– so we had plenty of time to talk.
My job was pretty simple. I washed buses, fueled them, and recorded their mileage at the end of the day. During my free moments at work I alternated between cringing and laughing out loud when Russ sermonized about money and people. Not everything Russ had to say was politically correct, but his crassness always had an element of truth to it.
Russ claimed he could tell how smart someone was by looking at what they drove. He couldn’t figure out why anyone would pay a lot of money for something – such as a luxury car – that depreciated in value over time. And if they leased it, or borrowed money to buy it, he was really left scratching his head. Russ recommended investing in assets such as houses or stocks. They appreciate over time. But cars lose money every year.
“Andrew,” he said, “If you can go through life without losing money on cars, you’re going to have a huge advantage.” He pointed to the guy across the parking lot. He worked in management. “You see that guy getting into that BMW?”
I had admired the car when I arrived at work that night. It was a beauty. “He bought that car two years ago, brand new,” Russ said. “But he has already lost $17,000 on it from depreciation and loan-interest costs. And in about three years, he’s probably going to buy another one.” I wondered what the car would be worth in three years if it had already depreciated so much in just two.
“If you’re truly wealthy,” Russ explained, “then there’s nothing wrong with blowing money you can afford to lose on the odd luxury item. But if you’re trying to become wealthy,” Russ said in a serious tone, “and you make those kinds of purchases, you’ll never get there. Never.”
Russ turned conventional wisdom on its head. Most people expect to lose money on cars. But expecting it becomes a self-fulfilling prophecy. He told me that people don’t have to lose money on cars if they’re careful.
I expected that from someone both financially and mechanically inclined. My biggest question at the time was whether it could work for me. Mechanically, I’m as gifted as a blind Neanderthal with two left hands.
“When you buy a car,” Russ said, “think about the resale value.” The bulk of the depreciation on a new vehicle occurs in the first year. Russ recommended I never buy new cars, and only buy a car if someone else had covered the bulk of the depreciation.
The best resale value, he figured, came from Japanese cars. He said I should look for low-mileage models that had been fastidiously maintained with original paint, great tires, and a great interior.
If I paid the right price for a car and the bulk of the depreciation was covered by someone else, he preached, I might be able to sell the car a year or two later for the same price I paid, if not a bit more.
Putting Russ’s theory to the test, I searched for cars that wouldn’t put holes in the bottom of my financial bucket.
It didn’t take me long to get a feel for the market. I read a few consumer reports on reliable automobiles. One useful resource was Phil Edmonston’s annually updated guide, Lemon-Aid Used Cars. Certain cars and models are bona fide lemons. Others can be great little workhorses. I would spend a few minutes each morning looking through the classifieds in the local paper. When I saw something interesting at a good price, I would check it out. Over the next few years, I bought several low-mileage, reliable Japanese models. I paid between $1,500 to $5,000 for each car. In most cases, I drove them for at least 12 months without putting any extra money into them. My cars were cheap, so my profits didn’t amount to much, usually $800 to $1,000 a car.
Unfortunately there are too many people who aren’t good with money. It’s often easy to find desperate people who have overextended themselves financially. Buy from them. Generally, they want money quickly, either to upgrade their cars or to pay off oppressively looming debts. I’ve bought used vehicles from both types of sellers, put as many as 60,000 miles on the cars, and then sold them two or three years later for the same price I paid.
On one occasion, I bought a low-mileage, 12-year-old Toyota van for $3,000. I drove it 4,000 miles from British Columbia, Canada, down the Mexican Baja peninsula, then on to Guadalajara, before driving back to Canada. After covering more than 8,000 miles in a single trip, I sold it for $3,500.
Here’s one surprisingly simple strategy for buying used vehicles that can save you loads of time and money.
Imagine wandering onto a car lot. You’re not generally given free rein to browse on your own or with a friend. A sharply dressed salesperson will soon be courting you through a variety of makes and models. They could have good intentions. But if you’re anything like me, your pulse will race a bit faster as you’re shadowed, and the pressure of being shadowed by a slick talker might throw you off. After all, you’re on their turf.
A minnow like me needs an effective strategy against big, hungry, experienced fish – and this is mine: first, I identify exactly what I’m looking for. A few years ago, I wanted a Japanese car with a stick shift and original paint. I didn’t want a new paint job because I’m not skilled enough to determine whether something had been covered up, such as rust or damage from an accident. I also wanted to ensure that the car had fewer than 80,000 miles on it, and I wanted to pay less than $3,000. It really didn’t matter how old the car was as long as it had been properly maintained and hadn’t been around the block too many times.
Like a secret agent wrapped up in the bravery of anonymity, I pulled out my hit list from the yellow pages to call every car lot within a 20-mile radius. Sticking to my guns, I told them exactly what I was looking for. I wouldn’t entertain anything that didn’t fit my criteria.
I did have to hold my ground with aggressive sales staff. But it was a lot easier to do over the telephone than it would have been in person. Most of the dealers told me that they had something I would be interested in, but they couldn’t go as low as $3,000. Some tried tempting me into their lairs with alternatives; others referred to my price ceiling as delusional. But I wasn’t bothered. My strategy was a knight’s sword and the phone, my trusty shield. I also practiced chivalry – knowing that I might end up calling on them again.
Because my first round of phone calls didn’t pan out, I called the dealers back when it got closer to the end of the month. I hoped the salespeople would be hungrier by then to meet their monthly quotas. As fortune would have it, at one dealership an elderly couple had traded in an older Toyota Tercel with 30,000 miles on it. The car hadn’t been cleaned or inspected, but the dealership was willing to do a quick turnaround sale for $3,000.
This strategy doesn’t have to be limited to a $3,000 purchase. The process makes sense for any make or model and it saves time. Over the past five years, I’ve become far less extreme. I no longer pinch pennies. But I still buy used cars. Typically, I now sell them for a little less than what I paid. But if I add up all the money that I’ve “lost” on cars over the past five years, it doesn’t amount to much. The typical new car buyer will lose more money in five months than I’ve lost in five years.
If you save more money on cars, you can invest more money in wealth-building assets.
My friend Nathan is a millionaire. But like most millionaires, he won’t ever lease a car. “Leasing a car, instead of buying used,” he says, “is a million-dollar decision.”14
According to The Millionaire Next Door author Thomas Stanley, 80 percent of millionaires have never leased a car. Finance author Dave Ramsey isn’t a fan of leasing either. He says, “Broke people think ‘how much down and how much a month.’ Rich people think ‘how much.’ If you can’t pay cash for a car, then ride a bicycle. But don’t lease a car.”
Nathan has never paid more than $6,000 for a car. Like me, he looks for cars with low mileage. The average American drives 12,000 miles a year. That means the typical 10-year-old car will have about 120,000 miles on it. Such cars may nickel-and-dime their owners as the cost of maintenance creeps up.
Nathan’s