I am quite happy with the car I have. He is not even three years old. However, I already have in mind what my next acquisition would be if I had to go buy a new one right now.
From time to time, I take a tour of the dealership and take a look. There is no reason why I could justify selling the one I have and buying a new one. I don’t need it, nor do I need to change cars. But there I am.
For some people, buying a car is a rational and thoughtful decision. For many others, it is a purchase guided by emotions and momentum. And resisting temptation is sometimes difficult. The dealers know it. And that’s why they want you to enjoy the driving experience you like and try it, and then offer you as many facilities as you need. You may have gone to take a look and without knowing how to leave by signing the purchase contract for your new car.
Recently, a neighbor of mine who changes cars every so often bought the car that I like. The one that would buy me if I changed cars right now. A BMW 420d great coupe of 190hp, with M sports, finish. It is a car that starts at a price of about € 52,000 — a real madness.
Every time I enter the garage and see it, I can’t resist keeping an eye on it and thinking about it. Sometimes I tell myself, I want it. But quickly, my analytical part begins to account. And I think about the future cost of having that car today. And I convince myself why I have to have a worse car than my neighbor.
My neighbor likes to change cars every so often. He has a few years and then sells and buys again. He says that at five years, they sell well and have not yet lost much value. It is also the second generation of a successful small business in the city, and it is seen that money is not lacking.
Suppose my neighbor and I each have those € 52,000. He buys my dream car, but I decide to continue with my mid-range car for a few more years and invest that money in some funds, which average 6.5% per year.
After five years, when my neighbor (whom we will call Angel), wants to buy his next whim, he will have a car that will have suffered a loss of value, say 12% per year. I think it will be more, but it is true that these premium brand cars, better maintain the value in the second-hand market. Total, which five years later still give € 27,500. Almost 50% less.
In the meantime, with my investments, I have made my € 52,000, become € 71,250. At a rate of 6.5% annualized (something quite reasonable). During this time, both me and Angel have saved € 12,000 every year, which we have left in sight for expenses.
My neighbor, who has now infatuated with a Volvo S90 T8 Hybrid, needs to reinvest what he has taken from his old BMW plus € 60,000. And he is still obliged to finance € 8,000 with the concessionaire, so that the discounts apply and because it does not reach him. But he believes that it will be paid almost alone, which will save fuel in the new car, being hybrid.
The maintenance of the BMW every year, the car insurance, the traffic tax, the cost of changing the covers, the fuel, the parking you pay every time you take the car out of the house so that some heartless person does not scratch the car and some fine than another for speeding, they have not been able to save so much these years.
I again tempted, when I saw my neighbor’s brand new car parked, I decided after much thought, to continue with my already 8-year-old car. And I put the € 60,000 saved with the € 71,250 of my portfolio of funds.
After another five years, Angel has grown tired of his Volvo. And you are already looking at your next acquisition. He has thought of something better. But he thinks he can sell the S90 at a good price.
For my part, I think about what to do. These years, they have not been good in the stock market. There have been a couple of years of crisis, and my funds have lowered their performance. Even so, I managed to get 4% per year. Not bad, given the circumstances. My portfolio of funds, after ten years, has a valuation of € 167,511. Of the € 112,000 invested, € 55,511 are capital gains. And I have managed to save another € 66,000, as my neighbor.
Only with the earnings could I buy the BMW that I liked. Because being honest, my mid-range car, after 13 years, has become a bit of tartan. Although seeing the results, maybe I no longer want to have my neighbor’s car and buy me another mid-range or stretch it for another couple of years. Total, it’s just a tool that brings me and takes me. And there are average ranges, which have nothing to send to a Premium brand.
My neighbor Angel may have a determined life thanks to the business he inherited from his parents, or things may be twisted, and he regrets the money spent on his high-end cars. But if I have a car worse than my neighbor Angel all my life, I may live a quiet retirement. I could keep it up by accounting for 15, 20, 25 years, or more. And as a result of compound capitalization, the amounts could become very large. I don’t know if you see where I want to go.
Maybe it’s an example a bit taken to the extreme. But what I mean is that giving up today consume assets that depreciate fast like cars, can make you live much better tomorrow or you can spend on other things that you need more in the future.
Many will envy my neighbor’s car. But trying to imitate him is reckless. Buying a car above your means is one of the biggest financial mistakes you can make throughout your life. But it is something that many people usually fall into. And it is usually the condemnation of some middle-class domestic economies. I don’t even tell you if that car is financed with short-term debt.