The Money Pit

Guest Post by Eric Peters

I know someone who is dead broke and living in a small apartment, on the government dole – despite having both earned and inherited many hundreds of thousand dollars over the course of her lifetime. In part, this person is broke because she spent hundreds of thousands of dollars on new cars over the course of her lifetime.

Five expensive new cars, starting with a 1974 Oldsmobile 98 (base price $5,869 when new; equivalent to $30,763 in 2018) followed by a ’77 Olds 98 (base price $6,786 when new;  $29,230 in 2018 dollars) then a 1983 ’98 ($13,018 when new; $33,541 in today’s inflated dollars) then a 1987 Lincoln Mark VII LSC (base price $25,683 or $58,607 now) and – finally, at the end of the proverbial road – a 2000 Lexus RX300 ($33,000 when new – the equivalent of $49,263 today).

Whoosh – there went $201,404 and change.

This is a low figure, too. It is calculated on the base price of each car – not the optioned-out price. Since I know the person – and the cars involved – personally, I know for a fact that she paid considerably more than the base price for each of these cars. The total is probably closer to $225,000.

And the figure does not count the insurance, property taxes and cost of maintaining and repairing those cars, which – figuring very conservatively – must have been at least $5,000 per car over its lifetime.

Add another $25,000 to the tab.

It is halting.

Almost – and probably more than – half-a-million dollars that could have gone toward appreciating assets or at least toward savings was instead spent on disposable appliances not fundamentally different from toasters – with the one important difference that toasters won’t bankrupt you while new cars will.

Especially high-end new cars, which depreciate titanically – exactly the right word.

Because their value sinks almost as fast as the famed luxury liner did. It is as predictable as Pravda during the Brezhnev years that if you buy any high-end luxury car this year, in about six years, it will be worth about half what you paid for it.

The main reason for this is that  the initial value of high-end luxury cars is mostly a function of their being “the  very latest thing.” And once they’re not . . . .

Also, ordinary cars now generally come standard with most of the high-end features which used to be exclusive to high-end luxury cars. For example, power everything, climate control AC, a very good factory sound system, heated seats and leather, etc. All these things are available in $20,000 Corollas – which makes it hard to understand what you’re getting when you buy a $50,000 Mercedes but easy to understand why the $50,000 Mercedes will be worth $20,000 (or less) five or six years from now.

My broke friend would have done much better buying a Corolla – or a used Mercedes.

The other big mistake she made – which you may have noticed from the timeline – is not keeping the cars she bought long enough to make them work for her rather than bleed her. Trading in a high-end car every five years or so – as she did – coincides exactly with the lowest point of the depreciation trough.

She bought high – and sold low.

Had she kept the cars 50 percent longer – ten years instead of five or so – she might not have lost 50 percent of her “investment.” And if she’d kept them long enough, she might have recovered some of her investment.

The rate of depreciation decreases after about eight years – and eventually stabilizes. You reach a point at which the value of the vehicle remains fairly constant so long as the vehicle is still functionally sound. And it is at this point that the vehicle becomes – if not an “investment” – then at least a kind of fungible asset. If it’s worth say $3,500 this year it will probably be worth about the same next year, assuming it remains functionally sound. This is true even though miles will be added. After a certain point, that matters less and less – so long as the vehicle remains functionally sound.

Such vehicle are also sound purchases – in part because it doesn’t take much to purchase them (most people can buy them outright, so no payments and no ongoing debt; also much lower cost to insure and negligible taxes, which are based on average retail value) and in part because they have already depreciated to the extent they are going to depreciate until they’re no longer functionally sound.

As an example of that – vs.  the example of my now-broke friend – I submit myself. I’ve never bought a new car, high-end or otherwise. I’ve always bought older, already depreciated cars, as follows:

1973 VW Beetle (bought used for $700 circa 1986; $1,609 in today’s dollars) then a ’74 Super Beetle (bought used circa 1992 for $1,200; which amounts to $2,189 in 2018 dollar) followed by a used ’98 Nissan Frontier (bought used in 2003 for $7,000 – or  $9,707 in current dollars) and then my current vehicle, another Nissan Frontier ($7,500 in 2008, equivalent to $9,336 today).

So, just under $23k (plus insurance, taxes and maintenance) over the same span of time as in the example of my friend who whooshed  through a quarter-million.

Sure, she got to drive high-end new cars and I drove older cars without the cachet or the climate control.

But I’m not the one who’s broke – and living on the government dole.

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