If you want to improve your odds of growing rich, you don’t have to drive a piece of junk. Where’s the fun in that? How about driving the sort of car driven by the average US millionaire? At first it might sound counterproductive to dole out many tens of thousands of dollars for a BMW, Mercedes-Benz, or Ferrari while expecting to grow rich. But most millionaires might surprise you with their taste in cars. In 2009, the median price paid for a car by US millionaires was US$31,367.10 In 2016, they would have paid a bit more as a result of inflation. But one thing is clear. If you want to grow rich, forget about expensive European darlings such as BMW, Mercedes-Benz, and Jaguar. When Thomas Stanley polled US millionaires, the most popular brand of car was the humdrum Toyota.11
Many of the wanna-be rich try to outdo their peers in the car-spending department, easily parting with $40,000 and upward on a luxury vehicle. But how can you build wealth and reduce financial stress when you’re paying far more for a car than an average millionaire? It’s like trying to keep up with a pack of Olympic sprinters but giving them a 50-meter head start.
Image is nothing if you lose your job, can’t make your car payments, or if you’re stuck having to work until you’re 80 years old.
If you want to keep pace with the millionaires, begin on the start line or give yourself the biggest lead you can. It doesn’t make sense to spend more than most rich people do on a set of wheels.
Paying More for a Car than a Decamillionaire
In 2006, Warren Buffett, one of the three richest men in the world, bought the most expensive car he has ever owned: a $55,000 Cadillac.12 The average decamillionaire—a person with a net worth of more than $10 million—paid $41,997 for his or her latest car.13 If you find yourself at an upscale mall, check out the parking lot and you’ll see many vehicles worth a lot more than $41,997.
Many will be worth more than Warren Buffett’s car. But how many of the car owners do you think have $10 million or more? If your answer is “probably none,” then you’re catching on fast. Many have jeopardized their own pursuit of wealth or financial independence for the allusion of looking wealthy instead of being wealthy.
Whatever money you save on a car (not to mention the savings from interest payments if you can’t buy the car outright) can go toward wealth-building investments.
Cars aren’t investments. Unlike long-term assets such as real estate, stocks, and bonds, cars depreciate in value with each passing year.
One of the Savviest Guys I Ever Met—And His View on Buying Cars
When I was 20 years old, I took a summer job washing buses at a bus depot to pay for my college tuition. What I learned there from an insightful mechanic was more valuable than anything I learned at college. Russ Perry was a millionaire mechanic raising two kids as a single dad. His financial acumen was revered by the other mechanics. They told me, “Hey, if Russ ever wants to talk to you about money, make sure you listen.”
We worked the night shift together, which wasn’t particularly busy—especially on weekends—so we had plenty of time to talk.
My job was pretty simple. I washed buses, fueled them, and recorded their mileage at the end of the day. During my free moments at work I alternated between cringing and laughing out loud when Russ sermonized about money and people. Not everything Russ had to say was politically correct, but his crassness always had an element of truth to it.
Russ claimed he could tell how smart someone was by looking at what they drove. He couldn’t figure out why anyone would pay a lot of money for something—such as a luxury car—that depreciated in value over time. And if they leased it, or borrowed money to buy it, he was really left scratching his head. Russ recommended investing in assets such as houses or stocks. They appreciate over time. But cars lose money every year.
“Andrew,” he said, “If you can go through life without losing money on cars, you’re going to have a huge advantage.” He pointed to the guy across the parking lot. He worked in management. “You see that guy getting into that BMW?”
I had admired the car when I arrived at work that night. It was a beauty. “He bought that car two years ago, brand new,” Russ said. “But he has already lost $17,000 on it from depreciation and loan-interest costs. And in about three years, he’s probably going to buy another one.” I wondered what the car would be worth in three years if it had already depreciated so much in just two.
“If you’re truly wealthy,” Russ explained, “then there’s nothing wrong with blowing money you can afford to lose on the odd luxury item. But if you’re trying to become wealthy,” Russ said in a serious tone, “and you make those kinds of purchases, you’ll never get there. Never.”
Russ turned conventional wisdom on its head. Most people expect to lose money on cars. But expecting it becomes a self-fulfilling prophecy. He told me that people don’t have to lose money on cars if they’re careful.
I expected that from someone both financially and mechanically inclined. My biggest question at the time was whether it could work for me. Mechanically, I’m as gifted as a blind Neanderthal with two left hands.
“When you buy a car,” Russ said, “think about the resale value.” The bulk of the depreciation on a new vehicle occurs in the first year. Russ recommended I never buy new cars, and only buy a car if someone else had covered the bulk of the depreciation.
The best resale value, he figured, came from Japanese cars. He said I should look for low-mileage models that had been fastidiously maintained with original paint, great tires, and a great interior.
If I paid the right price for a car and the bulk of the depreciation was covered by someone else, he preached, I might be able to sell the car a year or two later for the same price I paid, if not a bit more.
A Future Millionaire’s Car-Buying Strategies
Putting Russ’s theory to the test, I searched for cars that wouldn’t put holes in the bottom of my financial bucket.
It didn’t take me long to get a feel for the market. I read a few consumer reports on reliable automobiles. One useful resource was Phil Edmonston’s annually updated guide, Lemon-Aid Used Cars. Certain cars and models are bona fide lemons. Others can be great little workhorses. I would spend a few minutes each morning looking through the classifieds in the local paper. When I saw something interesting at a good price, I would check it out. Over the next few years, I bought several low-mileage, reliable Japanese models. I paid between $1,500 to $5,000 for each car. In most cases, I drove them for at least 12 months without putting any extra money into them. My cars were cheap, so my profits didn’t amount to much, usually $800 to $1,000 a car.
Unfortunately there are too many people who aren’t good with money. It’s often easy to find desperate people who have overextended themselves financially. Buy from them. Generally, they want money quickly, either to upgrade their cars or to pay off oppressively looming debts. I’ve bought used vehicles from both types of sellers, put as many as 60,000 miles on the cars, and then sold them two or three years later for the same price I paid.
On one occasion, I bought a low-mileage, 12-year-old Toyota van for $3,000. I drove it 4,000 miles from British Columbia, Canada, down the Mexican Baja peninsula, then on to Guadalajara, before driving back to Canada. After covering more than 8,000 miles in a single trip, I sold it for $3,500.
Here’s one surprisingly simple strategy for buying used vehicles that can save you loads of time and money.
Imagine wandering onto a car lot. You’re not generally given free rein to browse on your own or with a friend. A sharply dressed salesperson will soon be courting you through a variety of makes and models. They could have good intentions. But if you’re anything like me, your pulse will race a bit faster as you’re shadowed, and the pressure of being shadowed by a slick talker might throw you off. After all, you’re on their turf.
A minnow like me needs an effective strategy against big, hungry, experienced fish—and this is mine: first, I identify exactly what I’m looking for. A few years ago, I wanted a Japanese car wit
h a stick shift and original paint. I didn’t want a new paint job because I’m not skilled enough to determine whether something had been covered up, such as rust or damage from an accident. I also wanted to ensure that the car had fewer than 80,000 miles on it, and I wanted to pay less than $3,000. It really didn’t matter how old the car was as long as it had been properly maintained and hadn’t been around the block too many times.
Like a secret agent wrapped up in the bravery of anonymity, I pulled out my hit list from the yellow pages to call every car lot within a 20-mile radius. Sticking to my guns, I told them exactly what I was looking for. I wouldn’t entertain anything that didn’t fit my criteria.
I did have to hold my ground with aggressive sales staff. But it was a lot easier to do over the telephone than it would have been in person. Most of the dealers told me that they had something I would be interested in, but they couldn’t go as low as $3,000. Some tried tempting me into their lairs with alternatives; others referred to my price ceiling as delusional. But I wasn’t bothered. My strategy was a knight’s sword and the phone, my trusty shield. I also practiced chivalry—knowing that I might end up calling on them again.
Because my first round of phone calls didn’t pan out, I called the dealers back when it got closer to the end of the month. I hoped the salespeople would be hungrier by then to meet their monthly quotas. As fortune would have it, at one dealership an elderly couple had traded in an older Toyota Tercel with 30,000 miles on it. The car hadn’t been cleaned or inspected, but the dealership was willing to do a quick turnaround sale for $3,000.
This strategy doesn’t have to be limited to a $3,000 purchase. The process makes sense for any make or model and it saves time. Over the past five years, I’ve become far less extreme. I no longer pinch pennies. But I still buy used cars. Typically, I now sell them for a little less than what I paid. But if I add up all the money that I’ve “lost” on cars over the past five years, it doesn’t amount to much. The typical new car buyer will lose more money in five months than I’ve lost in five years.
If you save more money on cars, you can invest more money in wealth-building assets.
Leasing Cars Instead Of Buying Used Could Be A $1 Million Decision
My friend Nathan is a millionaire. But like most millionaires, he won’t ever lease a car. “Leasing a car, instead of buying used,” he says, “is a million-dollar decision.”14
According to The Millionaire Next Door author Thomas Stanley, 80 percent of millionaires have never leased a car. Finance author Dave Ramsey isn’t a fan of leasing either. He says, “Broke people think ‘how much down and how much a month.’ Rich people think ‘how much.’ If you can’t pay cash for a car, then ride a bicycle. But don’t lease a car.”
But How Could Leasing Cars Cost $1 Million?
Nathan has never paid more than $6,000 for a car. Like me, he looks for cars with low mileage. The average American drives 12,000 miles a year. That means the typical 10-year-old car will have about 120,000 miles on it. Such cars may nickel-and-dime their owners as the cost of maintenance creeps up.
Nathan’s most recent car typifies what he likes. It’s a 2006 Honda Accord. He paid $5,500. When he bought it, the car had just 60,000 miles on it. That means it has as much wear and tear as the average five-year-old car. “A well- maintained car with 60,000 miles on it still has plenty of life left,” says Nathan.
He typically drives his cars for three to five years. Then he sells them for a price that’s not much lower than what he paid. “I should be able to get at least $3,500 for this Honda,” he says, “if I sell it in three to five years.”
Many people prefer to lease new cars. It allows them to get behind the wheel of a brand new car without saving a penny. They drive those cars for a few years. They make monthly payments. But they don’t get money back when they return those cars. In many cases, they even pay extra. Many dealers have mileage restrictions of 12,000 miles a year. Those who drive further pay the financial piper when they bring the car back.
According to Edmunds.com, the average midsized leased car costs $294 a month, or $3,528 a year.15 But most households have two cars. That means leasing two cars costs the typical household about $7,056 per year.
Nathan, like most wealthy people, tracks what he spends. He and his wife’s two cars cost them about $2,200 a year after calculating purchase price, maintenance costs, and resale value. The difference between buying low-cost, low-mileage used models versus leasing is about $4,856 a year for a two-car household.
The US stock market averaged a compound annual return of 9.2 percent from January 1990 through July 2016. If a couple invested $4,856 a year, and if they earned such a return, they would make a lot of money.
As seen in Table 1.1, over 15 years this investment would earn them $158,162. Over 35 years, they would have more than $1 million. That’s why Nathan says that leasing cars is a $1-million decision.
Table 1.1 Benefits of Buying Used over Leasing (Based on 2 Cars per Household)
Time Duration Used Cars Savings* Leased Cars Savings*
15 years $158,162 $0
20 years $277,455 $0
25 years $462,692 $0
30 years $750,326 $0
35 years $1,196,962 $0
40 years $1,890,496 $0
Max purchase price per car $6,000 $0
5-year maintenance costs per car $3,000 $17,640 (lease payments at $294 per month over 5 years)
Total spent per car $9,000 $17,640
Resale value per car (5 years later) $3,500 $0 (sometimes it costs money to turn in a leased car if there’s high wear and tear or if it exceeds mileage limitations)
Cost per car after resale $5,500 $17,640
x 2 Cars $11,000 $35,280
Savings per year $4,856 $0
*Assuming $4,856 invested annually at 9.2 percent per year
Negative Nellies could find all kinds of reasons this wouldn’t work. Perhaps your investments wouldn’t gain 9.2 percent. Perhaps you couldn’t find well-maintained, low-mileage used cars. Perhaps your used vehicle maintenance costs would exceed an average of $3,000 every five years.
You might pay more than what Nathan pays for a good used car. But a lifetime of buying used cars over leasing cars will win––to the tune of (at least) a few hundred thousand dollars.
Careful Home Purchases
Most people realize that expensive automobile purchases can hinder wealth. But the global financial crisis of 2008–2009 taught us important lessons about homes as well.
One of the lessons that aspiring rich people have to learn is that the banks aren’t their friends. They’re out to make money for their shareholders. To do so, they often hire kind or convincing salespeople. Their jobs are to persuade you to buy lousy investment products (which I’ll discuss in Chapter 3). They also sugarcoat bloated house loans, so you continue paying interest for years.
What caused the financial crisis of 2008–2009? The greed of the banks not looking after the best interests of their customers, coupled with the ignorance of those who bought homes they couldn’t afford.
Caught up in the housing boom, buyers purchased homes they couldn’t really pay for, and when the dangerously enticing, low interest rates finally rose, they couldn’t make their mortgage payments. Unsurprisingly, many were forced to sell their homes, creating a surplus in the housing market. When there’s a surplus of anything, people aren’t willing to pay as much for those items—so they fall in price. Houses were no exception.
The banks had sold these mortgage loans to other institutions around the world. But when the original holders of the mortgages (the home purchasers) couldn’t afford their mortgage payments, the financial institutions repossessed their houses—but at a significant loss, because housing prices were falling like a skydiver without a chute.
The banks had also bundled the loans up and sold them to other global institutions, which were then on the hook when the homeowners couldn’t pay their mortgages, putting many of the world’s most
respected financial institutions in peril. With dwindling financial resources, the banks didn’t loan as readily to other businesses, which in turn didn’t have the funds to cover their day-to-day operations. The snowball effect resulted in a global slowdown and mass layoffs. Don’t believe those who sugarcoat housing loans. The effects can be devastating.
It reminds me of a lesson my mom taught me when I took out my first mortgage on a piece of oceanfront land. She asked me: “If the interest rate doubled, could you still afford to make the payment?” According to the terms of the mortgage, I was being charged 7 percent in interest a year. She knew at the time that a 7 percent mortgage was historically cheap, especially compared with mortgage rates in the late 1970s and 1980s. As far as she was concerned, if I couldn’t afford to pay double, or 14 percent interest, then rising interest rates could expose me. I would be one of those unfortunate guys caught swimming naked when the tide goes out.
Her advice is a good rule of thumb if you don’t want to be stripped of your real estate. If you’re considering purchasing a home, double the interest rate and figure out if you could still afford the payments. If you can, then you can afford the home.
Millionaire Handouts
There’s a Chinese proverb suggesting that wealth doesn’t last more than three generations. There’s a generation that builds wealth, a generation that maintains it, and a generation that squanders it.
US studies suggest that—contrary to what we might think—most millionaires didn’t inherit their wealth. More than 80 percent of those surveyed are first-generation rich.
I taught at a private school in Singapore where most of the expat students come from affluent families. I told my students (only half-jokingly) that they’re on the financial endangered species list. It’s natural for parents to want to help their children. But the Chinese have known for thousands of years what happens to money that’s given to youngsters who had no hand in building that wealth. It gets squandered.
Millionaire Teacher Page 3
