My Worst Financial Decision

I don’t think I’ll surprise anyone by saying that buying a new car was my worst financial blunder. Who am I kidding? I even bought two! Yes, I made the mistake twice! As a matter of fact, I talked about it recently on the 20 ans, pas l’temps? podcast (french only). 😉

Shortly after my second purchase, which seemed quite reasonable at the time, reading En as-tu vraiment besoin? (english version: Do You Really Need It?) by Pierre-Yves McSween was like a slap in the face. It especially stung as I had had my new car for only about a month. Suddenly, the purchase seemed much less reasonable. Unfortunately, the damage was done and the car was already worth less than the balance of the new financing, as soon as I left the dealership lot.

I’d fallen into the lifestyle inflation trap. I was earning a good salary for my age and I felt that I “deserved it”.  That’s not to mention how much the auto industry goes out of its way to make sure we fall in that trap. McSween explains it especially well in his book (loose translation):

The auto industry fights vehemently to push the consumer out of the world of rationality. We use a fraction of the car’s useful life, but we pay the greatest annual cost. In fact, the price of a car is so high that, we prefer to forget its real price. What is being sold is a monthly, biweekly, weekly, or simply a lifestyle payment.

The many other personal finance books I read afterwards all had a fairly similar opinion. It only confirmed how wrong I had been. Besides not being too proud of myself, I felt stuck with my new car, since getting rid of it would mean selling at a loss, not to mention that I actually needed a car.

So for anyone thinking of buying a new car, let me tell you why it would be better to buy a (relatively) old car.

Those Damn Car Payments

Let’s take a look at how much my last seven years of car payments really amounts to.

To start, I bought my first new car in May 2014, which was a month after I finished college and landed a high-paying job. Classic, right?

Then, I switched in December 2016, after an aggressive offer from the dealership. The new loan included a portion of the previous car’s balance, since the value of the previous car was not enough to pay off the entire old loan. Crazy, huh? They’re passing this off to customers who think it’s just normal or fair. Everyone else is doing it!

In order to get a complete picture, I reviewed my bank statements. I calculated that I have spent about $35,000 in car payments so far. Add to that my current balance of about $7,000 as of today. So once the loan is completely paid off in November, I’ll have paid a total of $42,000.

Now, what will I have seven years and $42,000 later? A 5-year-old car worth less than $10,000 that will continue to depreciate and will require more and more maintenance.

Depressing, isn’t it?

If you had any doubt that a car was not a good investment, I hope this confirms it. In fact, it proves perfectly how a car pays a guaranteed negative return. Ironically, it’s often the people who buy new cars over and over again who’ll say the stock market because it’s too risky. 😉

The Opportunity Cost

Let’s now analyze the opportunity cost, i.e., the return I did not get by making my payments on these two cars, rather than investing the money. To do this, I will use this compound interest calculator.

Yes, we’re not done being depressed. I’d even say that it is a borderline masochistic exercise.

So, that $42,000 in car payments over about 7 years averages out to $460 per month. If I had invested those payments in the stock market with an 8% return (which was absolutely realistic from 2014 to now), I would have gotten :

So instead of a car worth roughly $10,000, I could have $51,572 more in my nest egg. We’re talking about a difference of $41,572. Of course, this difference takes into consideration that I wouldn’t have had a car at all. If you add in the purchase of a used car and its maintenance, the gap narrows. But you get the picture. It would never have cost me $42,000 over seven years for a used car.

Let’s Push the Torture Further

That was a good reality check, wasn’t it?

Let’s cry some more. Let’s add to this the compound interest on that $51,572 until I’m 65, which is 30 years after I finish financing my car. That’s without adding a dime to it.

Ouch. It’s getting quite expensive for that new car smell.

And finally, if I were to continue investing $460 a month until I was 65, as if I was continuously changing cars every couple of years:

Now, you can see the huge opportunity cost that comes with car payments over several decades. I will stop the torture at 65, but you get the idea. It’s not going to get any better by adding more years.

We all know someone who changes car every 4-5 years once the financing ends or the lease is up. Well, those people might need to do that kind of math to see how much that new car smell really costs.

Especially since, at the end of the day, the result is always the same, no matter when you decide to break the cycle. All we’re left with is a used car that will continue to depreciate (and leave us depressed).

A Good Learning Opportunity

If you decide to do the same exercise I did, you may find it hard to see the positive side of this.

Personally, I’m just glad I learned my lesson. It’s a shame I literally wasted so much money, but what’s done is done. It’s unfortunately irretrievable, so let’s not dwell on it and move on. 🙂

We make mistakes, but we’re human – and maybe that’s the word that best explains us.

– Captain James T. Kirk

If I’d never gotten into personal finance, maybe I’d have continued repeating the cycle over and over again, like most people. So I’m glad I’m getting away with only seven years of car payments, rather than decades. I’m also glad I didn’t fall into the luxury car trap. All the previous calculations would be much worse if I’d purchased a more luxurious car.

Also, fortunately, I now only have 17 bimonthly payments left to make! At the end of the financing, my 5-year-old car should be faithful to me for several more years. I will try to maintain it religiously so that it’ll last me as long as possible. After that, the next car, if I still need one, will definitely be used and certainly not financed.

The other great news about the imminent end of my car loan is that I will then allocate these funds directly to my savings. My savings rate should then increase… by about 20%! This will be very beneficial in achieving my goal of financial independence. 🙂

Conclusion

That was it. That was my worst financial mistake and all that it implies or could have implied in terms of opportunity cost. I advocate being honest as much as possible on this blog, and that means talking about the good moves as much as the bad ones. I’m not perfect, far from it, and maybe some less glowing examples will comfort you about your own missteps.

And that’s not all, I could give you other examples. Particularly, I haven’t (yet) touched on all the money I’ve spent at Comiccons or the various official Star Trek conventions in the US that I’ve attended. These are wonderful memories, but it certainly wasn’t free. 😉

What about you? Have you made similar bad financial mistakes? Have you calculated the opportunity cost, or are you not as masochistic as I am? And have you made peace with your mistake?

Please let me know!

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