The Compound and Friends - Don't Let Your New SUV Blow a Hole In Your Budget (Ben with Tadas)

Episode Date: July 2, 2019

“As with most things in life you are in charge of your own stuff. If you want to drive a new luxury vehicle, more power to you. Just realize that there are financial (and environmental) trade-offs involved. But don’t be under the illusion that anyone really cares what car you are driving.”  Ben Carlson recently got Tadas Viskanta, Director of Investor Education at Ritholtz Wealth Management, on the phone Skype to talk about a recent post of his entitled “Why Your Luxury Car is Unlikely to Materially Boost Your Happiness” where he writes about the high financial costs of driving a new, luxury vehicle.  You can read more at Tadas' blog: https://abnormalreturns.com/2019/06/25/luxury-car-unlikely-happiness-boost/ 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify   Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here: https://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

So today I'm going to talk to Tadis Visconta about his post on why buying a luxury car is unlikely to materially boost your happiness. And Tadis, this is a topic that's near and dear to my heart because I've written on it. He actually put a little piece of mine in here. So what was the impetus for writing this one? You know, it just happened to be the case that for whatever reason I saw a bunch of posts kind of all on the same related topic. So whenever I see that, I always take that as an opportunity to write my own post. So I've seen some crazy stats lately, and I think I first worked off of anecdotes on this because I kept feeling I was seeing SUVs everywhere. And it kind of makes sense. Both of us are in the Midwest, and it would make sense we see SUVs for having the snow and getting through all that stuff. But the wall street journal put out a

piece last year and they said less than five years ago, new vehicle sales were split between cars and trucks and SUVs. And today the share of cars has slipped below a third. And so it's close to like two thirds or 70% of all new car sales are either SUVs or trucks. And I don't know about you, but I've looked recently because we had to get a new car in the last year and SUVs and trucks are expensive. And so it's, it's crazy to me when I see them driving around the road and I look and I think like this person is driving this expensive SUV. I don't want to be a spend shamer, but I wonder how much they're spending versus what they're saving on these things. Yeah, well, I think there's

a very good reason why Ford essentially got out of the car business to focus on SUVs. I mean, I think all the indications are that these are higher margin products for the auto manufacturers. And I think there, you know, there certainly are some practical reasons why somebody might want to drive an SUV. I mean, anybody with a larger family, or like you said, there are certain conditions under which an SUV might be preferable. But man, you know, it certainly comes at a high price. And you mentioned that in your post from last year. It's not just the price to drive the car off the lot. You know, once you start, then you start taking into account the, you know, fuel mileage and

gas and insurance and depreciation. And, you know, God forbid, you actually do have to do some maintenance on the car. I think that's really kind of the thing that people might get wrong about these sorts of decisions is they look at the sticker price and maybe they look at their, you know, if they have to take out a loan or to lease the car, they look at that monthly people, the biggest ones would be taking out a mortgage or your housing debt, student loan debt, and then car debt. And the thing with student loans and housing, at least you have an asset coming there. So student loans can hopefully help increase your earning potential. A house is an asset that, and it's also a roof over your head. The car probably depreciates by, some would say, 20% to 30% right when you drive it off the lot. And the problem with a lot of people is they're not driving them nearly as long as they're, it's sort of an asset liability in this batch. So the Fed actually has data on this,

and they show that the average new car loan is being financed at close to 67 months. And so it's somewhere between more than five, it's like five to six years. Some people are even going seven years on a new car loan. And a lot of times I think they're not even staying in the car that long. So you're getting this depreciating asset that you're borrowing over a longer period of time and constantly trying to trade up. And I think what happens is you end up spending more and more money. And again, I don't, I don't want to spend shame people, but I think, so I dropped my kids off at daycare every morning and I see these like decked out SUVs with black tire rims and, you know, the tinted windows and the really nice packages. And some part of me would like to ask them, like, are you saving for your child's 529 plan?

Couldn't you go down a little bit? And it's tough because a lot of times, especially with kids, you need an SUV. SUV. But I think, isn't it almost a good sign of someone who's probably building wealth that they drive something like a Honda Accord or something that is just can, can last them longer and maybe it's just more high quality than as opposed to luxury? Well, I think one of the things that's not stated in this discussion is that cars, you know, across the board, the quality has risen over the past 10, 20, 30 years. You know, cars last longer. And even, you know, what we might call mainline brands, you know, you mentioned a Honda Accord, those cars last forever. I mean, it's not the case that a 10-year-old Honda Accord or Toyota

Camry is ready for the junkyard. In fact, that car might have another 10 years in it if it's is ready for the junkyard. In fact, that car might have another 10 years in it if it's properly maintained. So, you know, the irony is really stark. And I think you're right. You know, I live in a relatively affluent suburb as well. And, you know, I see this all the time in terms of, you know, the vehicles that get driven. And frankly, you know, the most people that are, you know, the most people are driving or a couple of miles from, you know, to school or work and back every day. And, you know, we're essentially it's overkill for a lot of people what they're driving. Yeah. I would have loved to stick with something like a sedan. We have three young kids and that means three car seats. So I actually tried to convince my wife that I could make a Honda Accord

work, but it didn't work. So I ended up with an Explorer. But you see these really nicer luxury brands. I mean, some of the sticker prices for these things could be 70, 80, 90 grand. And it's insane to me. Again, if someone's maxing out their retirement accounts and they're saving for their 529 for their kids or whatever it is, go have fun with your car. But I think a lot of people, maybe they don't realize the choice they're making and how much money they could be saving on this fixed expense. And so someone sent me some numbers, one of my readers, saying that 85% of new car purchases are financed, but only 54% of used car ones. And I think that is maybe something that people who are having a hard time saving could look to, to go to something like a one or two-year-old

used car that maybe has been leased and you don't have to eat that initial depreciation when you drive off the lot right away. And that's a way to save, you know, a few hundred dollars a month potentially that you could then save for retirement or a house down payment or some other goal that you don't have to just eat it on your car payment. Yeah, you know, it's, you know, all of these discussions around personal finance, and you've written a lot on this, it's really about trade-offs. And, you know, like you said, you can drive, you know, you can get a car off lease, you know, either off of a two or three

year lease, which is essentially, you know, for all intents and purposes, pretty close to brand new. And you, like you said, you can, you can, you can save a pretty fair amount on that monthly payment and still be driving a car that you feel comfortable with and that you know is going to start every morning when it's time to go to work. And I think that it's really about those trade offs. And kind of the point of my post was, everybody know, you know, everybody would would prefer to drive a luxury car, you know, all else being equal. You know, the fact is, you know, those cars are in a certain sense, in a certain respect, better. So we'd all you know, we'd all like to drive the BMWs and the Mercedes of the world. Sure. But it all comes out at a tradeoff. And, you know, after that

new car smell wears off and that initial buzz of driving, putting that new car in the garage and talking to the neighbors about it, the utility of it drops off pretty quickly. And there are other things that we could be spending our money on that might have a much bigger effect on our bottom line and our futures than, like you said, owning a depreciating asset. And yeah, again, the biggest two things that I think are going to make the biggest difference in people's budget and their personal finances is getting your housing and your transportation aligned with your priorities and what you can afford.

And it would be great if everyone could afford a huge McMansion and a luxury car. But a lot of times doing that, especially if you do both of them and you're not saving, you know, the answer is kind of staring you right in the face as to, as to why you you're falling behind in terms of your, of your net worth. And so I guess the question for people is, you know, what am know, what is the point of a car? You know, some people, you know, there are car people out there, I realize that, that really want to have something nice. But again, if that's going to be your main focus, then you have to cut back relentlessly everywhere else if you really want to save, I think, because cars can be really expensive. So it's kind of funny you talked about cars lasting longer these days. So it's kind of funny you talked about cars lasting longer these days.

There was one that looked at the list of the top 15 cars that people owned for at least 15 years, and they were all foreign brands. So half of them were Toyotas, the other half were Hondas, and then a few Nissan and Volkswagens thrown in there. So there are cars that can last a long time if you sort of let them. It just depends on being okay driving the same car for a long time and not worrying what other people think about you, I guess. Yeah. No, I think that is the key point that you mentioned right there is not worrying what other people think. Unless you're in, some people feel like if they're in a sales job or something like that, they need to have, uh, you know, a brand new spanking car to, to have some sort of halo effect. Uh, but for the most of us, frankly, nobody really cares what you're driving. Um, you know, as long as you're getting to point, you know, from point A to point B and it's a relative, you know, it's a relatively safe

vehicle that like I said, starts up in the morning. Um, like I said, nobody really cares what you're driving in all likelihood. Yep. Okay. Well, thanks again, Tadis, for getting on here again. Our main takeaway here is if you want to look for a place to save some money, if you're having a hard time saving, your car is one of the first places to look. So thanks, Tadis. All right. Thanks, Ben. We'll talk to you.