Stupid Money Mistakes my Smart Neighbors Make (Part II: Car Payments)

Stupid money mistakes part 2
Relationships
6

In Part I of this blog series, I talked about the expensive mistakes my neighbors are making by sending their children to private schools. At the risk of being forever castigated by my neighbors if they ever discover my posts, I’ll continue with Part II to talk about one of my neighbors’ car payments.


Coming from the eyes of someone who grew up in a developing country, living in America is a big privilege. No other country in the world can provide you with the same opportunities for success and wealth building than the United States of America.

Being born an American is like winning the genetic lottery– you immediately have a massive leg up in life. None of the billionaires you admire, may it be Jeff Bezos, Bill Gates, or Warren Buffett, would have reached the same level of success had they been born elsewhere.

And yet millions of Americans are still living paycheck to paycheck and barely making ends meet. Yes, it’s true that sometimes they find themselves in deep water because they don’t have enough income to cover life’s basic needs. However, most are in debt because they buy (or lease) things they can’t afford. “I want it now” has always been their mantra.

This post is about my neighbor’s ridiculous car payments. But, again, this is not to make fun of my neighbor. Everyone makes mistakes. It’s the act that’s stupid not the person making it. I’ve masked his identity to protect him (and myself), but the details are factual.

“Rule your mind or it will rule you.” – Horace

Changing cars as frequently as I upgrade my phone

I have a confession to make. I’m not really super frugal when it comes to my phones. I buy cheap ones under $200 in cash and upgrade them every one or two years. It doesn’t affect me much as they’re a small percentage of my income. The same cannot be said about my neighbor who pretty much does the same thing, but at a much bigger scale– his freaking cars!

I’ll call him by the name of Joe because he’s an all-American type. He’s in his late thirties, a bit cocky, married with one child. Joe works as an I.T. support for a Fortune 500 company. Hence, he has an odd schedule, working mostly at nights and sometimes over the weekends. Like my other neighbors, he’s a fairly smart guy– but certainly not when it comes to money.

He’s been my neighbor for six or seven years and yet I’ve seen at least four or five different cars sitting in his garage over the years, among them:

  • Red Ford Mustang GT
  • Light blue Dodge Charger, and more recently
  • 2018 Black Plug-in Hybrid BMW 530e

My neighbor seems to have a fascination with anything that has a motor. He once tested my ire when he mowed my lawn using his fancy riding mower without permission. It was partly my fault because my grass grew a bit higher than I’d like them to be– I happen to be incredibly busy that week.

Normally, that’s something that you should be thankful for, right? Even then, you don’t just mow someone else’s yard out of the blue. When I gently confronted him, he reasoned that he was itching to use his mower because he hasn’t used it for months– he’s paying someone to mow his yard (easily a $200 monthly expense).

Joe and I obviously don’t have a lot in common. But if there’s one thing that we share, it’s probably our love for combat sports. So he gets invited to my house, along with a bunch of other neighbors, every time I host a Pacquiao “fight night” in my basement.

“I’m a car guy, you’re not”

About a month ago, right before Pacquiao knocked the hell out of Argentinian Lucas Matthysse. I invited a bunch of regulars, including Joe, to watch the sports event at my house.

The event begins with the undercard– the preliminary boxing matches that nobody really cares about. So the conversation quickly turned from what round Pacquiao falls asleep, as everyone seems to be skeptical of the Philippine senator’s chances against his opponent, to how high gasoline prices have steadily crept this summer.

“Exactly why I traded my Dodge Charger for a plug-in BMW,” Joe remarked.

“You should have bought a Prius like I did,” I jokingly replied knowing that he hates Toyotas.

“But you don’t understand. I’m a car guy, you’re not,” Joe fired back, laughing. He obviously doesn’t like my taste in cars.

“It’s actually a lease– I don’t buy depreciating assets,” Joe added.

“How much are you paying now?”, I inquired.

“$795 a month,” smiling, he quickly added, “But it’s totally worth it. The ladies turn their heads to see who’s driving.”

“It sure is,” I replied, grinning from ear to ear.

Depreciation is factored in your lease payments, dummy.

I’ll tell you a little secret. We all know brand new cars depreciate faster than Bruce Willis can comb his hair– you’ll lose thousands the moment you drive the car off the dealer’s lot. But what Joe and many people don’t realize is that you don’t have to buy the car to lose money– depreciation is already factored into the lease. The car companies are not stupid. They’re not in the business of losing money.

So when you lease a $60K car, three years later it will be worth $30K. Who do you think paid for the difference? (Hint, it’s you!) Not only that, there are other hidden costs: excess miles– you’re limited on how many miles you can drive, wear and tear, etc. Plus you need to put money down on something that you’re not buying! Car dealers make the most money by leasing their vehicles.

BMW 5-series depreciation
The car loses half of its value at the end of a 3-year lease.

What makes leasing worse than simply buying is that at the end of the lease, you don’t have anything to show for it. You need to make the same car payments, month after month, year after year, and paycheck to paycheck.

I know it’s none of my business. But you better be rich to do so, Joe. From the looks of it, you’re not. Otherwise, you won’t buy six electric portable heaters to warm your house instead of replacing your old worn down furnace.

Yes, with leasing, the ladies turn their heads (à la The Exorcist) and you get to drive a new car, every two or three years, with the latest and greatest equipment.

But is it really worth it??? Read further…

Hey, Joe. Here’s what being a “car guy” will ultimately cost you.

If Joe invested his $795 car payment instead, he would have $7,140,000 at the end of a 40 year period! This is assuming Joe invested the payments in a stock mutual fund that is earning Warren Buffett’s long-term rate of 11.88% with dividends reinvested.

$795 car payment invested instead

By the end of Year …

  • One, Joe would have saved enough money to replace his dilapidated furnace.
  • Five, he would have saved a 20% downpayment for a rental property.
  • Ten, he would have enough money to send her daughter to a private university.
  • Twenty, he can buy multiple rental properties with cash.
  • Forty, Joe is rich and have the money to put all his grandkids to college.

Too bad, Joe is blowing away these opportunities in, of all places, the Land of Opportunity!

The smart way to drive a car

I love new cars just as much as the next guy. I love the state-of-the-art technology, their elegant design and so on. But I’ve learned to admire from afar. As a result, I’ve never had a car payment for more than a decade. I now pay cash for my cars.

If you don’t have the money, buy a beater. While you’re driving it, PAY YOURSELF a car payment instead of giving it to the bank. After a certain amount of time, sell this beater and use your savings to upgrade without having to make monthly payments. Repeat this process until you’re satisfied. Delaying gratification is the key!

So many people think they need a new car to have something reliable, but that is simply not true. You can get a flat tire just as easily as an old car. If you’re uncomfortable buying a used car, get someone who does. Modern cars are now more reliable than ever.

If you want to stay broke, have a car payment. But keep in mind that NOBODY really cares about what you drive. Save up and pay cash for your cars.


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This cracked me up. “Otherwise, you won’t buy six electric portable heaters to warm your house instead of replacing your old worn down furnace.”

He’s not a car guy. He’s a show off guy. Why on earth would a person prioritize a car over a furnace just so people could turn their heads for a second. Strangers don’t care. What he should care about is getting warm during winter.

There’s one more thing I don’t get. Why do some cars look good in the outside but look and smell trash in the inside? Should’t they care more if they pay more. Sorry about the rant. It’s my neat-freak side talking.

Whether it’s a fascination to a car or a set of calligraphy pens, a person shouldn’t neglect important things like a furnace. I hope he’s warm enough to realize his mistake sooner.

I guess it’s because people put more importance towards outward appearance. We care about what people think even though, in reality, they don’t really give a crap. Unless of course, they happen to be a nosy finance blogger looking for something to write about.. lol

Great job. Interestingly, I used to own an older Mazda 3. I also bought it in cash, had a buyer’s remorse, and then returned it 5 days later (the dealer had a money-back guarantee). So I technically owned the car for less than a week 🙂

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