3 – Eliminate Short-Termitis, the Bankruptcy Disease
I just saw one of those automatically generated text ads at the top of my Gmail account. Here’s what it said:
2011 Pilot 4WD LX $319/mo
It gave me shivers to look at it, just because it is advertising a purchase that is so wrong on so many levels. We’ll get into all of those levels in future postings, but.. no, fuck it, let’s talk about this particular piece of financial suicide right now.
- 2011. Why the hell would you buy a vehicle made in 2011? Unless you’re a taxi company and you are going to systematically run that vehicle 60,000 miles per year until it evaporates at a million miles, you don’t need anything close to a brand new car to get around.
- Honda Pilot. A ridiculous truck from a great car company. 4500 pounds, 250 horsepower, 31 thousand dollars, all so you can carry usually-one-person on a paved road at 23 MPG.. 4 MPG worse than my work truck (a borrowed 1984 Nissan pickup) gets.
- $319/month. What!? Are we renting the truck here? We don’t buy things by thinking about how much they are “per month”.
And that brings us back to being on topic for today’s post. There are several ways to think about a purchase. We can list them here in order of increasing intelligence.
- I just want it and I don’t know how much it costs – put it on my credit card and I’ll deal with it later.
- $319 per month? I think I could afford that because I’m already paying $299/month on my current car and that’s only 20 bucks more.
- $31,000 is the price of the Honda Pilot? I do have $32,000 in the bank so I guess I’ll buy it.
- $31,000 list price, plus $2400 sales tax, $1600 registration equals about $35 grand. If I buy a 2002 Honda Odyssey for $6000, which is the same vehicle in a more practical minivan body, I save $29,000. Over a ten year period, that money will compound at 7%, saving me a total of $57 THOUSAND DOLLARS!
Wow, is a 2011 Honda Pilot really worth $57,000 more than a 2002 Honda Odyssey?
As a future young millionaire, you need to start thinking about all of your purchases as LONG-TERM events, not short-term ones. That means each decision should be carried forward in your mind for at least 10 years, rather than just until your next paycheck. Here are a few more fun examples.
A deserving couple eating out at a restaurant twice a week, with wine, dessert, and coffee ($75), versus once a week with just a nice meal ($40): A difference of $110/week, compounded at 7% for ten years is $82,756. Would you rather have a luxuriously soft flabby physique from 1040 restaurant meals, or a leaner one and $82,756 in the bank?
A Starbucks habit of picking up a regular coffee and biscotti on the way to work each workday. $4/day = $20/week = $15,040 in coffee over just ten years!!
A new pair of shoes, or a few necessities from target, or a professional haircut.. once a month, for a total of $100. $17300 of handbags and closet organizers and hair clippings in ten years!
Now that you are amazed by the numbers, here is the simple formula for you to apply yourself.
- to calculate a weekly expense compounded over ten years, multiply the price by 752
- for a monthly expense, multiply by 173
You can fiddle around with the “future value calculator” at calculatorsoup.com for other interest rates and payment amounts.
See? Everything costs a thousand times more than the price tag you see, Now you don’t want something just because your next paycheck will cover it. You want those big sums in bold above much more, right?
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Mr. Money Mustache is a family man living in the United States who retired from work, relatively wealthy, at about age 30. After several years of retirement, he noticed that his still-working peers were envious of his lifestyle. They were making more money than he ever had, yet they were somehow still broke. So he decided to write this blog to educate the world on how it is done.
I am finding your comments on cars particularly interesting seeing as we are shopping for one. And we were thinking of a CRV. We were originally planning on buying a used car outright. But then we noticed that in south FL at least, it seems impossible to get a good used car! Now, we are not people who need the best cars ever. Our family car is a 1997 Honda Civic that despite my husband having learned to do most of the maintenance on is slowly falling apart around me. We tried looking at used cars and they seem to cost almost as much as buying new. And you might think you get a better deal with a private seller versus a dealership, but we found that a lot of the “sellers” on craigslist were in fact used car dealerships. It’s been very frustrating to the point that although both of our cars (the other is a 2001 Nissan Frontier) are paid off, we are seriously considering incurring a car payment to get a safer slightly larger family car to at least get the warranties that come with it while still having money in the bank. Plus, we intend to keep that car well maintained for a least 10 years. So I was curious as to whether Mr. Money Mustache had any advice in this situation?
PS I am not trying to incur the wrath of MMM because we are really wondering what to do. We really do need a better car, but at the same time we are trying to build up a 6 month savings buffer so my FIL is pushing us to buy new and keep our money in the bank.
Hi Kristine, Thanks for that perfect question! And congratulations on keeping your 1997 Civic going this long – you are already way ahead of many of us. Your story is perfect, because many people go down the exact same path leading to a new car. It’s even more perfect because the CRV is the best-selling SUV in the country right now, so many people end up in just the same place.
The car industry makes it very easy and convenient to buy a new car, and by comparison it takes much more legwork to really score in the used car market. I happen to be a car-head, so I actually find it fun to shop for great deals on used cars. But most people don’t have this affliction. So with that in mind, I decided to make that exact situation the topic of today’s post. I’ll post it later today.
Hi mate, very informative blog you got here! About buying latest brand new car vs older (probably used) car, ain’t the first one better in the long term? E.g. it’s newer so it: 1. more energy efficient 2. less maintenance 3. higher price when sold. in essence, lower cost and higher resell value. At least that’s what people in here think. Please advice.
I can’t believe you people have left this poor guy hanging for 4 months! On to the response.
Those people are stupid and probably can’t do math. A new car loses most of its value within the first 2 years, so NEVER buy a car that’s less than 2 years old. As MMM says in another one of his postings, “It’s stupid to spend ALL of your money on a car, let alone MORE THAN ALL of it!” The reason for this is that a car is NOT an asset. It depreciates over time(at least, over the first 60 years), so you should only buy enough car to get you to where you need a car to get to.(MMM also heavily espouses the benefits of bicycling, but I’m sadly not that Mustacian.)
If you own a given car for 7 years or more, the depreciation of a new one vs. one that already has a decade on its back is going to offset any energy savings you may enjoy, offset any reduced maintenance fees, and… let’s get honest, you probably aren’t going to sell it anyway.
If you get rid of a car after owning it for less than 7 years, it had BETTER BE because you wrapped the thing around a tree and can’t drive it anymore. Otherwise you’re throwing more money away on a stupid expense.
I currently drive a 1989 Oldsmobile Royale. It cost me $400(plus a bit of maintenance), I’ve had it for about a year now, and it’s already out-valued anything I could have bought new over that time. It has at least another 3 or 4 years on it.
Thanks! I read the post to my husband. I am still digesting the info and thinking about how to respond. You kind of incited my husband who did in fact spend a day with his cousin (who buys, fixes up cars, and sells them on Craigslist) attempting to weed out private owners versus dealerships and they ran into a LOT of shady garbage including rebuilds (which I understand are bad) and dealers trying to trick people into thinking they are owners by taking pictures of cars in front of random houses. I got a rant about the difficulties of dealing with Craiglist. So while he is not opposed to getting a used car, perhaps Craigslist is not a wonderful way to go about it down here. The cars you suggested still seem a little small to us when we factor in things like 2 large car seats and wanting the ability to be able to drive somewhere on a family vacation and be able to bring luggage. We aren’t in a big rush to buy a car, but before summer would be nice since the Honda has a thermostat issue with the A/C and it kinda feels like child abuse to drive the kids around in the summer with one that blows only hot air. So we are not impulse buying anything.
I am just getting here and reading old posts, but I want to add to this one. We also considered our love of road trips in considering whether to get another vehicle….. our current one has 202,000 miles and still going strong. However, it is not something I would trust on a long road trip. We did the math. We come out WAY cheaper keeping our old trusty and just renting something newer and bigger for a road trip. Especially with most rentals not charging for mileage, it makes it way cheaper to pay extra for a couple of weeks two or three times a year than it does to pay extra EVERY MONTH (not just for the car; extra insurance costs, etc.)
Great strategy Yvonne – own the basic transportation, and rent the peace of mind that comes with brand-newness – only when you really need it.
I’m reading about the Honda Fit and I think I’m open to the idea. Perhaps it is not as small as I am thinking.
Nice! I definitely agree with your comments about comfort and convenience. I have found that getting a great deal on Craigslist takes a few weeks of review, rather than just a few days. And it’s not just the Miami area that has funny characters selling cars – Denver is just the same. But the biggest goal of the MMM blog is to get people to look past the emotional barriers – the perceived inconvenience of working harder to shop for a car or bring less luggage on a trip – and weigh it logically against the benefits of having an AMAZING life of not having to worry about money, and soon not even having to work!? I think you have just inspired another post on trying to weigh factors like these using numbers!
Howdy! Found your blog via Brown Girl in the Lane and find it quite entertaining. Ah, to read about finance and not be bored out of my effing mind. Sweet!
Anyhoo, I would just like to add: Folks actually have to *invest* money saved on expenses to make that shit real. We’re always talking about what saved money means in terms of long-term investments, but if you just piss it away on something else (which is what most people do, naturally), none of that fabulous math will ever be realized.
Hey, thanks a lot CF, it makes me very happy to hear that! I have always felt that reading and writing about money should feel more like scratching a turntable and mixing in some beats rather than doing tests from the back of an old school textbook. Money is very fun stuff to play and work with, not boring at all.
You’re right – you can’t just save money on cars and then spend it on pedicures. According to the stats, most people have some really bad debts outstanding (credit card, car, student), so I’m trying to get people to start by paying those off, which has a guaranteed compounding effect in itself. Once they are clear of that, I have an earlier post called “what am I supposed to do with all this money” that can work as an introduction to investing. Then we will get a bit fancier in the future for those looking to really optimize their investment gains for different situations.
‘Stash
I just had to comment on this post. Yes, people really do think the way you described in your third paragraph! It’s astonishing! I think they think they’ll be working until they’re dead anyway, so they might as well just figure the cost by month. A friend recently bought ten year old Volvo for $10K and he financed it and was pleased with his APR. I asked him how much he would be paying over the life of the loan and he figured it out at $17K and was shocked to the core. Anyhow..
This blog is terrific and your writing clear and concise, thank you very much for taking the time to educate us novices.
I have a dumb question, but when compounding, are you compounding monthly/yearly? How do you decide?
Hi again Acorn, thanks for reading!
For my examples, I use monthly compounding. So it’s as if someone put a series of monthly payments into an interest-bearing account, and the interest got added each month. I do that since it is similar to how most people save money – putting some away every paycheck or every month. If you compound annually instead, you get a slightly lower return, but it isn’t an enormous difference.
The best way to buy a car is to save money and investing until the amount needed to buy the vehicle is reached. This way the deal is really in our favour; at the same time, you can make money out of the interest. Now you will say shit..who has money to save, invest and live ? Not anyone but that is the target. Save in TFSA, and invest in something. Every extra penny received as interest is not taxable so there, another reason to save money. Our days vehicles are built well, they last 10 years. So sacrifice four out of five Timmy’s, bring lunch from home, bike in the summer to work (its good for you), or walk (also good for you), buy good food and eat less (really eating more feels better sometimes but it does not add up in the pocket but a bit above the pocket …on the belly). Anyhow…just a thought, probably not everyone has this option but I consider it ideal for a mid class citizen.
Have you considered the cost of repairs in your calculations? A new car is going to run for a few years with little to none maintenance cost where as a 2002 car is likely going to need repairs more often. Also, are you expecting the 2002 car to still be running in 10 more years, if not, have you considered the cost of purchasing more replacement vehicles? I also value my time, so it costs me something to spend my days tracking down the perfect used car — time I’d rather spend doing something else.
It’s an empirical question, though. If it takes you ten hours you’d rather spend doing something else, and you come out $5000 ahead on car costs, you’ve paid yourself $500 an hour for the inconvenience.
Hi MMM!!!
I just stumbled across your site from a yahoo article on a couple who retired at age 43….a commenter put your name “MMM” on the comments!
I just wanted to say that I absolutely love your blog and advice on how to perceive money…you give fantastic examples on how to live smartly. I am sending your site out right now :)
Mathematically challenged Arteeest here. If you’d be so kind, please hip me to the compounding formula used to arrive at $115k.
See, I looked up all these fancy monthly compunding calcs, entered $440/mo contributions at 7% annually for 10 years. $76157.32 was the result.
I’m quite sure I borked part of this life-saving equation, so help me obi-wan, you’re my only hope!
Thanks Arteest. You caught me in a typo! I fixed several parts of the article to get the numbers right, and added a link to the calculator I used. Note that in the restaurant example you used, I calculated $110 per week instead of $440 per month, since there are a bit more than 4 weeks in a month.
Ahh. I see the math now. Thanks mucho for dropping some killer knowledge on this recovering consumerist.
(And may i say…Wholly shit! Catching a typo is a first for me and can now cross that off the bucket list, so I thank you doubly for that!)
I’m struggling to understand how the Future Value Calculator works and how your figures of 173 and 752 work. I’d love to have a simple multiplier to carry around with me, but I’d like to know what it means so I can adjust for paying debt vs investing.
Never mind, I figured it out.
Great blog.
I guess your theory works well in first world countries. A lot us can’t make much by saving on coffee (costs around $0.23).
A fresh college graduate makes around $400 a month, if lucky. Unlucky ones like me make around $250.
Many of us do try to get by with what’s only truly necessary, with an occasional splurge once in a while.
Boy, would I LOVE to retire at 30 :)
You’re right that you can’t save 20 per week on coffee in a place where coffee costs 23 cents. But again it’s all about the saving rate. Also, I don’t trust the regulation of securities in most Third world countries, which might be a good reason to move. You can make your own choices abut the opportunities you want to take. MMM is not from a third world country yet he moved for new opportunities. I lived in Ecuador for a bit and there’s a reason that a lot of people have left.
I have not had a car payment in 9 years since I realized what a waste of $ car payments are. First step is drive what ever you can pay cash for, even if its only $1000. Drive it as long as possible while saving money for a better car (ie $5000). Sell the first car for scrap ($450) + $5000= a $5450 car. Save 12 mths for your next car. Sell the $5450 and combine the cash with the money saved and buy your next car. Within 3-4 years youre driving a nice car with no payments.