STUPID MISTAKE #4

Believing You Are What You Drive

The neighbor who has the most expensive car in the neighborhood has the smallest retirement account in the neighborhood.

—JONATHAN POND, Your Money Matters

In the market for a new car?”

You tiptoed softly onto the car lot and tried to remain inconspicuous. But as you casually browsed the display vehicles, this grinning salesman suddenly materialized from nowhere, and now he stands just three feet to your left. He has one thing in mind: to keep you on the premises until you buy or lease a car.

He knows the tricks of the trade. He’s been trained to get you inside one of those sparkling new vehicles and from there to an uncomfortable straight-backed chair across from his desk in a tiny cubicle where he’ll “just run the numbers.” His graduate degree is in new-car doublespeak, and it includes a series of car-sales phrases specially formulated to get your name on the dotted line and your money from your pocket to his. If you’ve ever purchased a vehicle from a dealership, you’ve heard the buzzwords:

“In the market for a new car?”

“We’ve got a great deal going on this one.”

“This car’s a great investment.”

“Let’s go inside and run the numbers.”

“I’ll see if I can get my manager to approve this deal.”

But because you and I didn’t get our graduate degrees in new-car doublespeak, we don’t fully comprehend what those buzz phrases really mean. As a public service, I’m going to share with you the meanings behind the phrases so you’ll be better prepared next time you set foot on a car lot.

12 Stupid Lines People Fall for at a Car Dealership

The following are the twelve stupid things we’re most likely to hear from that grinning car salesman, accompanied (in italics) by what the salesman’s words really mean:

1. “In the market for a new car?” You’re not getting off this lot for the next three hours.

2. “We’ve got a great special going on this one.” We couldn’t get rid of it any other way.

3. “This car’s a good investment.” Sure, it’ll depreciate $3,000 during the first ten minutes you own it. After that, I’d rather not say.

4. “These models are disappearing fast.” They’re all in the shop out back.

5. “We’ll give you top dollar for your trade-in.” And whatever we allow for your old clunker we’ll just hide in your financing so we recoup it in no time.

6. “Just $19,999.” If you want any extras, like an engine, it’ll cost you more.

7. “Let’s go inside and run the numbers.” I’m trained to keep you in my little cubicle until you wear down and sign anything I put in front of you.

8. “What were you thinking as far as a monthly payment?” If we tell you the full price of this car, with interest, we’ll have to call the paramedics, and they might wheel you away before you sign the papers.

9. “$175 dealer preparation fee.” This is what we charge you for attaching our logo to the rear bumper.

10. “$99.99 Premiere Protection Package.” The kid in back, whose dad runs the service department, wipes the dashboard with a rag and Armor All.

11. “I’ll see if I can get my manager to approve this deal.” This is where I disappear for ten minutes to make it look like I’m fighting tooth and nail for you. Then I come back with a sheepish expression, sigh, and tell you I did everything I could but my manager said he can’t possibly go this low. He’ll come down $150, if you’ll settle for recalled tires, but any less than that and you’ll drive him out of business and I won’t get paid. Do you want my children to go without shoes?

12. “We’ll see if we can get you approved for our payment plan.” You’d have to be dead and buried at least three years for us not to finance you; after all, we’re going to clean up on the interest.

The foregoing public-service announcement is, of course, presented with tongue firmly planted in cheek. I truly respect honest car dealers and their need to make a fair living as they supply the world with needed transportation.

But we now return to our regular programming.

In the last chapter we addressed the Stupid Mistake of “feeding the monster”: believing that we are what we own, that we derive and demonstrate our worth by spending and accumulating. We saw how feeding the monster causes millions of good people to embrace a “priority inversion,” spending nearly everything they make (and in too many cases, more than they make) and procrastinating in giving, saving, investing, and other crucial financial priorities while piling debt upon debt.

Sadly, the monster rarely stops there. It also ravages our finances in another, even more costly way: the manner in which we acquire or lease our forms of transportation. Mark this mistake well, for it is one of life’s most enticing, expensive, and oft-repeated financial blunders. Stupid Mistake #4 is believing you are what you drive.

Big Bucks, Temporary Aroma

Granted, we all need reliable—and hopefully attractive—transportation. But for the typical consumer, financing a new car, truck, SUV, motorcycle, or RV is the ultimate monster meal. Today you can easily spend more for an automobile than your mom and dad spent for their house. You may have noticed, however, that the house for which your folks paid $30,000 thirty years ago is now worth $200,000, while the SUV you bought for $30,000 a few years back is now worth only a fraction of that price and will only continue to depreciate in value.

With very rare exceptions such as a classic car, vehicles depreciate extremely quickly—up to one-third of the original price within the first three years of ownership. What doesn’t depreciate much is the amount you borrowed to buy the car, especially after interest is factored into the equation. High price, interest, and lightning-quick depreciation are why it’s not unusual to owe more on your new car after a year or two than the car is actually worth.

Ah, but the lure is powerful, the peer pressure strong—we are what we drive! So we keep paying the big, big bucks for a very, very temporary new-car aroma. When you combine hefty price with rapid depreciation, expensive add-ons, fees, finance charges, and all the other costs glossed over by grinning car salesmen, the way we typically buy a car is one of life’s single biggest wastes of good money. We can misspend thousands of dollars on a single car—tens of thousands on multiple vehicles—dollars that can and should be put to far better use in investments that build financial independence for the future.

Is Your Driveway a Car Lot?

On nearly every street of your neighborhood, vehicles spill from overstuffed garages into driveways and even along curbs fronting houses. There are two late-year cars for Mom and Dad. There’s a sports utility vehicle for the times Mom and Dad don’t want to take one of the cars. There’s a pickup truck for tooling about and hauling topsoil on gardening day. And a car for Bobby, age nineteen. A used car, handed down from Bobby to Junior, age seventeen. And one for Missy, who just turned sixteen and gets her solo license soon.

Imagine the monthly payments this family is tied to. The interest. The insurance; registration; gas, oil, and maintenance costs.

Imagine the tension it puts on the family’s monthly budget. The strain on their relationships as they constantly wrestle with cash flow and postpone other financial needs, goals, and dreams.

I am the youngest of four sons. Each of us enjoyed various and sundry activities requiring transportation, and it did become challenging when all of us became old enough to date and to hold after-school or summer jobs. However, at no time before I left for college did my parents own more than one car. We didn’t know any better; we just assumed we were fortunate to have a good-looking, reliable car and never felt deprived. We shared plans and shared the car, and, overall, our transportation needs worked out. Life went fairly smoothly for an active family of six. Neither my brothers nor I, to my knowledge, became clock-tower snipers. We really got along quite well, thank you.

My point is, do we really need all those cars, trucks, SUVs, motorcycles, and RVs we think we need?

Are we encouraging our children to have an entitlement mentality— allowing them to assume they each can have their own car as soon as they’re of age? Or are we helping them learn to work together as a family?

Does each parent really need a separate car to commute to work? Or could both parents, with just a little more forethought, do just fine with one car between them?

When it comes to transportation, convenience carries a hefty price tag. We’re talking payments, interest, gas and oil, batteries, tires, repairs, insurance, and registration for each vehicle. Plus the time and effort required to administer all of the above. Worth it? Get out your calculator and figure: How many thousands of dollars would you save in the next year if you were to sell one or more of your vehicles and “make do”? How much would you save over the next three years? Five?

Consider one conservative example. Just one of the vehicles overflowing Bob and Carol’s garage requires the following financial support:

Car payment	$2,400 per year ($200 per month)
Insurance	$850 per year
Gas	$1,040 per year ($20 per week)
Oil and lube	$100 per year ($25 per quarter)

Total annual cost for this vehicle alone: $4,390, which averages approximately $365 each month. And this sum does not include any service or repair beyond quarterly oil changes and lubes. If Bob and Carol were to divest their driveway of this one extraneous car and invest the $365 monthly savings over the next five years in a mutual fund averaging 10 percent return, it would mean an additional $28,265 in their nest egg. If they continue investing this monthly “found money” over the next twenty-five years, it’ll compound to $484,290. Think about that for just a moment: This single, simple move could result in nearly half a million dollars in just two and a half decades. Could you use another half million twentyfive years from now? (If you don’t need it, I run a charitable foundation, the Benson to the Bahamas fund, that will happily accept the half million in your name.) This is just one example of the tremendous financial opportunity you can create simply by getting along with only one less car—and of the huge “opportunity cost” to your nest egg if you insist on keeping that extra vehicle around.

For these reasons, we give the care and feeding of the ravenous vehicle monster its own well-deserved spot among the 12 Stupid Mistakes People Make with Their Money. In an alluring world in which cars, trucks, SUVs, and even motorcycles are confused with status and sex appeal, how can we be financially wise and still drive a good-looking, reliable automobile?

First, Be Courageous

As with many of our Stupid Mistakes, this one is rooted in the internal value system of the consumer. Societal mores, advertisers, peer pressure, and a wobbly self-image all whisper that the vehicle you drive makes a statement about you. If you drive something new, popular, and expensive, you’re in-touch, vigorous, and successful. But if you drive a vehicle that’s more than three or four years old, you’re considered to be a bit abnormal, slightly out of touch, and probably struggling with the challenges and finances of daily life.

It’s an unfortunate stereotype and one that often masks the rest of the story. Bob and Carol, who drive the sparkling-new sports utility vehicle and have three other cars in their garage and driveway, may in fact be buried up to their nostrils in lease payments and insurance and registration fees, leaving them struggling to meet their other needs. On the other hand, Ted and Alice, who drive a mint-condition four-year-old Honda Accord, may actually be free of car payments and enjoy smaller insurance and registration costs; thus they’re freer each month to pursue other interests—including saving and investing for their future. Really, now: Which couple is more likely out of touch, more likely struggling with life’s daily challenges?

I’m convinced that saving big money on transportation, and redirecting those thousands toward far more important priorities, begins with the firm conviction that vehicles are intended to help us get to and from in life; they are not life themselves. While it is important that we be good stewards of our transportation, the truth is that what we drive has absolutely nothing to do with our value or self-worth. You are not your possessions, and they are not you. You are not what you own or what you drive. A car is a chunk of metal created by Detroit or Japan or Germany; you are a person created in the image of God.

Once you determine to live by this premise, you’ll take on a courageous commitment to disregard the crowd and be your own person. You’ll exert a calm confidence, rooted in logic, that a good vehicle is worth waiting for, worth purchasing on your own terms, but not worth strapping your cash flow and mortgaging your future. Logic tells you that you need a clean, reliable, and, yes, aesthetically pleasing vehicle that safely gets you where you need to go. Logic tells you that the cost of this vehicle should complement your monthly budget so you can meet your other commitments and save and invest for the future. Logic also assures you that you don’t need a new, expensive SUV to feel “freedom,” you don’t need something brand-new every year or two, you don’t need what’s currently considered “hot,” and you don’t need high monthly payments at high interest to finance a mere implement that’s rapidly depreciating in value.

I know, I know. Waiting is hard because those new cars look so good. But you know what? They’ll look even better two or three years from now, after someone else has paid the enormous new-car payments, interest, insurance, registration, and depreciation. That’s when you’ll move in and make a deal for that same sharp-looking vehicle—and save a bundle because you had the courage and confidence to bide your time.

You May Be Making Stupid Mistake #4 If . . .

• you own or lease more than one vehicle per adult family member

• you own a vehicle of any type that is not used at least twice each week for necessary transportation

• your annual vehicle payments total more than 5 percent of your annual gross income

• you insist on buying or leasing a brand-new vehicle

• you step onto a car lot to browse without knowing the make, model, and year of the vehicle you want as well as its current Edmund’s or Kelley Blue Book price

The Buy-or-Lease Dilemma

When it’s time to make your move, should you buy or lease? Leases have grown in popularity because they make it easier to go home with more car. Not necessarily wiser, but easier. With a lease, the down payment is usually smaller and monthly payments are usually lower than with a car loan. However, you still need to come up with a down payment and a security deposit, plus the requisite insurance and registration. And there are subtle costs to a lease that, in the long run, make leasing less attractive and more expensive than buying. Here are some examples:

• At the end of a lease (anywhere from twenty-four to sixty months), you can turn the car in, but you then are without a car and will need to acquire another. Lease another, and you start the clock all over again: down payment, security deposit, new-car registration, new-car insurance premiums. When you buy a car and pay it off, you own it free and clear and can drive it as long as you like—ten, fifteen years, or more—with only upkeep to think about.

Registration fees and insurance premiums get smaller the longer you have the car.

• Leases usually come with mileage limits of 12,000 to 15,000 per year; exceed the limit, and you’ll pay a hearty per-mile premium for each additional mile.

• When you lease a car, the lessor determines your minimum insurance coverages. Try to economize on coverages, and you’ll receive a nastygram advising that you are hereby required to increase your coverage to a specified minimum. Again, the lessor holds the power.

• A lease can dock you for “excessive wear and tear,” a term subject to the interpretation of the leaseholder. Could be nothing, could be enormous. But it does give the lessor an uncomfortable level of power over you.

• At the end of the lease, you can purchase the car for the “residual”—the difference between the original total lease price and what you’ve paid in. Quite often, especially on longer leases, the residual is significantly higher than the actual book value of the car due to our friend, depreciation.

So while a lease can feel like a short-term cash-flow solution, its drawbacks can make it a poorer use of money in the long run. In general, you’ll do better if you buy instead of lease. Especially if you . . .

Buy “Almost New”

Cars depreciate so rapidly in their first two to three years that it makes a lot of sense to look for a well-maintained vehicle that’s two to three years old. With a little patience, you can find a make and model you like that is properly maintained inside and out and almost ding-free. Have a trustworthy mechanic give the car a thorough physical before you buy. If it checks out mechanically and you purchase the vehicle, you may even want to drop a few hundred more to make any windshield pits or body dings disappear.

Remember, too, that the price of registration and insurance goes down as a vehicle ages. By choosing an almost-new car over a brand-new one, you’ll save hundreds of dollars per year in these expenses alone.

But a good two- or three-year-old car is still a major expense, and whether you’re buying from a dealer or private source, it’s a Stupid Mistake to accept the initial asking price before doing some homework. Once you spot a pre-owned car that appeals to you, take down the key details—make, model, year, engine size—then check its estimated value in Edmund’s Used Car Prices, a book that’s updated annually (free estimates at www.edmunds.com) or at the Kelley Blue Book Web site (www.kbb.com). The estimated value you find in your research should be your ceiling. Then begin your search by checking www.autotrader.com for the pre-owned make, model, and year you’re looking for. Check your local classifieds as well as the Web sites of local dealers. Once you find a promising vehicle, and with your top price clearly in mind, offer a price significantly below that sum and wait calmly for the seller’s response. If he resists or counterproposes, consider his position for a moment; then inch your offer upward slightly until you reach a win-win agreement. Be prepared to courteously walk away if he holds to a price greater than your research justifies.

If researching, searching, and haggling don’t appeal to you, you may want to engage a car-buying service. You’ll pay a fee, but you’ll avoid the time-consuming hassle with the grinning salesperson at the car dealership. Check your yellow pages for local services or the American Automobile Association’s car-buying service (www.aaa.com).

If at All Possible, Pay Cash

Should you borrow to pay for the purchase of a car? I like the way Eric Tyson, author of the best-selling Personal Finance for Dummies, lays it on the line:

You should avoid borrowing money for consumption purchases, especially for items that depreciate in value like cars. . . . If you lack sufficient cash to buy a new car, I say “DON’T BUY A NEW CAR!” Ninety percent of the world’s population can’t even afford a car, let alone a new one! Buy a car that you can afford—namely not a new one. Don’t fall for the new-car buying rationalization that says that buying a used car means lots of maintenance, repair expenses, and problems. If you do your homework and buy a good used car, you can have the best of both worlds. A good used car costs less to buy and should cost you less to operate thanks to lower insurance costs.

Amen, Eric. Borrowing for depreciating or consumable items is one of life’s Stupid Mistakes. And if you’re implementing the savings strategies discussed in this book, I’m confident you’ll reach a point in the near future at which you can indeed pay cash for your next car and free up hundreds of dollars each month for other priorities.

Okay, If You Must Finance . . .

But in the meantime, I realize it’s tough out there. If you absolutely must borrow to purchase a car, please do so only after you

• drive the hardest bargain you can and pay no more than the Blue Book value;

• shop aggressively (at least three sources) for the best financing;

• promise to finance for no more than thirty-six months (if you can’t pay up in thirty-six months, you can’t afford the car)—less time if at all possible;

• commit to continue making car payments after the loan is paid off—payments to yourself. That’s right, keep ’em flowing to your savings so that next time you can pay cash on the barrel;

• commit to driving the car till it dies. Own it free and clear, keep it serviced, and treat it like one of the family until it absolutely will go no farther. This is the best way to make the high cost of car ownership somewhat worthwhile. Most number-crunchers agree: The least-expensive car is the one you already own.

Insure Wisely

It pays to shop for car insurance. Rates constantly change, and you’ll find that the same coverage can differ among carriers by $200 to $500 per year.

You want to carry liability coverage of at least $100,000 per person and $300,000 per occurrence. In our sue-happy culture, it’s smart to supplement this liability coverage with a separate excess liability (umbrella) policy, a relatively inexpensive plan that covers you for $1,000,000 or more in the event of a lawsuit.

To keep premium costs down, use the highest deductibles you’re comfortable with on both collision (damage arising from bumping into someone or someone bumping into you) and comprehensive (damage from other causes such as hail or vandalism). At minimum, take a $500 deductible on each; $1,000 will save you more if you have built an adequate savings reserve to cover such contingencies. Consider dropping these coverages altogether as your car ages—why continue paying high premiums to cover damage when insurance companies won’t pay more than the book value of your car?

Be sure you’re taking advantage of good-driver discounts, multiple-car discounts, multiple-policy discounts (if you insure home, auto, and excess liability with the same company), antitheft-device discounts, and safetyfeature discounts (air bags, antilock brakes). Forget riders such as towing and car-rental reimbursement; you’ll do better on those as part of a AAA membership without the hassle of filing a claim.

The Wiser Path

You can save thousands of dollars in transportation costs just by doing your homework, shopping smarter, and choosing the wiser path instead of following the crowd. A vehicle is an expense, not an investment. Regard it accordingly, stay strong and courageous in the face of advertising and societal pressure, and you’ll be able to drive an attractive, reliable vehicle while keeping your expenses as low as possible. By investing those savings instead of smoking them in your exhaust pipe, your nest egg can be tens of thousands of dollars richer down the road.