The Wheels Of Finance: How The Automobile & Finance Intersect
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America has had a long love affair with the automobile.
The automobile has been elevated to more than just a means of transportation.
Individuals may be driven to purchase a particular vehicle for the implied status that comes along with it.
We have all heard of stories of people who are going through a mid-life crisis and end up purchasing sports vehicles in hopes of clinging on to the last bastions of their rapidly fading youth.
Although there are some instances where purchasing a particular car can actually be a good investment, most notably in the rare collectible car segment, the majority of the times the car rapidly diminishes in value the minute you drive it off the lot because of depreciation.
The connection between the automobile and wealth goes far beyond the sticker price.
I thought it would be an interesting exercise to list all things automobile and how it may be extrapolated into the financial world.
Automobile Financial Concept 1: Car Poor.
Much like buying too much house (causing you to be house poor), a similar financial predicament can occur if an individual buys a vehicle that is not supported by his or her financial ability.
A good indication that you are treading dangerous waters and buying too much car is if you have to resort to financing (especially longer term financing) or leasing to get you behind the wheel.
When you lease a new car, you are paying for the rapid depreciation of the vehicle up front and then cannot recoup the benefits of holding onto the car long term to minimize the impact of said depreciation.
So how much car can you afford?
Financial Samurai has created a helpful guideline to help steer you (pun intended) in the right direction, stating that a good rule of thumb is to spend no more than 10% of your annual income or 5% of your net worth on a car.
Can you ignore these rules and still be financially successful?
Sure. But like anything in life, there will be a trade-off and your road to wealth will be that much longer.
Automobile Financial Concept 2: A Stitch In Time.
Too often in medicine we encounter patients who have let medical conditions go too long before seeking medical attention.
I have seen multiple mammograms where the patient invariable says that she noticed a lump but did not want to go through the trouble of seeing a doctor and thought it might go away on its own.
What might have been an easy surgical procedure now requires much more extensive methods such as chemotherapy and radiation for a (diminished) chance of cure.
Similarly a car can have minor mechanical issues that, if left unchecked, can cause repair bills to skyrocket when it eventually progresses to the point of being undriveable.
How often have we let the “check engine” light go on in hopes that it may resolve itself on its own?
Manufacturer’s recommended routine maintenance schedule should be adhered to as best as possible as that is the best way to prevent a financially crippling issue later down the road.
Automobile Financial Concept 3: Little things matter too.
A poster child for the FIRE movement is the index fund.
Numerous studies have touted that the reason why index funds have advantages over actively managed funds is because of the lower expense ratio fee.
Even though the difference in expense ratios between actively and passively managed funds is still a relatively small percentage (often 1% or less), the financial effect of this is anything but small, often in the six figure range.
In addition to following routine scheduled maintenance, it is important to keep your vehicle within normal operating parameters on a day to day basis.
Improper tire inflation is something that most of us are guilty of.
Much like the expense ratio, a small difference in PSI can lead to a much larger financial impact such as accelerated tread wear, or even worse a tire blowout or loss of control because of decreased handling capabilities.
It is also important to realize how outside temperatures can also affect your tire’s pressures.
When the weather gets crazy with wild fluctuations week to week (for instance in January/February we have had one week of temps in the 60s-70s followed by a week with lows in the 20s and then back again) your tires can dramatically gain or lose tire pressure.
Automobile Financial Concept 4: Time to let go.
One of the hardest decisions I face as my fleet of cars gets older is deciding whether it is more cost efficient to continue to keep the car in the face of mounting repair bills or whether it is time to cut bait and shop for a newer replacement vehicle.
I have to admit that I have a very low success rate with this decision making process.
Part of it is that I am lazy.
It is much easier to authorize the repair, no matter what the cost, pay the bill and keep my fingers crossed that I bought an acceptable level of trouble free use.
But this philosophy has caused me to waste a countless amount of dollars over my adult life (easily $50k or more).
My track record of financial mishaps with cars:
- I nicknamed my first adult car “the money pit” as it cost many multiples of the original purchase price because of repairs and service.
- I held on to my first “attending car” far past its expiration date, which cost me tens of thousands of dollars in repairs just over the past couple of years (as well as being a huge financial mistake to purchase in the first place).
- The jury is still out whether my decision to hold on to my Land Rover was the right one after I was faced with a repair bill in 2019 that exceeded the original purchase price.
As you can see, the automobile and finance are intricately intertwined with each other.
Making good choices with your vehicle can set you up for a bright financial future.
Wrong choices, on the other hand, can lead you down the road to the financial doghouse.
If you are in search of financial help, please consider enlisting the service of any of the sponsors of this blog who I feel are part of the “good guys and gals of finance.”
Even a steadfast DIY’er can sometimes gain benefit from the occasional professional input.
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