by Scott Pape -
Most people know that I’m not a car guy, especially when I arrive at an investment meeting in my ute. Yet like any good advisor I never let my prejudices affect my financial advice.
Last week I met up with a young couple that were hell bent on buying a brand spanking new Commodore – and I set them up on a plan that will eventually provide them with free cars for life.
That’s no misprint. (And no, it won’t be ‘free Kia Rios for life’). The plan I put in place will have them consistently driving late model Commodores.
Here’s what happened.
The Toxic New Car Smell
The couple I met was referred to me by one of my old clients who pleaded with me to ‘talk some sense into them’.
Rick and Samantha were in their early 30s, had been married a few years, and were frustrated that they still hadn’t been able to crack into the property market. To compensate they had fixed their thoughts on buying the status symbol of choice, a new car.
I could tell that they’d already been looking at cars – they had learned to parrot back the sales-speak perfectly:
‘We’ll be having a family soon and we need a good car”.
“It makes sense that we don’t buy someone else’s problems”.
“And you get a new car warranty”.
For reasons I still can’t quite comprehend, they set their sites on a brand new 2010 Commodore, which the dealer had scribbled $39,990 on his business card. They told me they were planning on getting a new car loan from their bank.
I pulled out a piece of paper and explained the following:
If they took out a five-year car loan with an interest rate of 11.25 per cent, they’d have repayments of $875 a month.
A $40,000 Loss
Five years later they’ve paid back the $40,000 loan – along with an extra $12,478 to the bank in interest.
If they choose to borrow and buy the Commodore they’ll spend $52,000 of their hard earned – all so they can own a car that is worth about $10,000 (according to car industry source Red Book)!
That’s what you call wealth destruction.
Worse, if they’re anything like most new car buyers, they’ll soon get another whiff of the new car cologne and repeat the process – and probably be broke for the best part of their lives because of it.
As a money guy, helping people avoid these disasters is like running down the centre of the footy ground and booting the match-winning goal, fist pumping the air…only to end up hitting the post:
Bloke: “Yeah, but, we need a nice car…And I reckon we can afford it”.
Barefoot: “We are talking about a Commodore, aren’t we?”
The conversation between the three of us was like a blind date when you walk in, see the person and want to walk straight back out of the room, but don’t, just to be polite. They’d already made up their minds.
That was until I pulled out a strategy that I call ‘free cars for life’, that I learned last time I was in the land of the never-ending car payment from an anti-debt campaigner called Dave Ramsey.
I asked the couple what car they currently drove, which Jeremy Clarkson reincarnate confessed sheepishly was a ‘limited edition’ Nissan Pulsar – a clunker of a car:
Legend has it that in the late eighties at a boozy Tokyo lunch a sloshed Nissan executive decided it would be a great idea to join forces with Reebok and manufacture a Reebok branded Nissan Pulsar – which consisted of a Reebok sticker on the bonnet, and an FM-sports radio.
The car held its value like a sweaty pair of sandshoes, which the couple assured me would be lucky to fetch $1500.
Here’s the plan I gave them:
Instead of buying the brand new Commodore, I advised that they tighten up their laces and hold on to the Reebok for another ten months.
Now rather than paying the bank a repayment, I suggested they put the equivalent amount of money – $875 each month – into a high interest online savings account.
After ten months they’ve saved up $8750.
They could then sell the Reebok Rocket for $1500, which gives them $10,000 to buy a 2005 Holden Commodore – for cash.
Just six months later, they’re still making those monthly repayments – although to their own savings account, not to the bank – and they’ve now managed to save another $5,250 in the kitty.
They could then sell the 2005 Commodore (which they get roughly the same money for), and combined with their savings, would be able to buy a 2009 Commodore for $15,000 – not exactly what they wanted, but I assured them that on hot days when the air conditioner is on, it would still occasionally let out a bit of that new car smell.
Lets say they decided to keep making their $875 monthly car repayments, but instead of depositing it into a savings account they now invest in a low-cost managed share fund that invests in solid, dividend paying Aussie companies.
A $40,000 Profit
At the end of five years, they’ll be in the same situation that they would be if they’d bought the 2010 Commodore – they’d own the car outright.
Yet instead of losing $40,000 of their hard earned by borrowing from the bank and buying the brand new car – with this strategy they would instead have about $40,000 in their managed share fund!
That’s what you call wealth construction.
But it gets better.
Free Cars For Life
The couple decides it’s time to upgrade and sell their (now six year old) 2009 Commodore and replace it with a nice, reliable fairly new $15,000 car. Which still leaves them with $25,000 in their managed share fund.
The kicker is that even if they never put in another cent – never make another car repayment – every five years or so through the miracle of compound interest (minus a little tax, but factoring in the trade in), they’ll have enough money to replace their car with another solid, reliable $15,000 car, for the rest of their life!
I’ve long understood that I’m unique – most people prefer to drive cars that need to be locked. Cars are never a good investment, but with some savvy money management that new car smell doesn’t have to knock you out.
Tread Your Own Path!
Photo: http://www.flickr.com/photos/macwagen/2266404921/
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68 comments
Great story, thanks Scott!
Scott,
Why don’t we just all get up and go to work.. earn money.. pay our mortgage, pay our bills.. and never experience some of the simple joys that life has to offer. Why deny anyone the experience of being able to walk into a new car showroom, get pick colours and options and eventually drive away with a brand new car! Smell included! I agree.. New cars are not a good investment, however a 5 year old 100,000k old Commodore may not be either. My advice is enjoy life.. enjoy your money. If you can afford it.. buy it.. if you cant.. save for it!
Interesting way of looking at purchase of a depreciating asset, Scott. However I have to agree with Ray that many times, a car is not just a means of transportation, its more than that. Its a thing of pride and joy for its owner and brings a lot of satisfaction every time its owner looks at it. I could had bought a cheap bomb as my first car and would had paid it off straight away (Sound financial decision). However, I bought a recent model V6 (although second hand but very low kms), and over the years, it has served me very well over long trips as well as zipping around town. For me, even though it was an expensive buy, it was money well spent. I would recommend buying a new/almost new car you love and enjoying it every moment (that would hopefully lessen the financial pain) rather than buying an old bomb and hating it every moment (n forking out bucket-loads on fixing/maintaining it).
Which Dealership do you work for?
You can’t assume that by placing money in a manage fund that it will always increase over a 5 year period. If you had of put money into a managed fund in 2005 it may not have increased in value in 5 years due to the GFC. I placed money in a managed fun at the end of 2006 and it is now worth about the same amount that I put in it back then. If I had of buried it in the backyard I would’ve gotten the same result. I think the high interest account is a better option
Scott,
I must say I’ve always been impressed by Dave Ramsey and I’ve listened to podcasts of many of his radio shows (he asks listeners to call and scream “we’re debt free!!!” down the phone). Dave’s on the radio about every night of the week on syndication in the US taking calls from people trying to get their heads above water financially and he gives them very specific advice on what to do. I know guys like you and Paul Clitheroe do talback radio fairly regularly but I guess regulations here in Australia limit the level of advice you can give to talkback callers on air.
That is a great plan, I love reading your weekly financial wisdom. I will pass this email on.
Scott, that really is a great idea, and I will be sure to tell a lot of people who need to heed this advice, and while I had a similar plan, this is much smarter! I will be taking your advice on this one… Love it!
Another great tip, that’s why my nephews are getting your book for Christmas.
Scott,
That is a brillant example of the value a financial adviser can add to client. I heard an excellent presentation last night regarding the value of financial advice, “are we selling lemons and giving away gold?”
That is gold what you have done, and a real testament to a good financial adviser. Very difficult to find those today.
Keep up the great work, love you ongoing emails and stories.
Regards,
Bradley
Not a bad story Scott,
I guess it’s the best of a bad situation. I’m guessing they have no savings of their own? Pretty hard to crack the property market without it! Buying more debt is not really a great way to go in my opinion, but instead of managed funds it would be good if they got into property – as an investment, not to live in. $875 per month would easily cover the shortfall and the capital growth would easily buy them a new car when they have earnt it!
Thanks Scott what a great way to look at saving and getting around.
Keep up the good work.
Always like your news letters.
Regards
Trevor
Ah yes, my Mazda 121 fits where other cars don’t & I’ve let my niece & nephew paint their names aross the doors. On the rear window I’ve put ‘New cars or retire now with a motorbike’. Some love it, some wince, recognising the folly of their ways.
Great advice and a good strategy.
In general, I agree that buying a car is seldom a good investment. You lose money the moment you drive out of the showroom, and then you lose again when you try and trade it in.
In my case, I prefer to buy a new car when it is a run-out model (great price and all the technical issues have been sorted out) and keep it for at least ten years. I also don’t like to take out a loan and buy it cash, giving me most negotiating power.
I loved this story! I have almost finished paying off my new car, but won’t be buying new again. Instead I am going to follow this advice and start creating a little bit of wealth!
Thanks Scott!
Any suggestions for a low cost managed fund?
Scott’s mentioned it before in his articles, Vanguard and Argo Investments are great places to start for a good, solid share market investment fund with low fees.
I decided to buy a car because my trusty old VOLVO….( yep, you heard right, which has lasted for 25 years), but died afew months back. Its been past down thru my family to me….anyway I needed a car to get around so i bought a toyota carrolla ascent…2006 for $15,000 (second hand) sort of new cuz it only did 38,000 kms and I paid it in full. I saved up my money and bought myself a beauty. its nothing fancy, its rather very simple actually and that is all i need.
I dont like buying things if i cant pay for in full and I have never had a loan … but i guess i have plenty of time to get myself into debt
, since i am only 23.
i have to say i miss my bloody volvo thou
such a good car and yes i got a lot of jokes told to me about volvo drivers, but that cuz they were all jealous 
lol …it got me from A to B and that is all that matters.
I hope this car will last another 25 years…. knock on wood. oxoxoxoxox
Loved the artical, im still in the middle of reading the book, and little things like this really bring to light the different directions to take.
How are you making this $15,000 over 5 years from $25,000?
25000 x 1.07 = 26750
26750 x 1.07 = 28622
28622 x 1.07 = 30625
30625 x 1.07 = 32768
32768 x 1.07 = 35061
For the finance types…25000(1+0.07)^5
This of course ignores tax consequences and makes assumptions about your average yearly share market return however even ASIC acknowledges on their FIDO website that a long term yearly average return of somewhere between 6-9% p.a. isn’t unreasonable for the sharemarket.
Although as someone pointed out above this hasn’t been the case recently with the GFC spoiling everything, however the GFC is likely to be a once in 80yr event (with the last comparable sustained share market rout being the great depression).
In fact, Telstra is actually offering prospective investors a share market return of 10% p.a., fully franked, at the moment based on a dividend of 28c/share p.a. which the CEO has recently stated is sustainable for the near term. Whether or not you get to keep your capital is up for debate.
$15,000 might be a bit of a stretch, however at least $10,000 seems reasonable.
Jason – Whats the x1.07? Where do you get this figure from?
Hi Scott,
The only new cars I’ve ever driven were company cars. I never bought a car that was over $7000 and that I could not pay for in cash.
I love your free cars for life advice and I’ll consider it once I decide to upgrade. In the mean time, my 2002 Toyota Corrolla that I bought for $6500 a year ago is running beautifully and I hope to have at least another couple of good years of inexpensive driving life out of it.
Thank you.
Gordana
Thanks I am just reading daves books and photocopied this part as I think it’s fantastic
I little thinking and time to add up something, and pressing stop on the impulse button deliver’s something like this. If only more people stopped to think about this – car’s are dead money! Great story Scott
Very interesting…This story couldn’t have come at a better time for me…was considering a new car (not brand new…but still!). Will be re-thinking the strategy to get it now. Thank you!
Yea, I love this plan, as it is applicable to all your dreams, whether it be a car, holiday, or only working for 6 months of every year, whatever, save & invest the amount needed and then reap the benefits of compound interest. Just save up that initial amount. Love it.
I love this. Such great advice.
Your advise is spot on.
Sure the older car may need more repairs and maintanence than the new one, but this is more than balanced out by lower insurance costs and those costly dealer services.
Sound advise, like you, except for provided company cars, I have never and would never own a new car.
The trick to making money is to pour your limited resources into things that go up in value over time, not depreciate.
Keep driving the ute – as long as it starts when you turn the key and stops when you put your foot on the brake you are miles ahead.
Peter Menton (driving a second hand 1993 Ford Ltd)
Dont be so sure about older cars needing more maintenance, got their car that was just out of warranty serviced last week. At the same time I got my 1997 Hyundai Excel serviced. Theirs had received its last warranty service 6 months before, mine had been abused and was getting its first service in 2 years…guess whose service was cheaper?
I don’t understand the plan. I’ll re-read a few more times.
cool!
…
if only you could do the same with houses… I’d gladly never see a capital gain again…
Awesome Scott, you have just reconfirmed in my mind why driving a $500 1990 Laser I bought 12 months ago is paying off for me. Life is about choices and not being consumed with the debt wheel and our affluenza diet! Alex.
Great advice Scott. I have never bought a brand new car and I never will. A car is part of my lifestyle and I accept that driving costs me money, ie petrol, maintenance and of course depreciation. I don’t want to drive a total clunker and as you pointed out above, 2005 model cars are really rather nice and have all the comforts one requires. My 2004 Honda is comfortable and safe and cost me less than half what a brand new one would have.
Of course we need people to buy new cars so people like us can pick them up for the right price when they’re 5 years old..
It is good to see someone takling sense. The general herd have to keep up with the jonses, but it is the guy in the daggy ute that pulls out his cheque book and pays cash for another investment property. Go Scott!!
I would of thought this was common sense, to do even better go to a Government Car Auction. In 2009 I bought a 2006 BF Futura with 26 000kms for $14 000, furthermore the model was egas so its cheaper to run than a corolla yet can easily tow a caravan. Twelve months later I could easily sell it for $13 000 and do it again and have a near brand new car for $1000 a year or less. The cars bought at auctions are sold at car yards anyway, only they cost an extra 4 to 5 grand!
I have seen Magna 360′s 2006 with 11 000kms sell for $11500, that’s a steal for a car that’s 3 years old with very little mileage.
Getting brand new cars on finance is burning the candle on both ends, devaluation and interest.
Unless you have too much money you would have to be crazy to do it!
Hey scott, your story left me feeling depressed. Earlier this year my wife convinced me that we needed a new car because we were having a kid, and she couldn’t drive her old car (daihatsu sirion) because “what if it breaks down”. Now we forked out 28k for our “brand new car, with free new car smell included”. Since i was young i have abhorred buying a new car because i believe putting money into a depreciating asset that is not tax deductible is lost money. I understand all the ways to save money but wish i had the balls to implement your strategy, but most married men know thats what happens when you say “i do” (joking incase she is reading this). Anyway tread your own path mate, because mine has been ploughed over.
I agree with you as we have always paid cash for our cars and my husband fixed them.
This year our circumstances changed as we have a special needs child and I now will be travelling up to 40,000 kms a year to take him to school. I could no longer have an old car that will break down when I am travelling four hours a day. We decided to buy a new car and put it on gas. It was a big decision as we have never spent that much money on a car. We pay nothing for his schooling so we have decided to invest the $5,000 per year on travelling costs. I know that I have to put this money away to replace the car in the future. Our mortgage is almost paid off so we could afford to do this. If we don’t educate him the cost will be higher later. I am good with money and still wonder if I made the right decision, but I also know our circumstances aren’t normal and put the cost down to education. It’s very important to put money away for future expenses.
your on to scott thanks for the great tips.
Great advice Scott. I have never bought a brand new car and I never will. A car is part of my lifestyle and I accept that driving costs me money, ie petrol, maintenance and of course depreciation. I don’t want to drive a total clunker and as you pointed out above, 2005 model cars are really rather nice and have all the comforts one requires. My 2004 Honda is comfortable and safe and cost me less than half what a brand new one would have. Of course we need people to buy new cars so people like us can pick them up for the right price when they’re 5 years old..
Very good stuff. Thanks Scott.
Great Inspiring story-love it
heard a story the other day-there is so much carnage of taxpayers $$ in back of Bourke-$450,000 dollar houses are built for locals to trash-why can’t we do something hardy-brick/brick!! for less & more of it
Shame when my husband and I were a young couple that we were never given sound advice, such as yours. Hopefully many younger people will read this and feel that it is great advice. Thank you Scott.
Since having children we have only gone out and bought used cars.
So, is there a financially intelligent way to borrow money for a car? The company that I work for has recently introduced a novated leasing program for it’s employees but I have crunched the numbers a few times (I used to work for a bank) and just can’t make the figures add up: you seem to have to pay a lot more each month than a personal loan over the same period would cost and still end up either giving the car back or paying a balloon payment to keep it. There are some small tax advantages but I can’t see that the lease approach is worth it myself…
Any thoughts?
I did the figures on a $20,000 Ford Fiesta on a novated lease. I currently own a $3500 Toyota Corolla and I need a car to get to work every day. 45 mins each way. To run the Corolla (which is uncomfortable and unsafe but paid off) I pay $450pm (post tax salary) to run including petrol. I would pay $600 pm to lease a fully maintained new Ford Fiesta including petrol. An extra $150 p/m than i’m paying now. Not as smart financially as holding onto the Corolla until it dies but i could sell it and almost cover a 2 year lease in the extra costs. In 2 years I could be in a new job in the city. A 10 minute bus ride from me and I wouldn’t need a car. My $3500 car could die next week and I wouldn’t be able to sell it then or justify a lease. Either way a car is a bottomless pit for guzzling money! If only Sydney’s public transport was reliable and easy to use!
Great theory… but where do you buy a 2009 Commodore for $15,000?? Also you’re also very unlikely to get a 2005 for Commodore for $10,000…. it simply wouldn’t work. These figures are far too low and are not practical at all.
You could try a government vehicle auction; lots of ex-government fleet vehicles are sold off every month or two and can be often picked up for a song! They are generally low mileage, well maintained and only a year or two old and I’m betting there will be a hell of a lot of commodore sedans amongst them…
Redbook.com lists Holden Commodores, second hand:
2005 $9,600 – $11,300
2006 $16,000 – $18,200
2007 $19,400 – $21,800
2008 $25,900 – $28,800
2009 $29,900 – $33,000
So its a bit of a stretch jumping from the 2005 model to 2009 in 6 months – but if they waited an extra year or 2 they could get the 2011 model for the same price!
Hi Scott, I first came across your zero car policy a few years back, not long before my 97 Mitsi Legnum committed hari kari on a road trip.
I never replaced it. Currently I live in the Sydney CBD and either walk or bike to work, and use public transport if I have to. For trips out of town I’ll either use Goget cars, or hire one.
What a life-changer. NOT owning a car rules! No payments, no insurance, no tax, no petrol bills, no wasted time doing that paperwork or cleaning the thing. AND we got $50/week off the apartment rental because we don’t use the carpark, so that’s $2600/year free driving. Not only is it fantastic not having to even *think* about anything to do with cars, removing all those expenses off the monthly budget is another monumental hassle removed and one step closer to a life without window envelopes. Highly recommend it to anyone who doesn’t *desparately* need to own a car.
Your comment here…
I bought my 1976 VW Kombi from a workmate 10 years ago for $500. I paid about $2000 to get it roadworthy and put aside some money every week into a car account. In 2008 I had enough saved to get a paint job (going from Telstra orange to light blue) plus get the rust cut out. I have very little problems as I get it serviced every 6 months. These cars were built to last. I am about to put it in for an engine recondition and have the interior fitted (it is a campervan). So I have managed to get the car I want from saving for it and renovating not replacing it. Best of all, as it is a classic car it will appreciate in value. Not to mention the cheap camping holidays!
Ha ha, love it! I’ve been on both sides of the fence of that argument. The Commodore side in my wasted youth and the Realist side right now. I would love to see this message released in to schools and compulsory reading with our first real jobs.
If only I had read this 1 year ago before we went and bought out 2008 VE V series Clais for $36,000 which is now worth a lovely $26,000. Our story is almost exactly that of the couple in the story. Great advice!!! Now, to get rid of our car….
Great advice!!Thank you. I have been planning on buying my new car, but won’t be buying, I am going to follow this advice.
Thank You Scott!
Wow! makes perfect sense – how do we get that information into the heads of our growing teen-agers – especially the boys! I will get them to read this and hopefully they will start on the path to learning some fundaments. tks Linda (bookkeeper) as for some of those comments below – we all need to learn we can’t always have it now – good things come to those who wait !! and save !! Then perhaps there would be less of the GFC’s
My husband needed a new car but we didn’t have any savings because we had just finished paying off all our debts. We had not choice but to get an 11K loan at 16% interest which we used to purchase a 2005 Ssang Yong Rexton SUV. We paid it off in 3 months with a total of less than $500 in interest and bank fees. If you buy within your means a bank loan is not always a bad thing. We could have waited to have the money but I doubt the deal we got would have been there after 3 months because we checked and there was nothing that could compare. Seize the opportunity and be smart with how much you spend.
Its sound advice in this article. I bought a new ute when i was 18, with borrrowed cash from my parents. Over 5 years later i still own it, and take it everywhere as a daily driver. It will be a work car i can get into drity- as i am a tradesman, and I plan to keep as my work car till i retire, hopefully or until the kids have left home anyway!
A really great article, I have no idea why people still buy brand new cars that lose thousands in value the second you drive them out the dealership.
I think some people are missing the point that you still have to save $900/month to buy your “free” car – there is no such thing as a free lunch after all! But there is no reason you should overpay $11000 for it either.
That all said I will begin saving now to replace my ’97 Ford Falcon ^.^
all well and good until the gearbox blows up and it costs 4 grand to fix…
Hi Scott,
Thanks for this article. I’ve been itching for a newer car (mine is starting to cost too much to service) whilst saving for a house deposit. And I think your advise will put me in a better position had I attempted to do both by myself.
Thanks!
I thought of buying the new FPV GT but now I’ll think twice… Thanks mate !!
wow..that’s really got me thinking.
wow! you’ve just saved my wallet/bank from going in debt!
Ahh cars , its like having a big hole in your pocket.
I don’t understand variable interest rates! If I take out a loan from any financial institution and they quote a rate and make the loan, why does that rate then change in the future? The lender has already sourced the funds and subsequent changes to their future borrowings should not impact on MY loan!
scott if had $50,000 to invest-how would you do that