It’s not easy being SmallIvy. Last weekend we were in a car dealer in the next town, looking for a car to replace our main vehicle. I had found an 2013 Toyota Avalon on TrueCar and we were in the dealership to see that car and also look at other Avalons to see if that is a model that we like.
My son was absolutely aghast, asking how I could be at a car dealer and why I was thinking about spending so much on a car. I was SmallIvy, after all. I was supposed to only buy cars from private parties and then always inexpensive cars. He then started asking how he was going to be able to go to college with us blowing all of this money. I guess that all of those lessons on budgeting and managing your money must have sunk in.
I’m not sure, however, that he quite got the point. The point of budgeting and saving is not to never have anything and surprise everyone when you die with tens of millions of dollars in the bank. It is to get yourself into the position where you are financially sound, at which point you can start to expand your spending a bit and start getting some of the nicer things that others have been getting using credit, except you’re actually buying them with cash and owning them. Where others have a facade of wealth, you actually own what you have and aren’t subject to a financial calamity should you lose your job or have some other sort of fiscal setback.
And even once you’ve reached that point, you still put critical items before luxuries. You make sure you have enough for retirement so you won’t be a burden on others. You have life insurance so that your family is taken care of should you or your spouse die unexpectedly. You also have important luxuries such as college savings for your children set aside or well in progress.
Once you have done all this, and after you have been saving and investing such that you have an income stream beyond your job from your investments, you can start to expand your lifestyle. If you have done things right, your investments will replenish the cash you spend on luxuries while still allowing you to grow your wealth. You also save up money for big expenses like new cars and home improvements, rather than putting everything on credit as others are prone to do.
Other than making the stupid purchase of a new Jeep Cherokee when I was in my last year of school and before I had “seen the light,” my wife and I have been very thrifty with cars. When I started working, we bought a six-year old Toyota Camry with 150,000 miles on it for about $4,000. I’m sure we could have qualified for another 6-year loan like we had on the Jeep, but we chose to not have another payment. We drove that car for about eight years and sold it for $1500 with 300,000 miles on it. Cost per year for depreciation, about $300. We then bought a four-year old Camry for about $8,000 from another private individual and have driven that car for 8 years as well. At worse, we spent about $800 per year for that car, which now has 250,000 miles on it.
Compare this with buying a new car, as many people would do, and losing $6,000 per year or more in depreciation and interest payments. While we put a little money into repairs, on the order of $800 per year during the last few years, we came out well ahead of where we would be with a new car and new car payments. (Actually, I’ve been very pleased by just how little we’ve had to do in repairs with these Toyotas.) We’ve been able to use that money to do things like put money in college funds, put the money away for retirement, and invest the money for the next car so that we’d have the cash available. That is where we are today.
Now that we have reached this point, paid off our home (saving about $800 per month), advanced in career, saved up to the point that we have extra income from investments, and have enough in savings to weather several years of unemployment if needed, we can start to move up in car. The 3-year old Avalon we’re looking at would cost about $26,000 with tax. Compare that to about $35,000 we’d pay for a new Avalon with tax. We’ll be losing about $3,000 per year in depreciation for the first four years and $1500 per year for the four years after that. That is compared to the $4500 or so we’d be losing on depreciation for a new car, not counting payments.
We will probably never buy a new car again (we paid the Jeep off three years early and I still drive it today although it is 18 years old), but we can continue to trade up in cars each time since our investments and investment income will be growing. We’ll stick to newer used cars to reduce the loss to depreciation – in three years we’d be in the same place and be several thousand dollars poorer if we bought new. Maybe we’ll decide instead that we’re happy with Avalons (or maybe go back to Camry’s) in eight years and instead spend more money on trips and home improvements.
The point is that there is nothing wrong with spending within your means so long as you’ve put first-things-first. The other point is that your means will increase with time as long as you keep saving and investing. So don’t think if you’re staring out and decide not to use credit that you’ll never be able to keep up with the Joneses. In fact you’ll pass the Joneses someday, and you’ll always sleep better at night.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.