Over at the MBN Forums there was some discussion about a short video presentation called Drive Free, Retire Rich over at Dave Ramsey's website.
The first part of the presentation (up through Slide 11) was very well put together, and showed perfectly the value of buying used over borrowing and buying new. A synopsis of the first 11 slides:
- Getting a loan and buying new is a bad way to buy a car because you pay for up to six years, the car loses a big chunk of its value the moment you drive it off the lot, and it's not what it once was after a few years, but you're still paying for it.
- Instead, save up to buy an inexpensive used car, and pay yourself the car payment.
- After 10 months, sell your used car for (close to) what you paid for it, and upgrade to a better used car using the proceeds and your saved money.
- Rinse and repeat until you're driving a pretty nice car, and saving what you would have spent on the car loan for an emergency fund, retirement, etc.
The presentation paints very broad strokes, but the premise is a viable solution to borrowing for a car. It will be slowed by things like taxes, registration, repairs, etc., but there's nothing wrong with the method at all.
Then, at the end of Slide 12, the video takes a right turn at Albuquerque and enters Fantasy Land:
At the end of six years, your $11,000 paid-for car has just about run its course. It's been great, but it's time to upgrade. But hey, that's no problem: You've got a mutual fund specifically earmarked as a car-replacement fund. You know how much is sitting in that fund right now? At the stock market average of twelve percent, you'd have about $32,000.
What freakin' stock market averages 12%? That's the ballsiest claim I've heard about the stock market. It's a full 5% higher than the real return of the S&P 500 from 1950 to 2008. How they can say that with a straight face is beyond me. What's more, the video goes on to make calculations assuming that this rate will hold for forty years. Sorry, there's little chance of that happening, unless the 12% includes inflation. Then I suppose it can happen, but if that's the case, then the $5-million-plus the video claims we'll have at the end of 40 years if we follow the plan won't be enough to retire on.
Bottom line: Buying an inexpensive used car, paying the car payment to yourself, and upgrading every year or so is a great way to get into a nice car that you actually own.
Just don't count on a double-digit stock market for the next 40 years to pay for your retirement, too. Please!
Sounds like a pretty nifty method, one I haven’t heard of before. One problem though – my truck is only worth it’s scrap value. Kinda tough to get started with that ;-D
On the other hand, my motor scooter defies the odds. Bought it brand new for $5000 over a year ago, have almost 8000 miles on it, and I’d still easily be able to sell it for $4000. About the only upside of Honda making so few Big Ruckus’s in only two model years.
MBH –
“What freakin’ stock market averages 12%?” Ok reasonable question.
1> I haven’t parsed the deck you’re referring to, but Dave never quotes “real returns” (inflation adjusted), just the nominal. I’m not sure why it would make sense for someone in his position to anyways – why compound the discussion by adjusting it with a variable? In fact, I’m pretty sure bloggers are the only folks I know of who discuss in terms of ‘real returns’.
2>Any mutual fund I buy had better out perform the S&P. Dave would likely tell you the same.
Those two points should make up the yards you need to get from 7% to the 12% he’s quoting.
Now, just to blow your mind, I have one mutual fund that since inception in the 1960’s has averaged over 10% (again, nominal). And that’s after the 40% hit it took last year. So yeah, it’s out there.
Sometimes, you just want to share a good piece of news with a friend, not get drawn into a life-coaching session re: their problems. Meh.
It’s very clever not to take any chances with the kind of economy run by Wall Street banksters right now.
That means using your own personal control on your personal investments as much as possible, rather than than letting some so-called “expert” doing it “better” for you. You don’t personally know this “expert” yourself, and you probably don’t know in what this “expert” is “expert”.
Using good old common sense will be all the difference in the world. Start with what has the most impact. Buying your car should be pretty high in your list, because your car is the second highest expense you have in your life. Just after paying taxes, and before paying your house.
At least in Canada. This information comes from Statistics Canada and is pretty much the same for other industrialized countries, but your mileage may vary a little bit from one country to another.
Buying a used rather than a new car is a little work that has high returns for you. But is has the secondary effect of yourself getting used to make more use of your judgement, something that will be more and more in demand as the economy starts to other energy sources and different ways of doing in the future.
Uncle Sam earned a reputation of creativity and originality by something else than going to the mall on weekends and watching American Idol the rest of the time they’re not working.
Hopefully, the judgement of everybody will be put together again to create something good for the future again.
In the meantime there’s much worse to do than working on our individual skills and judgement to keep Wall Mart away from the creation of original solutions to our day to day problems
Purchasing used cars and selling them every 12 months is a new idea to me as well. I guess it would work in the long run, however the paperwork part is a pain.
As for the 12% return, this is quite high. I thought I read somewhere that great brokers average and 8-9% return. Maybe I was mistaken.
-Little House
Right on. You’ll find that Dave Ramsey is very good at remembering things like interest, depreciation, taxes, inflation, and so forth when they support him, and quite forgetful when they cut against him. I especially love the bit about how that $1000 car never breaks down and doesn’t lose any value during the year you drive it, or how even that insane 12%/year, every year you get from your “good” mutual fund only buys you cars for the rest of your life if the inflation rate is zero.
Dave Ramsey is the best debt counselor I’ve ever heard of. If you’re sinking–or even under water–he will do you a lot of good. But as an investment counselor, he’s a clown. “Good” mutual funds always out-perform the S&P 500. A Roth IRA always beats a traditional because it grows tax-free. You should put money into an aggressive growth mutual fund that you are going to want in five years for a car. Full-fee brokerages (that kick a percentage back to Dave for the referral) will give you superior returns. Yeah.
While his debt advice is great, most (if not all) of his investing advice is very bad. He advises:
Stay fully invested in “good, growth stock mutual funds” throughout your retirement (never move some to cash or safer investments)
Cash out prepaid tuition plans and put it in the stock market (again, with a short horizon this is very bad advice)
Interesting in today’s WSJ an article on how bad the last decade for stocks has been – worst on record.
Could Mr. Not the Jet Set tell us the name of the mutual fund he’s had since the 1960s that has earned over 10% annualized? There have been few around for that long.
Virtually all the academic research says that you cannot pick the winners ahead of time. See William Goetzmann and others.
I have wondered why Dave Ramsey, whose stuff about debt, buying cheap, and the psychology of spending is really good, runs off the rails when he starts talking about mutual funds. I suspect, though I cannot prove, that Dave Ramsey and Ric Edelman (who likewise doesn’t recommend index funds) would not get invited to speak at financial conventions, etcetera, if they took a logical tack re: index funds.
I recommend that anyone interested in this topic read ‘The Four Pillars of Investing’ by William Bernstein. Pay particular attention to chapters 9 and 10, titled, respectively, ‘Your Broker Is Not Your Buddy’, and ‘Neither Is Your Mutual Fund’.
The 10 month recycling car is not such a great idea in a high-sales-tax state like LA. You will pay 9 % each time you trade your car, unless you go through a dealer to trade it in. If you do that, you will get 30 % less than its worth.
Trading your car in annually is a huge waste of money in sales taxes. 3 years should be a minimum hold time for a car, unless you are driving a $1000 car just to get back on your feet.