In my post on setting a 2017 expense budget, I revealed that we actually have a car payment. If you weren’t already aware, the financial independence retire early (FIRE) community frowns heavily on such a thing. Not only is having a car payment bad, but a lease payment is that much worst!
I was even called out on it by a fellow blogger in one of the comments on that post (you know who you are…Mrs Picky Pincher). I promised I would explain such a blatant infraction, so here goes. But first a history lesson…
My History with Cars
I’ve always loved cars in general. Not because I saw them as status symbols, but because I loved the freedom they represented. When I turned 16 I couldn’t wait to have my very own. This was the main reason I got my first part time job as a cook at a fast food chain.
I knew nothing about money back then. All I cared about was that I could somehow own a ~$8K used car without having to fork over that amount immediately to the dealership. The magical solution was the car payment. I just needed about $180/month (at 8% interest rate), and I could have my premature definition of freedom!
Flash back to 1993, and picture a young 16 year old Max with a slightly used 1990 Ford Probe “sports” car, complete with red interior and retractable lights. If you have no idea what I’m talking about, feast your eyes below!
That my friends was a thing of beauty! I wasn’t making any heads turn at my high school driving the thing, especially since this was considered a “cheap” car by my rich classmates, but it was mine (and the bank’s)…all mine!
Of course I was a fickle teenager, so a year later, I fell in love with another car. This one was twice as much, with twice the car payment. A beautiful 1993 Toyota Celica GT. I had to increase my hours at work to afford it, but that didn’t stop me!
This was the car I headed to college in, but unfortunately during my first semester as a freshman, I had an accident in it, and it was totaled.
To overcome the devastating loss, I bandaged my feelings with yet another car. Except this time I kicked it up another notch, and locked myself into a brand new car payment. This would officially be my first financial sin.
I bought a top of the line 1995 Mitsubishi Eclipse GSX sports car. Brand new, and with a stupid payment of $500/Month. Not only did I have to pay for tuition every semester, but I had to do it with that monthly payment hanging around my neck.
Still, it was a cool car…
I actually ended up keeping it for most of my college years. It wasn’t until I realized how much student loan debt I had graduated with, that the light bulb went off in my head.
Cars are terrible investments!
I should have used all the money I was making working 30-40 hrs/week through college to graduate completely debt free, instead of graduating with a depreciated hunk of metal.
My 20s and My Car
After graduating, I sold my car and made sure to go the used route, with the intent of owning a car for longer than the loan period. I bought a used 1997 Nissan Maxima for under $20K, and drove it for 10 years.
I never had any issues with the car, and although I had a car payment during half that time, the fact I owned it for that long brought the long term monthly cost of ownership to $200/Month over the entire period, excluding maintenance.
My 30s and my Car
I probably could have driven the Maxima longer, but by the time I turned 30 I had been promoted to a managerial role, and needed to have a more presentable vehicle.
I hadn’t totally lost my love for cars, but knew better than to buy new. I wanted something nice, but didn’t want to pay for it. I set my budget at a maximum of $30K, knowing I would keep the car another 10 years.
After a lot of research and eventually a full day of negotiating, I picked up a 2002 Mercedes-Benz C32AMG. It was 4 years old, with under 30k miles. Brand new the car sold for close to $60K. I picked it up 4 years later for under half that amount.
I found this approach to be a good compromise between combating lifestyle inflation and indulging in some small luxuries.
I kept it for 10 years, and had the loan paid off within a year of ownership. My long term monthly cost of ownership (excluding maintenance) came out to $250/Month during that period.
After about 10 years, the maintenance costs were getting too expensive and it was time to get a replacement vehicle. I ended up selling the Benz for $7,500 about two years ago. I timed my sale around the end of the year, because I had learned that December was the best time of the year to buy a car.
My Latest Car
By this point, I had grown to hate car payments, and would never consider paying for a brand new car. However, I wasn’t opposed to scoring a similar deal to the one I had made with my prior car, so I figured I would window shop at the local BMW dealer.
While there, I spotted their new electric car, the BMW i3. I didn’t know much about those cars, and was always intrigued by electric cars in general. I asked the salesman if he would give us a test drive, and off we went.
Yes, it’s an acquired taste…but it’s grown on me…
As we were driving around, I was instantly impressed by the driving experience. There was no sound, acceleration was instant, and the amount of technology packed into the thing was mind boggling!
By this time I had glanced at the window sticker and rolled my eyes at the gigantic price of $55K for the fully loaded version we were driving. This was about the time the salesman started talking about the great lease deal they were currently having.
I had never leased before, but knew that it was usually a bad deal, especially when you factor in the large required down payments, and other restrictions. So I ignored him, until he mentioned the payment amount.
He claimed that we could drive off with the car that day for $285/Month!
To put that in perspective, that would be the equivalent payment of a $16,000 car over a 5 year period at current interest rates. At an MSRP over $55K, the payment should be closer to $1,000/Month.
I immediately looked at my wife, and gave her my “this guys is full of shit” look.
So we head back to the dealership and we sit down to go over the details. Not only did the payment turn out to be accurate, but there was no downpayment requirement or any other fees. The lease period was for 2 years and 10,000 miles per year.
I asked for the mileage to be bumped to 12,000 miles, which brought the payment to $306/Month. This is something I later regretted doing. Despite that, over the 2 year period, the total cost of owning this car would only be $7,344. All maintenance and upkeep are included, with the exception of any wear items.
The incredible deal was too good to pass up, the frugal side of me just couldn’t walk away from a bargain, and I didn’t…
Why I Love my New Car Payment
I wrote this post one year into the experience, and I loved every car payment month! Here’s why…
It’s incredibly quiet. There’s no engine noise, no vibrations whatsoever. I can hear myself think during my commute, it’s very peaceful!
By now you know I like fast cars, I had considered a Prius a few years back but couldn’t tolerate the acceleration, I’m not a patient driver. This thing can move! If you haven’t experienced instant torque with no engine lag, strap yourself into an electric car.
Top speed and highway speeds may not be all that impressive (unless you’re in a Tesla), but acceleration under 60mph is fun! It’s no Porsche 911 Turbo, but it’ll do.
I haven’t been to a gas station in 12 months. Let me repeat. No gas station, waiting to fill up, breathing in the fumes, for 12 months. I plug it in at home, wake up the next morning, unplug, and drive off. I still smile every time I drive by the local gas station I used to stop at every week.
Ok, so maybe I’m stretching the logic a bit. Remember that I had sold my previous car for $7,500. This lease is costing $7,344 over the 2 year period. I’m effectively driving this amazing box of technology on wheels for free.
Before you guys riddle me with bullets over that last statement, let’s take a look at the math…
Fixed Transportation Costs
Everyone pays something for transportation, unless you live in a city where you can get by on walking/biking for all your needs. For most people, car ownership is not an option, it’s mandatory.
If you buy a car, even if you pay for it in cash, you still have a fixed cost to account for. If we assume a reasonable period of 10 years of ownership, your fixed monthly transportation costs would look like the table below.
To keep things simple, I show a purchase price threshold, a resale value of 25% of original cost after 10 years, and no maintenance/financing costs:
You may not think you have a monthly payment because you perhaps bought a car cash, but the cost still exists.
My last car was in the $30K threshold range*, so despite paying it off almost immediately, it cost me about $190/Month to own, excluding maintenance.
* This incidentally corresponds with Financial Samurai’s 1/10th car buying rule
Why my Lease was a Good Financial Decision
Based on the prior analysis, any new car I get to replace my old one, leased or otherwise would be a bad deal if it cost >$200/Month.
Since my lease is $306/Month, I clearly made a bad decision.
This isn’t any normal sort of car, It’s electric, and therefore requires no gas. I used to spend >$120/Month on my last car for gas. The electric car only costs me $20/Month to “fill up” in electricity charges. I’m saving a net $100/Month.
This means my effective lease cost is only $206/Month.
Although that’s still higher than my typical run-rate cost, what I get in return during those 2 years, is a brand new, highly advanced, safe, and maintenance free vehicle. I also get to experience the joy of a completely new driving method.
How I Got Such a Good Deal
I’m a good negotiator, but not that good! So why did the dealer literally give this car away?
Time of the year
I always look for cars in December. This happened to be a 2015 model, with 2016 looming. They needed to clear the old models.
The Oil Market
I work in the energy industry, so I’m fairly tuned to energy prices, especially the price of oil. I happened to be shopping during a time when oil was making new lows. Interest in electric cars had dried up, so the dealer was motivated.
We had walked into the dealership at the exact moment that someone had backed out of their deal for the same car. They realized that their commute would not work with this type of car. The dealer was motivated to not lose that deal.
Seizing the Moment
I knew a good bargain when I saw one. I’m certain that the car would not have been available had I wasted time deliberating the decision, and taking a few days to think it over. I was in a good position to make the deal, and seized the moment.
Finally, as much as I love this car, I would never pay full price for it. It’s fantastic to drive, but not enough to justify the costs. At half the price, I would buy one outright.
Now that my lease has come to an end, the bargain party is over. Or so I thought!
Readers, Do you think I made the right decision with the lease? Would you lease a car if the price was around $200/Month? What’s been your historical run-rate monthly cost of car ownership? Share your thoughts and comments below!