You Aren’t What You Drive

by mike on August 17, 2010

You work hard, right?   Most people I know work very hard to produce an income.  Have you ever stopped to ask yourself why?

Most people have two possible motives for making money: financial independence or to spend on a nice lifestyle.  It is rare for someone to fall into both categories.  Millionaires tend to be motivated by becoming financially independent.  One thing they are definitely not motivated by is prestige.  They do not care if they are perceived as being wealthy.  They don’t pick houses and cars to show off how much money they have.

What about you?  Have you ever purchased a vehicle, maybe more than you knew you could really afford, just to give the perception that you have more money than you do?  Your initial reaction is probably “no, I would never do that”.  But really think about it.  If you’ve ever said or thought “I would never be seen driving that”, then it is possible you are at least a little worried  about what others think about what you drive.  I once again use “The Millionaire Next Door” as a springboard, this time to discuss the topic of buying vehicles.

Let’s start with a few interesting stats on vehicle purchasing habits of millionaires:

1.)  Only 23.5 percent of millionaires own a new car and 25.2 percent have not purchased a vehicle at all in the last four years. This tells us that the average millionaire does not buy a new car every year.  In fact, they tend to hold on to them for awhile.  This speaks to their level of contentment in life, not always pursuing the newest, flashiest things.

2.)  More than 80% of millionaires purchase, versus lease their vehicles. Leasing is the most expensive way to operate a vehicle.  This is followed closely by financing one.  The least expensive way is to save up and pay for it.  I have recently been hearing an ad by our local Toyota dealer pushing the “great deal” of leasing a Camry.  You pay $299 a month for 3 years, all for the privilege of being able to purchase it at the end of that 3 years for roughly $14,200.  I looked up the value of a 3 year old Camry and it is about $10,000.  Wow, what a deal!

3.)  The typical millionaire spent $24,800 on their most recent vehicle, while the average American (non-millionaire) spent $21,000. Keep in mind, these numbers are from over ten years ago, but my guess is now both numbers are just higher.  The point is that the average non-millionaire out there is spending almost as much (84.7%) on a vehicle than the average millionaire.  That’s crazy.  It’s no wonder there are so few millionaires out there.

Another interesting thing to look at is the type of vehicle the average millionaire is buying.  Is it a Porsche, Ferrari, or Lamborghini? Not hardly.  First on the list is Ford (9.4%).  The two most popular Fords driven by millionaires are the F-150 and the Explorer.  I had to joke with my wife, Mandy, when I read this because we are currently in the market for a Ford Explorer.  I pointed out that 1 in 4 millionaire Ford drivers drive Ford Explorers.  Maybe we are on the right path!  The second on the list is Cadillac (8.8 percent) and third is Lincoln (7.8 percent).  As you can see, millionaires like American cars.  In fact, two out of three luxury imported cars are purchased by non-millionaires.  So, how can you tell a millionaire apart from anyone else if they don’t drive expensive cars?  You can’t!

The process of millionaires buying vehicles is also interesting.  The authors found that they generally fall into four types of buyers: those who buy new vehicles and are loyal to one dealer over and over again (28.6%), those who buy new vehicles, but shop different dealers (34.8%), those who buy used cars and are loyal to one dealer (17.1%), and those who buy used cars and shop around (19.5%).  Those who are dealer loyalists tend to be so because they feel it is a waste of time shopping around for a vehicle.  They spend their time producing high incomes.  Also, many of them shop a particular dealer because the owner of the dealership is a client, customer, or business associate.  Those who shop around do so because they believe the money they save shopping and negotiating are well worth their time.  They are likely to spend weeks and even months looking around for the best deal.  Used car buyers generally buy two to three year old vehicles because they feel the original owner paid while it lost value.  Cars tend to lose the most value the first couple of years.

The authors spent a large amount of time in this particular chapter discussing the fourth group of millionaire car buyer: those who buy used cars and shop around.   The group is the most aggressive bargain hunters of them all.  They most often buy from private parties, not dealers.  This group of buyers has the lowest average income of all four groups, yet they have been able to accumulate a $3 million net worth on average.  How did they do that?  This group was found to be the most frugal on all major purchases.  They also value financial independence over a high lifestyle.  This group contains the most PAWs.  If you remember from last article, those are people who accumulate way more wealth than they “should” based on their income and age.

I would like to finish up by sharing my guidelines for purchasing vehicles.  They tend to line up with the findings of this chapter.  First, I suggest buying a two to four year old car, not a new car.  I did a search on (Kelly Blue Book) and found that a 2010 brand new Ford Explorer sells for $30,331.  A 2007 Ford Explorer with 35,000 miles in excellent condition sells for $19,635 from a private party.  That’s over $10,000 in savings!  I also recommend saving up cash and paying for it outright.  Instead of paying a bank your car payment, pay yourself the car payment each month and save up.  For young people, start out by scraping together $2,000 for a car to get you around.  Pay yourself a $300 “car payment” each month for two years, saving up $7,200.  Chances are, you will be able to sell the $2,000 car for about $1,500.  So, now you can buy a $8,700 car.  Do that again for another 3 years, saving up $10,800.  You should be able to sell the $8,700 for about $4,500.  Now you can purchase a $15,300 car.  On and on it goes.  This is a great way to use discipline and planning to trade up in cars and not break the bank in the process.  This allows you to use the money you save to invest and build wealth.

If financial security and independence is your motivation for working hard, then follow the guidelines for purchasing vehicles in this article.  If you begin accumulating wealth and other people cannot tell that you are, then you are on the right track.  Next time we will look at “economic outpatient care”: how much help do millionaires receive from their parents?

Previous post:

Next post: