My wife and I walked into the Kia dealership off 494 in early July. I felt dirty about it. Being the frugal and very skeptical guy I am, I put my hands up and immediately announced to everyone on the sales floor, “Okay. I’m looking for the least sleazy guy in here.”
The smiling salesman making his way toward us with outstretched palm suddenly frowned. “Well, that’s not me… I’m a hard worker,” Victor said, loud enough for his bosses to hear.
I liked Victor. Victor was a straight-shooter with a good sense of humor. I suddenly felt less dirty about being in the belly of a new car dealership.
My wife and I did the test drive with Victor. Talked about our kids with Victor. Got down to brass tacks with Victor (whatever that means). The whole nine…
Hold on. Maybe I should just back up a bit and explain to my confused readers what my wife and I were even doing inside a Kia car dealership to begin with.
I mean, Crispy, you’re a personal finance blogger… sort of. Who writes great articles about financial independence… kind of. Isn’t it sacrilege in the FI community to buy a car new off the lot?
Truth. But we had a good reason to do so (or thought we did). It’s simple really… 0% for 66 months. We were lured in by that ridiculous financing offer from Kia. Free money (as they say).
Maybe I should back up even further and explain that my wife and I are currently building up a $15,000 car fund to buy her a newer used car outright so I can have her hand-me-down 10-year-old Malibu to replace my beat-up 20-year-old (classic) Civic that I so lovingly talked about in this article right here.
That kind of used car plan is sanctioned by the FI community. Financing a new car would be a big-time departure from that plan. But the numbers seemed to make sense. It seemed to be a short-cut to all our dreams.
and Victor is just such a great guy…
Mental gymnastics and soft pretzels
The numbers were really tempting. They still are. Every time that 0% financing deal pops up on the TV, my ears perk up. That magical number 0% would theoretically give us a shortcut to three of our near-term goals:
- Buy a newer car for my wife.
- Refinish our basement.
- Save up at least 2 years worth of current spending (a huge milestone for our seven-year plan).
Three goals that completely fight against each other in space and time if you subscribe to the Paula Pant Afford Anything mentality (and I do!). It goes something like this…
You can afford anything, but not everything. Life is a series of tradeoffs.
True, true, Paula. But 0% seems to allow us to short circuit that thinking just a little bit, and reach all three goals sooner. And it only requires a small bit of mental gymnastics to get there.
Follow along as I twist my brain into a soft pretzel to convince myself to do the new car finance thing.
I’ll use round, semi-real numbers…
Let’s say we need roughly…
- $15,000 to buy a nice reliable used car.
- $5,000 to refinish our basement (it’s really just a splash-and-dash).
- $100,000 to save up at least 2 years of current spending.
Let’s say we have roughly…
- $2,500 saved “off-the-books” (not included in our net worth) to buy a car.
- $0 saved to redo our basement (planning to take as-needed from upcoming cash-flow at the expense of other savings goals).
- $60,000 in a liquid war-chest (mix of brokerage accounts and savings).
Let’s say we save about…
$3,000 per month outside our retirement accounts.
Here are the scenarios of used vs new…
Used Car Scenario (save up
$15,000 $14,500 for a two-year-old used car):
In this scenario, my wife and I put $1,000 per month in our “off-the-books” savings towards a used car as planned, and we skim $500 off the top of our monthly cash flow for work on our basement. That leaves $1,500 per month left for the war-chest for the next 10 months and $2,000 per month for the 2 months after that.
At the end of one year, on July 1 2019, we slam a brief-case full of $14,500 in neatly wrapped five-dollar bills on the desk at the dealership and negotiate a killer deal with Victor to buy outright a reliable certified pre-owned Kia Optima with 25,000 miles and heated seats.
Meanwhile, my son’s grandma and grandpa are putting the finishing touches on the paint job in the basement that was otherwise done 2 months ago (Hey. My mom offered). And we have about $81,075 in our war-chest, assuming 3% compounded annually.
At the end of one year, we can also start to put the full $3,000 per month*** back into savings and our war-chest would grow at max speed until 2022 (the theoretical end of our 7-year plan). We reach our $100,000 war-chest milestone by January 2020.
Not too shabby.
*** That is, of course, not including massive raises and bonuses I’ll obviously be getting along with cash flow from my hugely successful productivity app Half Hour Hank (download it in the App Store now!!)
New Car Scenario (finance $24,090 at 0%):
In the New Car Scenario, we give in to temptation. We finance a brand new car with $0 down and at 0% interest, signing up to pay $365 per month for 66 months. It’s like we’re putting the car on layaway at K-Mart, but we get to test drive it the whole time we’re paying it off!
Stretching payments for a new car out over 66 months allows us to shift the $2,500 of “off the books” money to the basement and finish paying for that in 5 months instead of 10. Instead of squirreling away $1,000 per month for the next 12 months for a car some other slob gets to drive before us, we commit long-term to pay $365 per month for a brand new model. The rest goes into the war-chest.
That’s $2,135 in the war-chest for the first 5 months and $2,635 for several years thereafter.
The key here is, we get much more money in our war-chest much sooner. Its balance balloons to about $91,325 in 12 months. That’s about $10,000 more than in our Used Car Scenario. We reach a major $100,000 war-chest milestone in the New Car Scenario almost three months sooner than the Used Car Scenario. Sometime in October 2019 vs January 2020.
AND as the graph below shows, it takes quite a while for the Used Car Scenario to catch up. By the the time our war-chest even starts to feel the burden of our decision to buy new it’s three and a half years from now and we already have about $180,000 in the bank. By the time the drive-off-the-lot new-car depreciation fully hits our war-chest, the about $10,000 looks puny and insignificant next to a growing cash hoard of more than a quarter-million dollars!
With the New Car Scenario, it’s almost like my swank self from the future slips $10,000 into my back pocket because he knows I need it more. Nothing like, but almost kind of exactly like that Biff meets Biff almanac scene from Back To The Future II…
What did I tell you? Brain → Soft Pretzel → Justification.
Do I like soft pretzels? Yes, I do. Garlic with honey mustard dipping sauce.
Do I like the smell of new cars? Yes, I do. And the “new car” smelling pine-tree air fresheners aren’t a substitute. They smell like shit.
Do I desperately want to replace my 20-year-old Honda? Yes. 1,000 times yes!
Do I want to own a gigantic casino flanked by huge cauldrons of fire in an alternate dystopian future? Who wouldn’t?!
So, let’s do this!!!!
We didn’t do it. We didn’t finance the new car.
Buzz kill. What the hell?
Of course! The $9,590 difference between the new car and used car got to you after all, didn’t it Crispy! That dreaded new car depreciation. Not so easy to just brush off, is it? It’s stupid to pay that. The thing loses thousands as soon as the front tires hit the highway.
Nope. I feel pretty good about the numbers and my fancy graph with the intersecting lines. The straight-up depreciation itself didn’t bother me.
I’ll tell you what did bother me…
That’s what bothered me. That’s what ultimately sunk this campaign.
Heated seats. I don’t even like them. I like my heat blown right on my face and in between my toes like a dragon warrior. My ass doesn’t need to feel sweaty, thank you very much.
But my wife likes her seat heated and she likes the feel of the leather that usually goes with it.
We seemed to be able to make the cold hard numbers work in our favor in our New Car Scenario. But heated seats is where the universal law of Afford Anything trade-offs Ms. Pant warned us about really sunk in. Remember? You can have anything but not everything?
As I sat at Victor’s desk pondering features and packages and the True Coat undercoating no one needs, it hit me. If we bought this new car, my wife would be settling for less luxury than what’s in her 2008 Chevy Malibu right now. Many of the luxurious items that are really important to her, at least. Heated leather seats included. That’s the trade-off here.
We’d be buying a base model for the $24,090 I talked about. Fabric seats. Luke-warm seats. And we would be stuck buying a Kia. They’re one of the few car companies crazy enough to offer a 0% deal nowadays.
Nothing against Kia. They’ve come a long way and I’ve heard a lot of good things about them. We’d probably be happy with a Kia, in fact. But, my point is, at our price and to get the sweet financing deal, we’d be locked into a very limited range of car choices if we bought new.
I suppose we’d have our choice of color. And with my skills, I might be able to get them to throw in floor mats. But no heated seats. And we sure as hell wouldn’t get that moon roof my wife has always wanted.
On the other hand, with a little more patience, a whole used car market would blossom before us. A beautiful bouquet of countless makes and models and feature packages. You can buy a lot of used car for $14,500. Maybe, just maybe, if we search hard enough and are ready to pounce on a great deal, we could get heated leather seats AND a moon roof in the car of our dreams.
That’s the story. Heated seats sunk the deal. Not depreciation.
Oh… and one more thing
After our decision, I went back and reran our numbers. You know, the ones that screamed, Do the deal! Get the new car!
I added one more column to the spreadsheet and created a different graph.
It’s the only number that really matters when it comes to our war-chest. The actual dollar amount is meaningless without it. After all, the point of the war-chest is to buy ourselves a runway of time away from mandatory work so we focus on building our ideal life. I call it Runway Retirement. You could call it a Fully-Funded Life Change if you want to and I won’t get mad.
When War-Chest Runway is considered, the whole New Car vs Used Car graph changes completely:
What happened! Why does the Used Car blue line look so much more impressive now?
It’s simple. A $365 monthly car payment adds an extra 8% to our monthly living expenses. That means we need a much bigger war-chest to cover that inflated spending in order to get the same length of runway. I was completely ignoring that side of things.
There is a brief 9-month time frame early on when the New Car Scenario gives us more runway. But it only gives us maybe an extra 3 weeks of runway at it’s peak. And the Used Car Scenario quickly catches up.
In fact, over the life of a 66-month loan, the Used Car Scenario builds a commanding six-month lead over the New Car as far as War-Chest Runway is concerned. That’s massive!
That means, if 5 years of runway is our ultimate goal for Runway Retirement (and that’s the very high end of our range), we get there a full 6 months sooner!
That’s an extra 6 months to spend with our son in the prime of his childhood. An extra 6 months to pursue happiness in our healthiest and most vibrant remaining years. An extra 6 months to build our ideal life!
Choice and Time
With the 0% deal from Kia, my wife and I thought we found a great shortcut to some of our biggest short-term money goals. It looked good at first, but digging deeper, we realized we’d be robbing ourselves of both choice and time in the long run. Those are the inescapable trade-offs of borrowing money for consumer stuff.
Sadly, money is never free. Even at 0%.