RPF0167-Used_Cars_vs

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00:00:14.720 | The business proposition of radical personal finance is very simple. Works like this. I create

00:00:22.880 | great media that gives you ideas and inspiration on various ways that you can save a bunch of money

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00:00:50.400 | Today on the show let's dig into one of the most hotly debated topics of personal finance.

00:00:58.880 | Should I buy a used car or a new car?

00:01:01.840 | Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets and I'm your host

00:01:24.880 | and this is the show where we dig into all of the most hotly debated topics.

00:01:29.360 | We just don't do it every single day. And today let's talk about those car things. People have

00:01:34.720 | very strong opinions and are very entrenched on both sides of this issue. I'm going to try to

00:01:39.760 | unpack it a little bit and give you a very simple framework for how to consider it so that you can

00:01:43.840 | make a wise decision for yourself. If this is your first introduction to the show, one of the

00:01:54.720 | things that you need to know about this show is that I don't tell you what to do. I give you ways

00:02:00.320 | for thinking about what you should do and then you decide what to do. That fits in line with my values

00:02:06.880 | and the way I like to approach life and so that's why I do it. So today is going to be no different.

00:02:10.320 | I'm not going to tell you buy a used car or buy a new car and here's why. Rather I'm going to discuss

00:02:17.760 | the decision, talk about the things that I think you need to be aware of and then from there it's

00:02:25.120 | up to you. But let's start with this. Let's start with instead of talking about it from the

00:02:31.280 | perspective of a car, let's pretend it's something else. Now it can be just about anything else that

00:02:38.000 | we want to talk about. It can be a piece of clothing that you're buying. It can be a tractor

00:02:43.760 | that you're buying. That's actually the example I'm going to use because it's kind of a fun one

00:02:46.480 | because very few of you go out and look for tractors. But my point is that the car is not

00:02:51.120 | this somehow special decision. The reason it gets so much attention and so much press and so much

00:02:57.280 | publicity as a big important personal finance decision is because it's usually a big decision

00:03:03.360 | as far as dollar amounts involved. Anytime there's a big decision, there's a potential for

00:03:07.280 | big mistakes and also big – what's the opposite of mistakes? Good big benefits. We'll go with that.

00:03:16.400 | Big dollar items matter is the point. So for most people, the number one thing that we spend money

00:03:24.560 | on is taxes and that takes up more of our budget than anything else. That's why I spend so much

00:03:29.600 | time on taxes. Number two is usually housing. For most of us, we spend a lot of money on housing.

00:03:34.240 | That's why there's so much written about when to buy houses and how to buy houses and when not to

00:03:39.280 | buy houses. Third thing is transportation. Now it doesn't necessarily have to be that way.

00:03:44.880 | You don't necessarily have to spend a ton of money on transportation. But generally,

00:03:48.560 | at least in the US-American culture, we do. The US-American culture is the culture of the

00:03:52.320 | automobile. So if any of you non-US-American listeners are wondering like why do American

00:03:57.280 | finance people spend so much time on this, it's because the United States of America,

00:04:01.280 | we have a culture that's built around the car. Our country is very spread out. We have a culture

00:04:05.920 | that comes from driving. Driving is a rite of passage for young people where you transition

00:04:10.640 | from childhood to adulthood and you have your freedom. We in many ways as a culture worship

00:04:15.120 | the automobile. So that's – it's not the same throughout the world but in this culture, it is.

00:04:21.040 | That's why there's so much content. But what I have to share with you is applicable no matter

00:04:24.560 | where you live. But let's talk about not buying a car because there's simply too much emotion

00:04:30.080 | associated with buying a car. Let's talk about buying a tractor.

00:04:35.440 | Now, for a tiny percentage of you, by my best estimate, three of you,

00:04:39.600 | there is actually a lot of emotion associated with the idea of your buying a tractor.

00:04:45.440 | But for the vast majority of you, it's not something that you've considered. But let

00:04:50.400 | me paint this picture for you and let's talk about how you would approach buying a tractor.

00:04:56.720 | Now, for all but the three of you who are committed to the myth and mythology of the

00:05:02.720 | beautiful bright red tractor, the beautiful bright green with yellow trim tractor, beautiful yellow

00:05:07.920 | tractor, whichever brand you prefer or blue, those are the four major ones that come to mind that I

00:05:12.960 | see out in the fields when I travel through farm country. But for those of you, you might have some

00:05:18.160 | baggage associated. Most of us don't have any baggage that's associated with a tractor.

00:05:21.680 | So pretend I come to you as a farmer and I'm saying I think I need a tractor.

00:05:27.120 | And I start listing off what I need in a tractor. How would you advise me

00:05:33.280 | in that scenario? What would you tell me that I needed?

00:05:39.200 | So let me play just some fun little examples here to hopefully make you think. Let's assume that I

00:05:45.680 | am operating a small half-acre garden plot. I have an urban farm. It's a good example. I have

00:05:51.600 | an urban farm. And I come to you and I say, "Listen, I was down at the John Deere dealership

00:05:56.480 | this weekend and I saw just the most beautiful John Deere tractor. This thing was awesome. It

00:06:02.800 | had 800 horsepower. It has a total of eight tires. The tires are 68 inches in diameter and there's

00:06:09.840 | eight of them total so I don't get stuck in the field. And this thing can haul three implements

00:06:15.280 | all at the same time and I can put across a 30-foot..." I'm not good enough making these

00:06:21.920 | examples up. So those of you who actually know are making fun of me right now, but let me keep

00:06:25.840 | trying. "I can put in place a 60-bottom plow. It's 120-feet wide plow. I can get this tractor

00:06:33.840 | and I can plow my entire half-acre urban farm plot in about three minutes." And I got to tell you

00:06:43.040 | about this thing. After all, this thing, it's got air conditioning, it's got leather seats,

00:06:46.960 | it's got an air suspension in the seat, it's got a GPS built in so I can just simply click the

00:06:52.000 | buttons in the GPS and allow it to... The tractor will drive itself. It's got a TV screen there. I

00:06:58.800 | can sit there and I can watch satellite TV. And yeah, I need to be in the cab, but I can watch

00:07:02.880 | satellite TV while I'm cruising down my half-acre garden strip in comfort. It's an utterly ridiculous

00:07:12.560 | scenario, isn't it? But do you see the parallels to what we do with cars? You would look at me if

00:07:20.480 | I were all hot and bothered about the fact that I had this big, giant John Deere tractor and you

00:07:24.480 | would say, "Come on, man. What's wrong with you?" But if I were coming to you and I'm all hot and

00:07:29.520 | bothered about this brand-new car that I'm going to buy and somehow it's going to enhance my

00:07:33.280 | self-image, you would look at me and say, "Well, that's normal. After all, driving a nice car is

00:07:40.480 | important, right?" Now, let's flip my scenario. Let's say that I come to you and I'm running a

00:07:48.320 | 15,000-acre corn farm in Iowa. I come to you and I say, "I'm running this 15,000-acre corn farm.

00:07:55.360 | We're running a little bit short on our ability to get the corn out in time because the fields are

00:08:03.280 | muddy." So what I've done is I pulled out my local classified ad and I was able to find a used lawn

00:08:10.400 | tractor from a guy down in Des Moines. So I'm going to drive a few hours into Des Moines with

00:08:16.400 | my little pickup truck and I'm going to put this little lawn tractor – you know what I'm talking

00:08:19.120 | about, right? Little ride-on lawn mower that people mow their yards with. I'm going to drive

00:08:23.280 | down there and I'm going to pick this thing up. It's about nine years old. It's really – but

00:08:27.200 | it's in pretty good shape for it being nine years old. I picked it up. I only given the guy $280.

00:08:31.760 | So that's going to solve my problem. A little bit silly, right?

00:08:38.160 | But yet, haven't you noticed that some people, when they're trying to run a massive operation

00:08:45.760 | or it's massively financially profitable, they're trying to nickel and dime and save every last bit

00:08:51.600 | and buying a rusty old nine-year-old lawn tractor when they need a $180,000 brand-new John Deere?

00:08:59.120 | In reality, that's actually what they need. My point is simply to try to reframe this conversation

00:09:05.280 | because cars in our culture are a very funny thing. People have such strong opinions and they

00:09:11.840 | state them so strongly about this is the right thing to do and here's why. Again, people are so

00:09:18.000 | strongly stuck in either side of the camp, in either side of the buy used or buy new camp.

00:09:23.280 | We're very prone to confirmation bias in this scenario. As an example, I personally, me,

00:09:29.360 | Joshua, I've never purchased a new car or at least I haven't yet. Maybe someday I will,

00:09:33.680 | but I never have. I've had pretty good experience with all of the used cars that I've had.

00:09:38.480 | I've got some data that backs that up, but what happens is I'm very prone because of my good

00:09:43.280 | experience, I'm very prone to indulge in a little bit of confirmation bias and say, "Well, here,

00:09:48.400 | I've made these good decisions. This is right for me, so therefore it should be right for you."

00:09:53.120 | I'm very prone to that. Now, on the flip side, I know people who always buy new cars. Then there

00:09:58.800 | was that one time where they bought a two-year-old car and it broke on them.

00:10:01.920 | They're very prone to confirmation bias of their decision as well.

00:10:06.640 | But yet we've got to look through it a little bit more. We've got to actually understand the

00:10:11.120 | situation just a little bit deeper. If it helps you, set aside the idea of buying cars and think

00:10:19.040 | about buying something else. Think about buying a tractor if you like that example. Think about

00:10:23.440 | buying a chariot if you like that example. One of my favorite personal finance books is a book

00:10:28.640 | called The Richest Man in Babylon. If you haven't read it, read it. You can find it online for free.

00:10:32.800 | You can get it in your library. You can buy it online, a paperback. Go to Amazon, use the book.

00:10:38.640 | I'm sure you can find it for about 10 cents. It's a well-written book. It's really fun. I like it.

00:10:43.520 | One of the things that I like most about it is the author. I think it was George Clayson

00:10:48.240 | is the author. He wrote it from a modern perspective but in a past time period.

00:10:54.080 | In our modern perspective, we have so much baggage associated with all of our decisions,

00:10:59.760 | so much baggage associated with the cars that we drive and the houses and the right way to live and

00:11:04.480 | the clothes and things like that. He goes back and he takes all of these things that we associate

00:11:09.600 | today and he puts them in a historical context. For example, he talks about somebody looking

00:11:14.720 | jealously and enviously at the brand new chariot to be pulled around town in or somebody buying the

00:11:21.680 | brand new tunic and robe and paying triple the cost to have the most perfect shade of tunic

00:11:28.880 | to wear or the new sandals. It makes you laugh because at least for me, not having been in that

00:11:35.760 | type of culture, I don't care at all about what color my tunic is or how fancy my sandals are

00:11:41.600 | but I do care what type of clothing I wear today and I do care what brand my shoes are.

00:11:48.880 | Interesting. Sometimes it's valuable to look at things from a different perspective.

00:11:57.200 | Now, when we look at cars, basically this comes down to a financial calculation.

00:12:03.360 | What is going to be in my best financial interest given my personal situation and giving all of the

00:12:10.880 | decision input and criteria that I have in my situation? That's what it comes down to.

00:12:16.720 | Now, I would encourage you, try to think of yourself like a business owner. Pretend you're

00:12:23.280 | the farmer or whatever business owner or other business owner that you want to figure out and

00:12:30.480 | think about your car not as an extension of you but just think about it as something that is useful

00:12:37.520 | to you in your business, the business of your life. Ask yourself, as the CEO of this corporation,

00:12:46.640 | Joshua Sheets, Incorporated, what advice would I give Joshua Sheets? Well, if you were doing that,

00:12:53.280 | you would probably sit down and you would write a careful list of your needs, what you actually need.

00:12:58.480 | You would also make a list of what you actually want

00:13:03.440 | and those needs would be different depending on the scenario and the situation that you're in.

00:13:09.680 | Now, I am going to give you some details on all the different aspects of the costs

00:13:14.480 | so that – and give you some tools which – through which no matter what decision you make,

00:13:19.680 | you can mitigate the cost and lower the cost. But just think about this. Think of the farmer.

00:13:24.640 | If I've got a half-acre farm, I probably don't even need the lawn tractor but if I need a tractor,

00:13:30.080 | I need a small basic lawn tractor. It's probably not that big a deal if the lawn

00:13:34.800 | tractor breaks down one day a year. Now, flip it around. If I've got a 10,000-acre farm,

00:13:40.240 | a lawn tractor doesn't serve my needs. I need that big John Deere and I probably need

00:13:45.680 | to make sure that thing is in top shape. But I also have a difference of scale, right? Think

00:13:51.360 | about my profit potential on 10,000 acres versus my profit potential on that little tiny plot that

00:13:56.960 | I'm managing. There's probably a little bit of a difference as far as what percentage of my profit,

00:14:03.360 | the actual cost of that equipment is going to be. So when we're making needs and wants and we're

00:14:08.320 | making lists of those things, recognize what it is that you need and that you want.

00:14:12.560 | Recognize the scale of the decision. Let me give you an example from my life. So far in my life,

00:14:20.640 | I have owned and operated three vehicles. The first vehicle that I owned and operated,

00:14:25.280 | I bought while I was in college and I bought it from my brother. It was a 1993 Honda Accord.

00:14:29.760 | I bought it with 193,000 miles on it. I paid $2,000 for it. I drove that car for many years.

00:14:37.440 | I don't remember the exact number. I sold it with 315,000 miles on it and a total of $1,200.

00:14:44.240 | I experienced a total of $800 of depreciation. I think it was over about five years,

00:14:48.960 | something somewhere in that range, and a lot of miles on it and relatively trouble-free.

00:14:53.200 | I only had one or two major repairs in the range of a couple hundred dollars. Other than that,

00:15:00.320 | it was all just normal scheduled maintenance, most expensive of which was swapping out the

00:15:04.560 | timing belt, but it was a good car to me. At that stage of my life, that was a good decision because

00:15:11.360 | I didn't need much car. I needed basic transportation and I'm still in the

00:15:16.160 | wealth-building stage of my life. I sold that car when I finally decided that, A,

00:15:22.000 | it was having a little bit of problems with some oil leaks and I decided I would go ahead and sell

00:15:26.000 | it rather than fixing it because I wanted to upgrade a little bit. I needed a car that was

00:15:30.480 | a little bit more appropriate for my occupation as a financial advisor. I was able to find a 2006

00:15:36.320 | Ford Expedition. I've told the story in the recent show with Tom Stanley. What I found with what I

00:15:42.880 | needed, my goals for what I needed at that time is I needed a vehicle that was, A, big enough and

00:15:47.280 | comfortable for me. It's a real challenge for me with cars. I'm 6'6" and over 300 pounds and I wear

00:15:52.720 | a size 16 shoes. As much as I love driving small sports cars with manual transmissions, I simply

00:15:59.680 | can't do it because to drive them, I have to be barefoot. My feet can't work the pedals. My shoes

00:16:03.920 | are too physically large to actually press the accelerator without also pressing the brake,

00:16:08.240 | just the normal shoes that I wear. So I can't buy a small, cheap, manual transmission sports car.

00:16:15.520 | I can't get into many of the cars, even with the seats all the way back. I remember one of the more

00:16:20.960 | disappointing experiences of my life. When I was a kid, I always wanted to have a Dodge Viper. That

00:16:26.400 | was my dream sports car. Then one day I was at the Dodge dealership, killing time. I had some time,

00:16:32.320 | I was waiting and I decided to go look at cars. I've always enjoyed looking at cars at dealerships

00:16:36.160 | and they had a Viper on the showroom floor and I tried to get in it. I literally could not get in

00:16:40.400 | it. My head was too tight. My shoulders were too big. I couldn't shut the door and my dream was

00:16:46.080 | dashed. I knew that I would never be able to have a Viper because I couldn't physically fit.

00:16:53.360 | Same things happen to me with Corvettes. Every time I've driven a Corvette, I've always thought

00:16:57.200 | that would be the best car for me as far as that it's a supercar that is very low priced. But man,

00:17:03.120 | I can't drive them comfortably. I have to take my shoes off and I can hardly see through the

00:17:06.960 | windshield because the top of the windshield is staring right at my face. So my dreams of

00:17:13.680 | owning and having supercars, I've basically decided that's never going to work for me.

00:17:18.480 | But a big SUV works well for me. Now, it has high expensive gas mileage. It's not cheap to drive as

00:17:25.520 | far as the fuel. But on that one, I got a good deal. It was four years old when I bought it

00:17:29.520 | and I bought it for less than a third of the new price. So you figure out the depreciation,

00:17:34.560 | but in four years, it was less than a third of the purchase price. Bought it with almost

00:17:38.960 | 100,000 miles. I think sold it later with $150,000, 150,000 miles. Replaced it with a 2007

00:17:46.320 | Hyundai Entourage that I bought for $5,000, the minivan. Bought it for $5,000 and something like

00:17:52.400 | 160,000 miles. Now, it's at almost 200,000. It's been a great car. It's done a good job.

00:17:57.440 | Did have one expensive repair, but that was not endemic to the car. That was probably due to

00:18:04.080 | mechanical error and just kind of a freak set of circumstances. But these vehicles have been good

00:18:09.360 | to me. But I have been at this stage of my life, I've been very focused on how can I buy for the

00:18:15.440 | least possible money that meets my needs. So the needs that I've tried to fulfill at various times,

00:18:19.760 | the car needs to be big enough for me. It needs to be comfortable enough for me. It needs to be

00:18:23.680 | new enough and fancy enough to not be – when I was a personal financial advisor, to not be

00:18:29.040 | a negative mark on my image and my reputation. But I also didn't want it to be a negative mark

00:18:35.440 | from being too fancy. So I was trying to find the gray man vehicle. So I won't go more into that.

00:18:43.920 | But also I live in a city where it's very easy driving. I have good local networks. I have

00:18:47.840 | little problems if I have a used car. Because it's a personal vehicle for me, then if the car breaks

00:18:54.240 | down, well, all right. I'm out in a little bit of inconvenience for a few days. But that's really

00:18:58.560 | not that tough. I've got a great family network of vehicles I can borrow. I've got – I live very

00:19:03.280 | close to everything. Now at this stage, I work close from home. So that's not a big deal.

00:19:08.560 | Now, what if I were in a different place though? What if I were – well, I want to give one quick

00:19:13.680 | calculation and I'll give you some different scenarios on me. The way I look at it, if I were

00:19:17.840 | doing what many of my peers did, let's say that I went out and I bought a $30,000 vehicle. Well,

00:19:25.440 | if I were to go and buy a $30,000 vehicle, then each year I would have about $4,500 of depreciation

00:19:33.440 | assuming 15%. So in the first few years, I would lose let's say $9,000 in the first two years.

00:19:38.560 | At this stage of my life, I am very much in the wealth building stage. So I run the numbers and

00:19:44.160 | I say let's say that I have $9,000. Let's do a quick calculation here. $9,000 today that I save,

00:19:50.000 | invest it for 30 years, assume 10% interest for a nice round number, $0 into the account. At the

00:19:56.400 | end of 30 years, that's $157,000. At the end of 40 years, that $9,000 turns into $407,000.

00:20:06.960 | There are a whole lot of things that I would like to do with $9,000,

00:20:12.720 | not only having the money tucked aside for 30 or 40 years, but a whole lot of other things I'd

00:20:18.800 | rather do today than lose $9,000 of depreciation on a car. So I make different decisions.

00:20:25.920 | Now, fast forward to the point. Let's assume that I'm 50 years old. I'm a multimillionaire.

00:20:30.320 | I've got more money than I'm ever going to spend. I'm able to fund all of the financial

00:20:34.480 | goals that I have and I want to go and buy a fun car. If I'm a multimillionaire, if I go out and

00:20:40.640 | buy a brand new Corvette for $100,000, is that going to be a big deal in my financial life?

00:20:45.600 | No. My time is much less and so at that stage, if I want to go ahead and waste the money on

00:20:52.640 | the depreciation, it's no problem. So I can see different scenarios even in my own life in which

00:20:58.720 | I would make different decisions. Now, back to the farming example. I've worked with a couple of

00:21:05.600 | ranchers here in Florida, cattle ranchers and grass farmers and orange farmers. One of the

00:21:13.040 | things that's interesting is if you put yourself in the position of a farmer or rancher, you might

00:21:18.800 | spend a lot more time in your vehicle and the vehicle gets used much more – it gets used a

00:21:24.480 | lot more than anything else. Now, can you still buy a used vehicle? Yes. But now we're switching

00:21:30.320 | the transition and we're saying how much use is actually going to be put onto it. I remember being

00:21:35.440 | amazed at a former associate of mine, somebody I worked for in the past. I looked at his pickup

00:21:43.600 | truck one time. He was a rancher and I think the thing was four years old and he had almost 300,000

00:21:48.160 | miles on it. It was insane. The vast majority of that time or much of that time, the vehicle was

00:21:55.600 | used in very difficult circumstances, hauling a large heavy trailer with big equipment, things

00:22:01.040 | like that. So the vehicle was extremely used. Now, when you put the context of savings,

00:22:07.040 | saving $4,000 or $5,000 up front by buying a vehicle that's a year or two old and you compare

00:22:13.600 | it to the life cycle of the vehicle of how much and how heavy it's used, it's a rather insignificant

00:22:19.680 | savings versus the intended purchase. But that's very different than my situation right now.

00:22:25.120 | Understand that. The other thing that you got to understand with vehicles is not all markets are

00:22:36.640 | the same. We really have a luxury in the United States of America of having an amazing used car

00:22:44.000 | market with a tremendous supply of much less expensive vehicles that have been very lightly

00:22:52.080 | used in comparison to what they could be used in some places of the world. They're at very

00:22:59.360 | favorable prices and the quality is extremely high. Frankly, the used car market is phenomenal

00:23:07.760 | simply because cars have not been used that heavily. We have primarily paved roads in the

00:23:11.680 | United States of America. Most cars are not beat up that much and we have a culture of steady new

00:23:18.800 | car sales. So the reason that people go out and they replace their vehicle every three, four,

00:23:22.480 | five, six years, however long, that leads to the fact that there always being a steady supply of

00:23:28.720 | used vehicles. But it's not the same everywhere. That's unique to this market. I remember reading

00:23:35.120 | about vehicles in Africa. There's an awesome, interesting car manufacturer that I keep my eyes

00:23:40.800 | on called Mobius. I came across it when I was – I like reading adventure stories from overlanders

00:23:48.000 | who load their family up in their cars and drive around the world basically. It's something that

00:23:52.400 | someday I think I'll do. These families – this one – I read the story of this couple that drove

00:23:58.320 | across the Congo and they described about the abuse that their vehicle had taken driving across

00:24:04.800 | the Congo. The thing was ripped to shreds practically after something like 30 days of travel.

00:24:09.760 | They were talking about how vehicles in Africa, in that part of Africa were used. Somebody could

00:24:14.800 | buy a brand new Land Cruiser or a brand new Land Rover and the thing would be essentially

00:24:19.040 | demolished after a couple of months of use. It's a little bit of a different decision if you were

00:24:26.000 | in a used market like that where vehicles had been used so heavily. So that I don't leave it as an

00:24:31.520 | unfinished thought, the example of the Mobius is actually a vehicle that is – there's a founder,

00:24:36.640 | an English guy who's trying to have this thing built in Africa by Africans for the African

00:24:41.680 | context. It's an awesome little rugged SUV that he's creating and it's just very cool. Check it

00:24:47.680 | out. Just do a web search for Mobius. But it's very different in that market versus here in

00:24:52.960 | Florida where everyone drives on the highways. Think about even going and evaluating buying a

00:24:58.880 | pickup truck. Here in West Palm Beach, Florida where I live, the majority of pickup trucks

00:25:04.240 | are driven purely as status symbols. There's no actual practical usage to them. Go and look at any

00:25:11.280 | local fire department and the majority, there are usually about five pickup trucks and one jeep in

00:25:16.800 | the parking lot. It's a status symbol. It's a lifestyle choice. So I can find easily a hardly

00:25:23.200 | used pickup truck with 100,000 miles on it. It's just been running up and down the highway all day

00:25:27.200 | and that can be a great vehicle that might fit my needs if I have a need for a pickup truck.

00:25:34.400 | Now compare that to my trying to find a pickup in West Texas and every truck that's got 100,000

00:25:43.680 | miles on it has been run up and down a gravel washboard road or been loaded with a cattle

00:25:48.800 | trailer on the back of it for 85,000 of those miles. That's a very different market,

00:25:54.800 | very different usage, very different market. Now obviously there would be probably some price

00:26:00.960 | differential but my point is you need to understand why do we actually have this market.

00:26:05.280 | So you can't say, "Well, buy used in every country in the world or in every situation." No.

00:26:10.080 | You've got to say, "What is the actual scenario that I need? What do I actually need and want?"

00:26:16.160 | And here's the fundamental reality. You want to make sure that you can meet your stated

00:26:23.920 | needs and wants at the lowest price possible. That's a good decision. Whatever method you find

00:26:32.960 | to be able to meet your stated needs and wants at the lowest cost is going to be the best scenario

00:26:38.400 | based upon the market that you have. I'm going to talk about times in a minute where markets will

00:26:43.520 | change and the person who would ordinarily have chosen a used car might find themselves choosing

00:26:50.160 | a new car and the person who would ordinarily choose a new car might find themselves choosing

00:26:54.720 | a used car. Markets change. The marketplace is based upon supply and demand and you've got to

00:27:00.720 | figure out where do I make a good choice within this. Now, that being said, I think for many

00:27:08.800 | people, they seriously should consider always choosing a used car versus a new car. This is

00:27:15.600 | what's so frustrating why there's such an emphasis on this as personal financial advice because when

00:27:23.120 | you look at the fact that very few people are wealthy, very few people are just buying cars

00:27:28.720 | out of extra money. Many people, their car is sucking all their money out of their budget.

00:27:33.520 | And when you have a heart to help people become wealthy, you see the opportunity cost and many

00:27:38.320 | people don't see that. We don't teach and train people on opportunity cost. At some point, I need

00:27:42.960 | to do an entire show on it. But in simplicity, basically, there's always two costs that are

00:27:48.080 | associated with something. There's the cost when you buy something. There's the cost of the price

00:27:52.560 | that you pay for and then the opportunity cost is what you could have done with the money

00:27:58.000 | or the resource if you hadn't made that choice. So if you choose to go see a movie, your opportunity

00:28:04.960 | cost for the movie is what the other decision you could have done – you could have made with the

00:28:08.240 | time, the other activity you could have engaged in with that same time. And so what happens is

00:28:14.080 | oftentimes people aren't clear about their needs and their wants and they don't recognize what

00:28:20.160 | could be done with the money with the alternative use of the dollar. So when I look at the scenario

00:28:26.560 | and say, "Well, if I choose to buy a – this is my thinking. I could go and I could buy a brand

00:28:34.000 | new minivan for $40,000 or I could buy my minivan for $5,000. That leaves me with $35,000 of

00:28:40.880 | investment capital. If I did nothing else other than that one decision, the $35,000 of investment

00:28:46.560 | capital, and if everything else were constant, it's not, but assume it is, $35,000, if I invested

00:28:53.120 | $35,000 today over my working lifetime of 40 years at 10% interest with no further contributions to

00:29:00.400 | the account, then I would probably have an extra $1.5 million in 40 years' time when I'm about 70.

00:29:07.760 | That's compelling to me. When my primary need is I need a way to transport my family from location

00:29:16.800 | A to location B, that's the need that I have and fit everybody in the car. That's it.

00:29:22.800 | And so I happily will drive the $5,000 vehicle so that I can have an extra $1.5 million. Now,

00:29:29.120 | that's motivating to me. That may not be motivating to you, but every person, if you go through what's

00:29:35.120 | my alternative use of the dollar, let's say that you're making a choice to purchase a used car for

00:29:39.600 | $10,000 less than the new car, then the question would be what else would you do with the $10,000?

00:29:45.440 | So would you rather, young person, would you rather have this cheaper used car and a motorcycle to go

00:29:53.920 | with it, or would you rather have the more expensive new car? Or would you rather have

00:29:57.920 | the cheaper used car and take a year off and backpack around the world, or would you rather

00:30:02.160 | have the new car? Or would you rather have this and stay home from work and raise your kids for

00:30:07.920 | a year and have a year off with your kids or have the new car? That's the decision that we're making,

00:30:12.960 | but we're often not clear and specific about the decision, as long as you're clear and specific

00:30:18.880 | about it, because there'd be many people who would say, especially at an older stage with greater

00:30:23.760 | wealth, there'd be many people who would say, "You know what? I actually don't have something

00:30:27.920 | that I'd rather do with this money. I'd rather have this money and just simply enjoy the new

00:30:32.560 | car experience." Then in that case, the new car decision is probably the right one. That could be

00:30:37.680 | due to scale, the scale of somebody's wealth, or it could be due to lifespan. They value

00:30:43.120 | the experience more than they value the money. If I didn't have a 40-year investment time horizon,

00:30:48.800 | my answer would be different. Let me get to some of the actual

00:30:52.320 | costs and benefits, some of the techniques that you can do that you should consider.

00:30:58.000 | The key thing to keep in mind, as I said, is the total cost of ownership. What is the total cost

00:31:04.080 | of ownership of choice A, and what is the total cost of ownership of choice B, assuming that both

00:31:09.600 | choices satisfy your needs and wants? That total cost of ownership number is important, because you

00:31:15.040 | may find that your total cost of ownership would be lower with new or would be lower with used.

00:31:19.840 | It's tough to get data on some of these things, though, so let's talk about what actually makes

00:31:24.160 | an impact. Price makes a big impact. The price that you pay for something matters,

00:31:30.080 | but it's actually not the number that we should be calculating based upon. We should be doing most

00:31:34.400 | of these calculations based upon the depreciation. Depreciation is something you get very comfortable

00:31:40.800 | with in the context of running a business ledger, a business accounting system. In personal accounting,

00:31:46.960 | we don't often think about it. We don't recognize it. In business, you need to recognize the

00:31:51.040 | depreciation every single year, but in personal accounting, we don't usually even think of it.

00:31:54.800 | Depreciation is very simple. It's the purchase price of the item

00:32:01.040 | minus the residual value when the item is sold. That's the actual cost of the item in terms of

00:32:07.280 | upfront pricing. It's not the total price. It's the depreciation price. If I purchase a car,

00:32:13.600 | as an example, for $30,000, my upfront price is $30,000, but if I sell it in five years for $15,000,

00:32:20.240 | my total cost was $15,000, because the vehicle has $15,000 of residual value remaining.

00:32:28.400 | It's very important to make those decisions based upon the depreciation,

00:32:32.640 | because there are many situations in which I could see somebody purchasing a new vehicle

00:32:36.400 | and buying a vehicle that has a higher residual value

00:32:44.240 | and maybe other benefits and actually having a lower total depreciation than the alternative

00:32:54.000 | used vehicle. Let's assume for a moment that there is a hotly in-demand brand. Here, where I live in

00:33:00.960 | South Florida, it would be the Japanese brands, Hondas and Toyotas, and their associated luxury

00:33:05.840 | brands, Lexus and Acura. Hondas and Toyotas, and to some extent, Nissans, are very popular down

00:33:12.480 | here. They're especially popular with basically the non-ethnic white South Floridians. I have a

00:33:21.600 | lot of friends from the islands. They only drive Toyotas, because those are the vehicles that come

00:33:26.480 | or Hondas. Those are the vehicles that are in demand there. I've got a couple of friends from

00:33:30.800 | Jamaica. It's one of the islands, but they only drive vehicles like that. Down here in South

00:33:37.760 | Florida, where we have a high ethnic population of people from the islands, we have a high Spanish

00:33:42.880 | population, then those brands are very much in demand. It's hard to find a good deal here

00:33:48.320 | on something like a used Honda or Toyota. You got to take that into account.

00:33:51.600 | Sometimes, you might be better off just simply going and buying a new one.

00:33:55.440 | Usually not, but you can do the calculation. Always factor in what's the actual amount of

00:34:03.360 | depreciation. You also got to account for all of the other costs and look at it totally,

00:34:09.840 | all involved. Another example would be tax costs. What is the sales tax on the purchase price of the

00:34:14.800 | vehicle? That's a big cost that many people don't think about. The difference between buying a $30,000

00:34:21.840 | vehicle and a $20,000 vehicle, that's $10,000 in my state, 6%-ish sales tax rate, $600 extra cost.

00:34:30.000 | You got to factor that in. Also, financing costs. If you're going to finance the vehicle,

00:34:35.920 | what is the total cost of that financing? Then you have all of the operating costs. You've got

00:34:40.880 | the fuel or the energy to put into it. We've got to start changing as electric cars have become

00:34:45.680 | more popular. We've got to start changing our vocabulary to talk about the energy cost of

00:34:50.640 | operating the vehicle. You've got your maintenance and repairs costs, which is most people's biggest

00:34:54.800 | fear about used car versus new car. The used car is theoretically going to require more maintenance

00:35:01.360 | and repairs than the new car, theoretically. You have your insurance costs and then you have other

00:35:05.520 | ownership costs, so paying for a parking spot or a garage space or fixing up the stereo system or

00:35:11.120 | buying floor mats. This stuff adds up. Now, the big one though is obviously depreciation. This is

00:35:17.920 | primarily the biggest difference between a new car and a used car. We always ask the question,

00:35:27.120 | why is there such a difference of the value? Why is there such a depreciation for the new car?

00:35:33.520 | There are probably many reasons, but very simply, if there's only a tiny difference between a new

00:35:42.000 | car and a used car as far as the price, let's say a new car were $30,000 and the used car were $29,000,

00:35:47.920 | then most people would go ahead and just simply say, "I'll be the first driver. That way I know

00:35:55.520 | that everything is taken care of from the beginning. I'll drive the first mile on the car."

00:36:00.720 | There's got to be a difference to make it worth making to incentivize people to buy the used car,

00:36:07.040 | but the big one is actually that knowledge. Because there's a difference, the car buying

00:36:13.520 | transaction is a transaction of an asymmetrical amount of information. The buyer has relatively

00:36:19.200 | little information about the quality of the vehicle and the seller has all the information

00:36:24.240 | about the quality of the vehicle. If the buyer is looking and saying, "Here's a one-year-old car,

00:36:30.240 | why is somebody selling a one-year-old car?" The buyer looks at it and says, "Wait a second,

00:36:35.200 | what's going on here? What's wrong with this? What's wrong? There's got to be something wrong

00:36:40.000 | with the car." Now, so to actually make that sale, then the seller will usually have to say, "Well,

00:36:45.600 | I've got an emergency in my family. I've got to unload it because I'm moving," or something like

00:36:48.640 | that. But the reason is that there's an asymmetrical amount of information. So if the seller is trying

00:36:56.640 | to get rid of the car, then they got to get rid of it quickly. Well, you got to discount the price

00:36:59.920 | to get rid of it quickly. And so that's why recently purchased cars, whether it's a year,

00:37:06.240 | two years, three years old, they can be found at a substantial discount. Now, that's a great

00:37:12.720 | scenario for you if you'd like to save money. It's not so good for the buyer of the new car.

00:37:16.400 | But it's all about that risk. You're taking a risk when buying a used car and there's more risk than

00:37:22.640 | when buying a new car. And then because of the difference in the amount of information,

00:37:26.800 | then you're in a weaker scenario, weaker position. It's a big deal. That's why there's

00:37:33.840 | depreciation. It's all about the market. But the key is not to get exclusively focused on the

00:37:42.320 | purchase price, but rather look at the total cost, factoring in all of those things, factoring in

00:37:50.400 | everything, and then make your decision based upon that. So the reason the scales tilt so heavily in

00:37:57.440 | favor of the used cars is we have a large supply of quality used cars in the United States of

00:38:04.320 | America. That massive supply is driven by the fact that many people choose new cars,

00:38:10.720 | drive them lightly and then get rid of them, but so you can find good deals. The cars today last

00:38:15.440 | longer than they ever have. Many people seem to have this impression that vehicle quality is the

00:38:22.240 | same today as it was in the 1970s where if a car reached 100,000 miles, it was practically used up.

00:38:28.160 | It's not so. And you can find good quantitative evidence demonstrating that it's not so.

00:38:35.120 | My anecdotal evidence, I've never had a car that had less than – let's see, I guess less than

00:38:39.440 | 100,000 miles basically and two of mine had over 100 and almost 200,000 when I got them.

00:38:45.600 | Anecdotally, I've had very few repair scenarios that were due to the mileage of the car.

00:38:53.200 | And there are some things that you can do to care for that. And if you talk with people who are

00:38:59.280 | garage owners, mechanics, things like that, 200,000 miles is probably pretty normal for

00:39:04.880 | many cars to be able to get to without some major scenario. Build quality matters completely.

00:39:10.800 | But add up all of those costs and figure out what the total cost is and then based upon that,

00:39:16.960 | make your decision. Now, focus on purser's price but also focus on other things while you're making

00:39:22.640 | the decision. I'll give you a couple of the bits of data when my wife and I chose to buy the minivan

00:39:28.160 | that we drive. What I was looking for was looking for a minivan of a certain vintage. And so there

00:39:33.760 | was in the minivan market, there is a – by the way, minivans, the best vehicle for – probably

00:39:39.920 | the best deal of a vehicle for all the benefits put together. I'll save that for another time but

00:39:44.720 | they're just great vehicles. But in the minivan marketplace, the Toyotas and the Hondas

00:39:49.840 | have a premium price associated with them. There is a substantial difference in the pricing.

00:39:55.920 | But there's a substantial discount for the American brands and for the Kia and the Hyundai.

00:40:04.400 | But based upon the research that I did at the time, the build quality of the Kia and the Hyundai is

00:40:09.040 | pretty good, pretty good, pretty comparable to the build quality of the Toyota and the Honda.

00:40:15.120 | And so I was able to get a substantial massive discount by going with the second tier of brands

00:40:21.600 | and the build quality based upon the research I've been able to find seems to be pretty good.

00:40:26.480 | Now, who knows? I did have one expensive repair and again, that was probably due to mechanic

00:40:32.160 | error rather than to the problem of the vehicle. That can happen on any car. So I'm not ready to

00:40:38.160 | say that I had a bad experience. So far, it's been pretty good. So there's a substantial discount on

00:40:43.360 | the purchase price. But other things that substantially benefited me, the actual cost

00:40:47.200 | to insure the vehicle was at that time much lower than other comparable vehicles partly due to

00:40:54.240 | excellent safety ratings and partly due to the lower replacement costs, so much lower insurance

00:40:59.760 | costs. Additionally, because the vehicle was so cheap, I could have much cheaper insurance by not

00:41:05.760 | necessarily choosing to put comprehensive insurance on it. I probably wouldn't make that decision if

00:41:11.680 | I were buying a fancier, newer one because it would be a bigger deal in my life. I could, if this car

00:41:16.160 | broke down, I could go and buy a whole other car. I could buy two Hyundais or Kias for the cost of

00:41:24.880 | the Honda or Toyota. And so it was no big deal for me to say, "Okay, I can get cheaper insurance

00:41:29.920 | costs." I was also able to find a substantial discount because of buying a high mileage vehicle.

00:41:35.440 | But in my scenario at this point, I don't drive that much. And so to me, that's actually a benefit

00:41:40.640 | both ways. If you drive a lot, then driving a high mileage vehicle can be a benefit. And if you don't

00:41:45.040 | drive that much, then it can be a benefit. There's a sweet spot somewhere in that curve of usage

00:41:50.800 | versus repairs. I don't know where it is. I can't find the date on it, but there is a sweet spot

00:41:55.280 | there somewhere. So for me, all of those things resulted in a dramatically lower cost. Factor

00:42:03.600 | these things into your decision-making criteria. Try to estimate your actual costs. And let's start

00:42:08.560 | with depreciation. Depreciation is almost always going to be your biggest cost. So ways you can

00:42:13.840 | mitigate depreciation. Number one, buy a less costly vehicle. 20% depreciation on a $40,000

00:42:20.080 | vehicle is a loss of $8,000 of value in one year. 20% depreciation on a $20,000 vehicle is a loss

00:42:28.080 | of $4,000 in one year. In just about any vehicle class, you could find a $20,000 vehicle that's

00:42:35.760 | just about as good as the $40,000 vehicle. And you can especially find that in things like the SUV

00:42:44.240 | marketplace, luxury car marketplace. You can find it. So unless you're rich, just buy a little bit

00:42:50.800 | less car, and built in, you're going to have lower depreciation. This is why the scales tip so heavily

00:42:59.680 | in the favor of used vehicles. Two or three-year-old vehicle, drop $20,000 in price.

00:43:06.560 | And the reason is because $8,000 of annual depreciation, eight times what? That'd be two

00:43:12.480 | and a half. You're down now again, depreciation is always based upon the year. So $40,000.

00:43:16.960 | So let me just explain. So $40,000, pull $8,000 off the price is now 30 $40,000, pull 8,000 off

00:43:25.680 | the price. That now is down to $32,000. Well, 20% of that is only $6,400 of depreciation. So

00:43:32.800 | basically, you buy a three-year-old vehicle for $20,000 versus a new vehicle for $40,000.

00:43:38.000 | You can find a great vehicle, and you're not going to incur $4,000 in one year of maintenance

00:43:46.080 | costs just because the vehicle is a few years older. So simply by choosing to buy a less costly

00:43:52.320 | vehicle, you'll have lower depreciation. Another way to cut depreciation costs is get an upfront

00:43:59.200 | deal. Now, here's what I mean. It might sound the same as, and it is the same as buy a less costly

00:44:04.160 | vehicle, but sometimes you can find an inefficient market, an inefficient market where you can buy a

00:44:09.840 | deal that you shouldn't be able to find. So you can buy when the timing is advantageous.

00:44:15.200 | Examples that come to mind, I've watched and paid attention to the hybrid and electric car market.

00:44:21.040 | And a few years ago, the Chevy Volt just was not selling. Now, you couldn't really find a great

00:44:26.720 | deal on a used Chevy Volt, but you could find some phenomenal deals on the new Chevy Volts.

00:44:31.520 | And they were so heavily discounted, especially through their leasing program, which is a show

00:44:35.360 | for another day. But you could find some deals that were so substantially great that it was a

00:44:42.000 | great buy for somebody who was in the marketplace. It wasn't a good enough buy for me because it was

00:44:46.800 | more car than I needed for my needs. It would have been me buying a $200,000 big fancy tractor

00:44:52.400 | for my quarter acre farm. But the Chevy Volt had that. The Smart car a couple years ago was that

00:44:57.920 | way. Right now, as I record this in 2015, March 2015, the Prius is pretty low priced. Gas prices

00:45:05.040 | have come down. That has a change in demand. And always remember this, the market does respond to

00:45:10.320 | supply and demand. The dealer, the car dealer needs to move their inventory. Inventory that's

00:45:15.200 | just sitting on the lot for a long period of time is not making them money. And most of them are

00:45:19.520 | incurring financing costs for their floor plan. So the market will react to demand. They need to

00:45:25.520 | be continually moving inventory. If they're not moving inventory, the salespeople aren't making

00:45:29.840 | commissions. If they're not moving inventory, then the dealership is not making money.

00:45:34.720 | So the marketplace does respond to market conditions. The next way to limit depreciation

00:45:43.200 | is to buy a vehicle that depreciates at a slower rate than the market average.

00:45:46.560 | How? Well, it could be that the market itself is demonstrating that the vehicle is more in

00:45:55.040 | demand. So back to the Prius scenario. A few years ago, I was shopping for one and disclosures and

00:45:59.760 | gas prices were high. At that time, people trying to sell a used Prius were sitting pretty. Gas

00:46:05.920 | prices were through the roof and so the market price of the used vehicle was extremely high.

00:46:11.360 | If you can anticipate that in the long term, it's hard to do. But if you can anticipate it,

00:46:17.840 | you might be able to do better. Some of the cars that depreciate the lowest, things like Jeeps.

00:46:24.240 | I don't know if you've ever gone out and shopped for a used Jeep, but the prices are extremely high.

00:46:28.000 | So they depreciate pretty slowly. Novelty cars like Mini Coopers, sometimes things like diesel

00:46:35.520 | pickup trucks, depending on the gas prices again, is another big deal. So the market might be a

00:46:40.960 | limited production market. It might be a luxury car market and you might find a certain type of

00:46:46.960 | the limited luxury car market that depreciates more slowly. If you go out and you buy a Ferrari

00:46:52.000 | Enzo, it's tough to find a substantial discount on a used one versus a new one. It's a unique,

00:46:58.560 | very small market. Now, if you go buy a Chevy Malibu, man, you can find those things for pennies

00:47:03.600 | on the dollars all over the place. Shop your market. Another way to limit depreciation is

00:47:10.080 | take better care of your vehicle so it depreciates at a slower rate and sells more quickly. Remember,

00:47:15.120 | any market still has competition. So when you're a seller of a car, your car is in competition

00:47:20.080 | against all of the other cars currently for sale. And if you can demonstrate a superior product,

00:47:25.920 | maybe you can mitigate the fear that a buyer has about their lack of information, back to that

00:47:32.400 | asymmetrical amount of information. Maybe you can save all of your maintenance records, have them

00:47:36.160 | carefully organized from the beginning. Your car can look better. We all know that intuitively,

00:47:41.280 | but it's good to actually identify it. And so if you take better care of your vehicle, you'll

00:47:46.320 | limit your depreciation. Or you can buy a vehicle and keep it longer. Remember that depreciation is

00:47:54.320 | always the highest up front. But if you can keep an item for longer, then you can limit and spread

00:48:02.400 | out the impact of that cost. So even if you buy a new car, keep the car for a very, very long time.

00:48:10.000 | That's why so many people stay poor from constantly leasing and upgrading new cars,

00:48:14.000 | because they're always operating a vehicle at the most expensive point. If you buy a new car

00:48:19.760 | every four years, you're automatically basically kissing goodbye 50 to 70% of the value of the car.

00:48:29.360 | And you're always operating a vehicle in that most expensive price range.

00:48:32.880 | Even if buying a new vehicle is a decision you made, just keep your car for 15 years.

00:48:40.480 | And the impact of that decision is much lower. And it could, in fact, if the car served the

00:48:46.320 | needs for the long period of time, it could in fact be a lower cost than somebody who bought

00:48:50.160 | used at two years old and kept the car for six years. I don't know, you have to run the numbers

00:48:54.480 | in your scenario. But just always calculate in the purchase price and the residual value.

00:48:58.880 | Now, how can you turbocharge these things? Do all of the above.

00:49:06.240 | That's the key. You don't ever have to just do one thing. So if you really want to get the best

00:49:11.520 | deal on a car, then buy a less costly vehicle simply because it's used. Get an upfront deal

00:49:18.080 | because you're buying at a weird time scenario. Let's say, again, I just focus on gas prices

00:49:24.560 | because they're very connected to us. But you're buying a used vehicle that's a three-year-old

00:49:30.240 | vehicle that's out of favor because of the gas prices. And then you're making sure that you

00:49:34.960 | choose a vehicle that has a lower overall depreciation rate and you're getting an upfront

00:49:42.000 | deal. You're buying from a distressed seller, buying in cash, something like that, buying

00:49:47.200 | quickly. And then you take better care of the vehicle and then you drive it for a very long

00:49:52.240 | time. Well, now you've mitigated your depreciation costs in every area. And that's where your best

00:49:59.360 | benefits are going to be. But don't forget about all the other stuff as well. Fuel costs or energy,

00:50:04.720 | obviously, the lowest cost to operate a vehicle is going to be better. So one of the things that's

00:50:08.880 | interesting to me is looking at this from a behavioral perspective. Let's say that my choice

00:50:14.640 | is between buying a used expensive – I'll just use a used expensive SUV versus a new commuter car.

00:50:23.280 | And let's say that I have a pride issue that I've got to drive a car that's of a certain fanciness

00:50:28.880 | and I'm not willing to drive a used commuter car. So I'm going to buy a new commuter car. If those

00:50:33.280 | are my choices between A and B, it very well may be that I'll save enough on the used commuter car –

00:50:39.840 | excuse me, on the new commuter car and gas to justify the fancier car and get a better deal

00:50:46.800 | over the used SUV. Calculate the total cost. Now, anybody listening to the show is probably – you're

00:50:56.160 | probably not stuck between those two decisions. And the reality is it's almost never a good idea

00:51:02.000 | to upgrade a vehicle based upon gas prices alone. You need to have a – either – if you're going

00:51:10.400 | to upgrade a vehicle based upon gas prices, you either need to have a level swap or go to a

00:51:15.600 | cheaper vehicle almost every time. I built a gas calculator years ago in Excel to demonstrate this

00:51:21.520 | to people and it was from my dad. He was trying to think through – he had a 1995 Chevy van at one

00:51:27.840 | time which incidentally, other anecdotal evidence for the quality of vehicles in my family, a couple

00:51:35.280 | of cars that we've had – we have had a couple of Chevy vans, all of which ended up with more than

00:51:40.320 | 200,000 miles on it. We had a Chevy Caprice at one point that was stolen with 327,000 miles on it,

00:51:46.320 | little cost. Vehicles can simply last is my point on that. But with this van, he was trying to

00:51:53.280 | calculate based upon his commute, had a low value of the van but very expensive fuel cost, didn't

00:51:58.640 | need the van anymore. He was trying to calculate the switch to a more – a fuel-efficient car.

00:52:02.240 | Unless the car were an even swap, I could not make it make financial sense.

00:52:08.640 | I simply couldn't even with this atrocious gas mileage of a large full-size van as compared to

00:52:15.360 | a commuter car. There's got to be other reasons for it other than fuel and energy. But if you can

00:52:20.480 | get a vehicle that has lower total lifetime fuel costs, it's going to be better. Now, one of the

00:52:26.080 | costs that I do want to include here that most people don't think about would be the cost of

00:52:29.440 | downtime. The cost of downtime is a major impact or can have a major impact on some decisions

00:52:39.520 | but probably not yours. People worry about this a lot. If my car breaks down on me,

00:52:46.960 | I'm going to have a problem with my job. Does it happen? Yes, it does. But you as an individual,

00:52:52.640 | if you are just simply operating as an individual, the marginal difference of your not missing a day

00:52:58.480 | of work or having to work from home for a day or two when the car is in the shop,

00:53:02.320 | it's probably going to be worth a much lower – it would be a much lower cost than the cost

00:53:08.240 | of the guaranteed depreciation from buying a new vehicle continually. That may not be the case,

00:53:13.760 | however, if the vehicle is an integral part of your ability to create income.

00:53:19.840 | So imagine if you're running a fleet of trucks for let's say a large supermarket chain or for

00:53:25.760 | a logging company or some scenario in which the vehicles actually make you money. One day of

00:53:31.920 | downtime, two or three missed loads might have an actual cost to you of – I mean it could be tens

00:53:40.160 | of thousands of dollars, maybe more. So when you compare the cost of downtime, you've got to

00:53:46.480 | calculate how to avoid that and that's why you'll see – for example, I noticed down here where I

00:53:53.280 | live, Publix is the largest and most popular supermarket chain. The Publix trucks, they're

00:53:57.520 | brand new as I understand it. There's some kind of leasing arrangement. They're almost always

00:54:01.600 | brand new. They're in a few years old and then they're leased, they're run and then they're

00:54:05.440 | slipped out. I'm sure that their accounting team has sat down and has decided that that is the best

00:54:10.720 | way for them to operate and accomplish what they need to accomplish because the potential cost of

00:54:17.920 | a load sitting on the side of the road with a broken down truck and a store that is missing

00:54:23.120 | some of the key ingredients, it's too much of a cost for them. It might be the same for you

00:54:28.560 | but it's probably only the same for you if you actually have a business that's dependent upon

00:54:34.480 | that asset to create money. So you need to calculate that, the cost of the downtime.

00:54:40.560 | Understand also other costs such as financing costs. I've never borrowed money for a car. I

00:54:48.720 | think it's for the most part a silly idea. I can design a few situations in which it

00:54:54.800 | theoretically can make sense but it's almost never a good idea. But if you add that in,

00:55:01.600 | it can be a substantial increase in the cost, especially if you're at the bottom end of the

00:55:08.160 | market where you're paying a very high interest cost. Then of course also calculate any other

00:55:13.920 | maintenance, repairs, trying to estimate that, the insurance costs, the ownership costs.

00:55:20.400 | When you add all these things together, for somebody who is focused on needs,

00:55:28.160 | I think that in the market that we live in, the United States of America, you'll almost

00:55:31.360 | always wind up with a choice of a used vehicle, almost always. There's simply such a flood

00:55:38.560 | of vehicles that are great quality vehicles at much cheaper prices available in today's world

00:55:44.880 | that when you start compounding these things, cheaper purchase price, the ability to pay cash

00:55:51.280 | instead of finance because of the cheaper purchase price to strip out financing costs,

00:55:54.800 | the ability to carry collision insurance only instead of comprehensive insurance so you have

00:55:58.320 | lower insurance costs. You have lower ownership costs because you don't have to pay for the

00:56:02.400 | covered garage to maintain this car. You're happier parking it out on the street. I mean,

00:56:08.320 | there are so many ways to compound this that almost always the question is what is the best

00:56:13.360 | financial decision? You're probably going to wind up with a used vehicle. But there may be different

00:56:21.360 | – there may be unique situations. Like I said, if I were in my former boss's shoes running a ranch

00:56:28.480 | and putting 300,000 miles on a vehicle in a very short period of time, would I worry too much about

00:56:34.400 | that year or two of depreciation up front? I wouldn't. I probably wouldn't. You get to a point

00:56:40.400 | at which you're making enough money that the scale is not that big a deal. There's a Mercedes

00:56:44.400 | dealership right near my house. I've met a couple of the sales guys in there and people just trot in

00:56:51.280 | and trade out the cars once a year just for fun, just to keep current. It leads to an excellent

00:56:58.080 | used car market for the Mercedes brand down here. The key is figure out what you actually need and

00:57:05.200 | then look and calculate the total cost. It is hard to find the data. I ran a scenario recently and

00:57:12.240 | it was with a friend of mine who keeps careful records. This was one of those perfect used car

00:57:18.880 | scenarios. It was a Honda Accord. He had done everything. We calculated out and I calculated

00:57:23.920 | that with his current ownership cost, it was something like $385 a month. It was astounding

00:57:30.080 | because of the amount of repairs that he'd had on the vehicle. When you compare that to the cost of

00:57:35.360 | him going out and leasing something cheap and run the numbers on that, if he could find a good deal,

00:57:40.400 | it was comparable. This is not always a simple decision, which is why there's so much debate

00:57:46.080 | about it. You actually have to find some data and it's hard to find the good solid data.

00:57:50.720 | It's hard to know in advance. Because you don't know, is this car going to be great and it's a

00:57:56.000 | used car and I'm going to run it for 10 years and it's not even going to have a single problem?

00:57:59.280 | Or is this car going to be a bunch of problems? At the end of the day, you're still guessing

00:58:04.720 | pretty much. That's what you're doing. Hopefully, you can make an educated guess.

00:58:12.320 | Hopefully, you can do that. Remember that you might be able to solve some of your needs without

00:58:17.760 | actually owning a car. I am convinced more than ever after now a few years of my wife and I having

00:58:24.880 | one car instead of two, that the route that we took of downsizing to one car is a tremendous

00:58:31.680 | route for many people to consider taking. Even just one of the costs that I always hated was

00:58:37.920 | all the time spent just sitting on the oil change place, getting your oil changed or a new set of

00:58:43.200 | tires on two cars. Just going from two to one is a dramatic time savings. Recently, for the first

00:58:48.800 | time a couple of months ago, I took Uber and Uber, they have an Uber. Uber is active here in my area.

00:58:54.720 | I took Uber. I think for many families, if you're keeping a car for that every now and then scenario,

00:58:59.280 | go ahead and try the actual cost of using some of the ride-sharing services like Uber and Lyft.

00:59:06.560 | Go ahead and calculate what would be the cost of renting a car for the long over the road trip. Try

00:59:10.400 | to find a way that would solve it without owning a car. I really believe – just make the comment

00:59:16.720 | here but many people who are stuck in that two cars because we sometimes need the second one,

00:59:22.400 | if you just switch to Uber, using Uber as that second time and feel free with doing that,

00:59:27.360 | you might save enough money to where it's worth dropping from two to one.

00:59:33.280 | Also, recognize the next phase of cars is going to be self-driving and electric and it's here.

00:59:40.160 | I've said for a while, it's a decade or two. I'm convinced at this point, it's less than a decade

00:59:44.880 | where it'll be normal within a decade that it'll be normal that a bunch of us have self-driving

00:59:50.640 | electric cars. That's going to completely change the marketplace. It's going to make deals. It's

00:59:55.920 | also going to make more efficiencies. Then when you start compounding these technologies, if you're

01:00:00.480 | not paying attention to this, do so. It's here. When you compound Uber type of connections with

01:00:07.360 | self-driving, I think a decade – again, maybe two for this but I think it'll be very normal in the

01:00:12.800 | future. We'll pull out our smartphone and when we need to ride somewhere, we'll click a button

01:00:17.520 | just like Uber works now. You click a button on your smartphone, you tell it where you need to go

01:00:21.040 | and a self-driving taxi is going to pull up. We jump in and it's going to take us and drop us

01:00:26.160 | off and that's going to be in many cities. That's going to be the primary way of transportation

01:00:30.000 | works. It's not sci-fi. It's here now. Every bit of technology has been created and it's only

01:00:36.480 | waiting on legislative regulatory changes for it to happen. I want to close this show with a couple

01:00:43.200 | of topics from the Patreon page. I put out – I try to do this plenty of time in advance but I put

01:00:50.240 | out on the Patreon page what the show topic is going to be for tomorrow and I invite people to

01:00:54.880 | comment. When I put this show topic out for the patrons of the show, which by the way, if you're

01:00:59.120 | not a patron, you can be one. This is one of your benefits. Go to RadicalPersonalFinance.com/patron,

01:01:04.400 | check out all of the Patreon benefits. You can do this at any level, even a buck a month. I'll

01:01:09.120 | share this stuff with you. I got a lot of questions. I want to answer some of these

01:01:13.280 | questions specifically. John says, "How do you put a dollar value on the emotions involved when

01:01:18.000 | your cheap used car breaks down?" John, it's a great question because I think this is the number

01:01:23.520 | one reason why people make poor car decisions. You get into a point of stress. Usually, it's because

01:01:30.240 | many times the people when they're buying, trying to buy cheap used cars, cheap used cars, cheap used

01:01:34.080 | cars, car is breaking, car is breaking. They reach that point of stress and they say, "I've had it.

01:01:39.040 | I just want a car that works." That is a very prime time when it's very possible to make a poor

01:01:46.400 | decision. Now, I'm not saying it's always a poor decision to buy a new car. It can be a good

01:01:53.200 | decision, but the key is avoiding that stress. I think that's the big one. Try in advance to have

01:02:01.600 | your plans worked out. Try to stay ahead. A comment that Marcus made on John's comment, he said,

01:02:08.080 | "That's why we have three cars. My wife and I have three cars. The good one, hers, the beater,

01:02:12.160 | mine, and the old beater, which is the spare. Then they can rotate the cars around if one breaks."

01:02:16.960 | That's a good strategy. I think also Uber is a good strategy. Knowing that you have cheap

01:02:21.120 | transportation can be a workable strategy. Evan talks about buying new with an extended warranty

01:02:29.200 | versus buying used as is. Evan, I think that one's so hard to answer. You got to go on the data.

01:02:34.560 | Here, I would lean heavily on data like sources like Consumer Reports and buying carefully.

01:02:40.880 | All cars are not made equal. It's foolish to compare a cheaply built piece of junk car

01:02:47.680 | with a well-built quality car. Go with the data. Go with the Consumer Reports data. Go with the

01:02:53.280 | other quality data. I think you can make a good decision on the used cars. Again, it's got to be

01:02:59.760 | a personal scenario. Peter asks about depreciation. Is it non-linear? What are the average percentages

01:03:05.360 | or anything else that comes to mind on depreciation? Peter, depreciation, it's hard to measure because

01:03:09.920 | it's individual to the actual car. It's also individual until you actually go out and figure

01:03:15.040 | out what the sale is. Oftentimes, how do you calculate your actual depreciation when you

01:03:19.280 | sell the car if you have to go and differentiate a dealer price and a private party price?

01:03:24.320 | The numbers that I've seen is generally pretty consistent. The first year depreciation is

01:03:30.400 | somewhere between 20% to 25%, maybe 20% to 30% depending on the car. It could be less for some

01:03:35.760 | other cars and then basically about 15% to 20% per year. I usually use in my mind 15% per year as the

01:03:41.920 | number that I go based upon but it varies depending on the car. If you go out and search, you can find

01:03:47.040 | some cars that have low depreciation like I've mentioned, some of the Japanese brands and also

01:03:52.160 | things like Jeeps. Of course, other costs as well. It's going to cost you a lot more to be driving a

01:03:57.520 | Jeep every day than a Toyota Corolla. J.Y. says, "What about electric vehicles negating much of

01:04:02.720 | the maintenance of the Rube Goldberg contraption we call modern internal combustion engines?" I

01:04:08.640 | think this is going to be changing dramatically quickly. If you look at how effective the electric

01:04:13.280 | cars are now, Tesla changed the game. I'm so thankful for the people that are supporting Tesla

01:04:19.680 | and buying their vehicles. They changed the game. In a decade, I think it's going to be very normal

01:04:25.440 | that many of us will drive electric vehicles. I've run the prices on them for myself. I've

01:04:30.960 | still not gotten to the point where it's worth it for me to go with an electric vehicle but I

01:04:36.480 | think for many people, it will be. If I were at a different phase of my wealth building journey,

01:04:42.320 | if I had the money and I just wanted to simply support it, I would probably make a choice to

01:04:46.400 | support. I'd have something like a Tesla to make a choice to support it. The future is bright.

01:04:53.440 | You look at some of the stuff that's done, some of the research that's done with vehicles that

01:04:57.760 | can run over a thousand miles on a gallon of fuel. Now, of course, these are super slow,

01:05:02.400 | super light vehicles but there's some amazing research that's being done and there's no reason

01:05:08.720 | for us to have the atrocious performance that we have now. We recognize the market hasn't demanded

01:05:13.120 | it in the past. People are demanding it now. Car manufacturers are filling the market.

01:05:18.000 | Rocky asks, "Does your used car have to be cheap? We bought an almost new Yukon and saved over

01:05:24.800 | $10,000. I put a warranty on it that'll cover me for seven years." I think no, Rocky. I think for

01:05:30.240 | me, that is one of the ideal scenarios. If I were wanting to drive a fancier car, I would focus on

01:05:36.080 | that couple-year-old space, especially if you get one off lease where somebody has just come in and

01:05:41.280 | off lease from a good part of the country where you have a few concerns. That's a real sweet spot.

01:05:45.280 | I think one of the ideal scenarios is when you're a few years into a model year. For example,

01:05:50.880 | on the Yukon, what year was it? I think it was 2007 at which Chevy and GMC changed the badging

01:06:00.000 | of those things. If you buy the model year, I think a sweet spot is if you get to something

01:06:04.480 | like 2010 and then you buy a 2007 or 2008 model year, then your car is still very current. If

01:06:11.760 | it's in good condition, it looks very fancy and new until they change the badging in the future.

01:06:17.040 | You get a substantial discount on the price. You're driving a very fancy current-looking car,

01:06:21.200 | so you get all the benefits of the image of the fancier car. You get the discount on the used car

01:06:28.240 | and that stays current for quite a while. For me, that's a big benefit is buying those cars that are

01:06:34.800 | a couple years old. Now, I'm not at the stage where that's important to me. I'm still at the

01:06:40.000 | very beginning wealth-building stage. For me, I would rather have a vehicle that's substantially

01:06:44.800 | cheaper in order to have more money available for other goals. But that changes throughout your

01:06:50.720 | time, throughout your lifespan. In the beginning, you have more time than money and so you've got

01:06:56.560 | to get all your money working for you for later in life. Later in life, you have probably more

01:07:01.760 | money than time and then you're looking for a different scenario. The key I think has to do

01:07:07.920 | with the actual marketplace. You have to actually look at your actual marketplace and you have to

01:07:13.360 | shop to see what's available. I had a relative recently who was looking for a car and they

01:07:18.080 | were shopping the used market and there just simply wasn't a supply of vehicles in the

01:07:23.280 | category they were choosing. There was no good supply of quality vehicles in which case,

01:07:28.080 | chose to buy a new one. Then finally, Carl makes a comment about the quality and recommendations.

01:07:34.400 | He says here, I'm going to read it just so that you know because he makes a comment that he's in

01:07:38.960 | the industry. "Assuming one is not wealthy and is looking to get there and/or minimize debt,

01:07:43.120 | I can't see a reason to buy new. Consumer Reports is a good source for ratings and

01:07:47.040 | recommendations on used cars. After five years, two-thirds of the depreciation has been incurred.

01:07:52.080 | Cars are better quality than ever. 200,000 miles is a lot versus 100,000 miles 30 years ago.

01:07:57.440 | My opinion is a result of 30 years of buying used, five to 10 years old, in the car business for the

01:08:02.560 | last seven and most importantly, reading Millionaire Next Door. Give a gift to your future

01:08:06.720 | self and buy a five-year-old car." Carl, I can't think of a better thing to end on. Hopefully,

01:08:11.280 | this has given you some ideas and I agree with Carl's assessments. Hopefully, this gives you a

01:08:16.400 | way to think about it. I would encourage you just to look carefully at your own situation.

01:08:20.240 | If you make a list of your needs and your wants and again, remember the concept of opportunity

01:08:25.600 | costs and you say, "You know what? I don't care about missing out on the $10,000 of depreciation,"

01:08:30.320 | or you shop your actual market, make a list of them, make your own decision. But pay attention

01:08:36.800 | to where money is flowing out of your life. One of the things that I like about business

01:08:40.480 | accounting that I wish we taught in personal accounting and I'm trying to teach it to you now

01:08:44.320 | is in business accounting, you always have to account for depreciation.

01:08:47.520 | If I were running a tractor in a business, every year I would depreciate that tractor and I would

01:08:53.920 | incur a cost from using accrual-based accounting. I would incur a cost of a depreciation cost for

01:09:01.120 | that tractor and then I would actually be able to see it on my expenses. As an example, if you

01:09:07.280 | wanted to replicate this or mimic this in your personal financial accounting, take your personal

01:09:12.720 | cash flow statement and figure out how much your vehicle depreciated in value last year.

01:09:17.200 | So if your vehicle was worth $15,000 at the beginning of the year but now you could probably

01:09:20.800 | only sell it for $11,000, then account for that with a $4,000 expense of car depreciation. That's

01:09:28.960 | a much better way to do it than to account for it with purchase price or just monthly payment

01:09:35.600 | costs, things like that. Now, it's a little bit clunky to maintain all these statements,

01:09:39.520 | so this is primarily more of a mental concept, but recognize that. For me, that's where the

01:09:45.440 | decision is all about. Recognize that depreciation is guaranteed and so I need to have the car that

01:09:51.040 | fits what I need and want. Recognize the amazing opportunity that we have in the United States of

01:09:56.400 | America with a healthy supply of used vehicles, but also recognize that market could change

01:10:03.280 | and it does change. So hopefully this gives you a bit of a background. I didn't go too much into

01:10:07.920 | leasing versus buying. Someday I'll do a show on the taxes and the cost and the comparisons.

01:10:12.320 | I'll do a show on how to get a good lease deal because you can get good lease deals,

01:10:15.920 | but like anything, you have to negotiate them. I'll do some shows on how to get good deals when

01:10:19.360 | buying. My list of topics is way too big for me to ever get through them all. Hopefully this was a

01:10:24.960 | good introduction to it. Thank you all so much for listening. I appreciate each and every one of you.

01:10:29.600 | Go to RadicalPersonalFinance.com/patron if I've saved you money today. Cheers, y'all.

01:10:34.800 | Thank you for listening to today's show. If you'd like to contact me personally,

01:10:39.120 | my email address is joshua@radicalpersonalfinance.com. You can also connect with the show on Twitter @radicalpf

01:10:47.760 | and at facebook.com/radicalpersonalfinance. This show is intended to provide entertainment,

01:10:54.240 | education, and financial enlightenment, but your situation is unique and I cannot deliver

01:11:02.000 | any actionable advice without knowing anything about you. Please, develop a team of professional

01:11:09.360 | advisors who you find to be caring, competent, and trustworthy, and consult them because they

01:11:17.600 | are the ones who can understand your specific needs, your specific goals, and provide specific

01:11:24.960 | answers to your questions. I've done my absolute best to be clear and accurate in today's show,

01:11:31.280 | but I'm one person and I make mistakes. If you spot a mistake in something I've said,

01:11:36.320 | please help me by coming to the show page and commenting so we can all learn together.

01:11:41.120 | Until tomorrow, thanks for being here. Hey parents, join the LA Kings on Saturday,

01:11:46.480 | November 25th for an unforgettable Kids Day presented by Pear Deck. Family fun, giveaways,

01:11:51.760 | and exciting Kings hockey awaits. Get your tickets now at lakings.com/promotions and

01:11:56.720 | create lasting memories with your little ones.

RPF0167-Used_Cars_vs_New