As featured in South Lake Neighbors Magazine (December 2017)
By Marc D. Langva, CFP ®
I have always had a passion for cool cars and it showed when I was 21 years old working for Toyota Motor Corp. in San Diego. The dealership manager noticed this and said “Hey Marc don’t fall in love with these cars, it’s just Paint, Metal and Glass…”
When I reached 27 and had already owned 17 cars and 3 motorcycles, Bill’s advice final sunk in. Since then I formulated 3 guidelines for vehicle investing:
#1. Never buy a vehicle that exceeds 10% of your net worth.
#2. Never buy a vehicle that exceeds 20% of your annual household income.
#3. Buy a vehicle 7 years old and keep it 7 years.
Why? Would you like to enjoy an extra $3,000,000? Would you like to be WorkOptional 10-15 years ahead of your co-workers and neighbors?
How? By having a P/M/G (Paint/Metal/Glass) plan.
The research is out and it’s relatively easy to find the vehicle with the best reliability. You can buy a better vehicle than you otherwise would new, one with all the bells and whistles instead of the striped down base model. Plus, 93% of the population couldn’t decipher if your new hot rod is 12 years old or 2 years old! And, the days of cars only going 100,000 miles are ancient history. Simply Google cars with over a million miles, you will be quite surprised. This is why each one of our clients have a P/M/G plan.
Transition Costs: Every time you make a vehicle purchase you have to take time to do the research. Time to haggle with the dealership, time to shop around and switch your insurance, and my favorite, time to wait around at the DMV until your number is called. What’s your time worth? $25, $100, or $1000 per hour, and it is being wasted on transitioning your vehicle.
Transaction costs: When you purchase a new hot rod it’s time to pay the piper! The state of Minnesota love’s it’s sales tax, title tax, tag fees, etc.
Carrying costs: The insurance on a 7-year-old vehicle versus a new one is roughly half, so say $100 per month vs. $200 per month. Let’s just assume for our example that this insurance cost saving is offset by additional maintenance costs on the older vehicle.
So, let’s forget about the other costs for a moment and just run the basic numbers on our opportunity cost: We have Jennifer Jones and Sally Smith both age 29. Jennifer buys a new $50,000 vehicle every 3 years and trades it in for another new one. Sally, on the other hand, buys a 7-year-old $20,000 vehicle, keeps it for 7 years and trades it in for $5,000. Over a 30-year period Jennifer has 10 vehicles whereas Sally has 4.28.
Since Sally is only paying $20,000 and has a much longer timeframe to save up, she can pay cash on all her future vehicles. Jennifer has to make payments of $943 at 5% interest every month. At the same time, Sally invests her saved money at 8%, minus the $178 she saves up for her next car, which she buys every 7 years. But wait it gets better! Sally decides to invest those extra dollars into her 401K, saving her an additional $252 per month in taxes, which she also wisely decides to invest in her IRA.
Fast forward 30 years; Sally’s strategy allowed her to be the bank instead of paying the bank. Sally’s investment of $765 plus investing her tax savings $252 every month ($1017) now equals $1,536,921. Guess what? Steve, Sally’s husband, did the same thing, and the Smith’s now have 3 Million more than the Joneses! Simply making smart Hot Rod choices…
Wow! You really have to love your new vehicles to spend an additional 10-15 years EACH continuing to fight traffic as you commute to work! Who knows, maybe the Smith’s will go nuts and pick up a couple Ferrari’s and still have 2.5 million left over!
Take the road less traveled when it comes to your Paint, Metal and Glass.
Margaret Leto December 14th, 2017
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