Financial Independence

Car Buying Mistakes: Leasing

Car Buying Mistakes

TTF Family!! Today, we continue on the beaten path of my Early Money Mistakes, focusing on my car buying mistakes. There are more mistakes? you ask. Yes, there are more and honestly, the more that I write about these mistakes the more that come to mind. So raise your glass and cheers to me learning the hard way (so hopefully you don’t have to), and we are off to another one of Mr. TTF’s fumbling face plants.

Do you remember how I told you that my life has been a series of “one step forward, two steps back” scenarios? Well, I wasn’t kidding and here is yet another example of that.

Transportation Costs

Vehicle / Transportation is typically one of the top three expenses we deal with in life. And there is a lot of room for error, causing that cost to unnecessarily increase. We’re going to talk about the mistakes I have made and how you will be able to prevent them.

  1. Housing (checked that mistake box)
  2. Food (Miss TTF will have more on this one soon)
  3. Transportation (the reason we are here, now)

My First Car

While this isn’t my car, I was (and still am) the worst with keeping or taking pictures, as Miss TTF can attest to. But mine definitely looked somewhat similar.

First, a little backstory on my car buying career. The first car I ever owned was a used White Chevrolet Cavalier. I got a kkkkiiiiiilllllllllllleeeeeerrrrrr deal on it, and I mean a killer deal… my parents bought it for me.

No, I did not grow up with money growing on trees, my family was very much middle class. In fact, when people used to ask me where I lived growing up, I would always mess with them a bit. I would ask them if they knew where this really, really, and I mean RE-ALLY wealthy neighborhood was? When their eyes lit up just thinking about that neighborhood and the massive McMansions that lined the golf course, I would stop their imagination dead in its tracks and say, “Yeah, I am the neighborhood just before that.” I would watch their gaze come back down to earth when they realized I lived in the older development that had nothing to do with the ritzy new neighborhood.

With that said, my parents made sacrifices, and by sacrifices, I mean delayed their own retirement, so that they could provide us kids with things they did not have growing up. We had everything we needed and then some: a beautiful home that slept my smelly friends and me (my mom’s words, not mine). We had more food and snacks than Ms. TTF and I ever do. Most of all, we had a massive amount of love and support.

That Dream Moment

So yes, they purchased me my first car as a complete surprise to me. I will never forget when they opened up the garage and I absolutely lost my shit. I went crazy. It was like George Gray from the Price Is Right just unveiled my “Braaand Newwwww Car!!” Frolicking and hugs ensued, followed by my first ride and song in my car. “You Can Do It” by Ice Cube was the natural choice as I thought it was an awesome song at the time and sounded incredible at max volume. I am sure the neighbors felt differently, but I certainly wasn’t concerned then.

For my first cruise, I took it to this nearby country road that never had another car on it and doubled as my “runway.” You could easily reach over 100 mph on this stretch… with a 6-cylinder. Unfortunately, this Cavalier was a 4-cylinder so I think I rocked closer to 75-80 when all was said and done. But it didn’t matter, according to my friends, I had reached 200 mph on that day. I had made it, life was good. This car should have lasted 10 years.

I am sure you can pick up on the “should have” so I will confirm the bad news and tell you that it lasted about two. You see, I learned a valuable lesson that day on the side of the highway when my car stopped running… cars need oil… like really badly.

Cause of death: Engine seized due to nickel sized hole in the oil pan and a completely oblivious car owner.

Oh, the places I could have gone with the money I would have saved on cars over the years if I had simply taken care of the Cavalier

Car #2

While I lucked out with my parents purchasing me my first vehicle, I thought I was on my own-ish on the second. But as it turns out, my dad just told me, “I was in no position to purchase another vehicle” that I was “still goofing off and playing basketball,” etc. etc.

So at this point, I am just embarrassed that my parents purchased two vehicles for me. Heck, I think my parents should have told me to get a second job and figure out how to purchase my own vehicle. But alas, they are nicer than I. If it is any consolation, I took much better care of this vehicle, but more on that later.

So what was my second vehicle? It was a… drum roll pleaseSubaru Impreza Outback. “Automatic or Manual?” you ask. I mean, I was getting to it, but it was a Manual. And you are correct, nowhere have I discussed that I could drive a manual… because I couldn’t! That made for an interesting test drive, let me tell you.

Again definitely not my exact car, but just giving you an idea of what this guy looked like.

I will never forget the time I stalled it about twenty times at this T-intersection on a slight hill. This kid was playing soccer in his front yard, oblivious to the world outside of his game. That was until I stalled the car about fifteen times. At this point, he was wondering what the heck was going on with this imbecile (me) trying to turn right in front of his house. For all he knew it was another eight-year-old, like himself, who stole his parent’s car and was making a run for it… or at least trying to.

As time went on, I got much better, but only after stalling it and struggling in every place imaginable.

All Wheel Drive

Growing up in the midwest, however, this car was awesome. With all-wheel drive, shoveling my car out was a thing of the past. I went to school at the University of Wisconsin-Milwaukee. Their street plowing strategy was interesting, at best. Essentially, they would plow down the middle of the street, pushing the snow up against all of the cars parked on the street. From there, they left it up to the tax paying citizens to shovel their cars out and complete the job.

So every morning after a snowfall, you would see the groggy, resentful, college students outside shoveling their cars out. Not me, though, which I am certain they resented me for. As they were shoveling away, I simply turned the ignition and drove right over it with my all wheel drive (and in my head, smiled and waved at them and in their head, they smiled and waved the bird back at me).

Lesson: Taking Care of the Things You Own Pays Dividends

It was a great car and as I mentioned earlier, a car I took care of. I learned how to complete my own oil changes, check fluids, and I learned that Discount Tire will rotate your tires for free. At the time, they would also plug your tire for free if you happened upon the good fortune of accidentally running over a nail or other sharp object (so long as it is in an area that can be plugged). Of course, by offering such amazing customer service, they are playing on your reciprocity trigger in hopes that you will one-day purchase tires from them. I do, so hey, I guess it works.

This car made it all the way out to Arizona, but eventually became more expensive to maintain than it was worth. The damn thing had a serious rear-wheel bearing problem. It was an issue I had repaired to the tune of $600, twice for a total of $1,200. It needed to be replaced again, but by that time, I decided it was time to move on. I let this car sit in my previous apartment complex for over a year before they decided it was abandoned and it was impounded.

Unfortunately for me, it wasn’t completely gone, I had just procrastinated what I was going to do with the damn thing. Fortunately, I had a good friend who knew the ins and outs of this business and helped me turn the car over to the company that had impounded it. This was a far superior outcome of paying a massive amount of money to get a car out that was no longer running. No, thank you. So long and farewell to the Sub and on to the vehicle that replaced it.

Buying My “First” Car

So now it was my turn to actually buy my own car. I did extensive research on car buying. In the near future, I plan to post my learnings in the car buying process. It can be daunting, but there is a lot you can do to put yourself in a good position. One of the biggest leverage points is patience.

At the time, I was borrowing a friend’s car while they were working out of state. This allowed me to take the necessary time to buy the right vehicle for me at the right price. For whatever reason, I was dead set on finding a Honda CRV or a Toyota RAV4. It was very important that I have this because I didn’t have a family to drive around, I almost never transported anything large in size, and it was less fuel efficient than a simple car like a Honda Civic or Accord, or a Toyota Corolla or Camry.

In all honesty, it was not uncommon to hear stories of smaller, more simple cars being stolen in Arizona which is why I stayed far away from them. With that said, having the extra cargo space of an SUV would serve me very little, and coupled with the decreased fuel efficiency, it would certainly cost me more… it was perfect (insert all of the sarcasm you can muster here). It wasn’t long before I came across a beautifully cared for Honda CRV. The stars had aligned. The seller was leaving the country and needed to get rid of it sooner than later. I had it checked out by a local mechanic and was able to negotiate a great deal. I was elated and llloooovvvveedddd driving that car. Very unfortunately, that love was short lived.

Yes, this is a Honda CRV. No, this is not my car nor did I ever “camp.”
The Much-too-Early End of the Perfect Car

Fast forward two months and I rear-ended another vehicle and totaled my car. I was out apartment shopping on that beautiful AZ afternoon. When I was returning home after looking at a completely overpriced studio, I took my eye off the road for a moment, and when I did look up, the highway had turned into a parking lot much to my chagrin. I could not stop in time and that was a very, very long day. Fortunately, nobody was hurt. In fact, the car I hit didn’t have a scratch on it; it was a massive pickup truck. My car was not so lucky and would never be driven again.

This was the point at which I recognized just how good of a deal I got on that car. The insurance company paid me more for it than I had paid for it. What?? Was this even possible? I was dumbfounded and had no idea this could happen.

Buying My 2nd Car

So many nature shots of my past cars. It’s quite ironic really since I am never actually in nature…

So here I was again, going through the car buying process for the second time in a few months. I was so happy to be done with the car buying process when I had finally purchased the CRV, and now I had to do it all over again?! The difference, this time, was that I did not have an indefinite amount of time to purchase my next vehicle. I had a loaner from the insurance company, but only for a week or so. So, I was off to find my next vehicle and I did not have quite the same success I did the first time.

I ended up finding an older Toyota RAV4 with much fewer bells and whistles, and for about the same price. I remember, very clearly, sitting in this gentleman’s office signing the official documents. His office was some random closet in this warehouse. I really had no idea if I was leaving there alive or if this car was even his to sell. The entire experience felt off, but no issues actually arose so we can all collectively breath a sigh of relief. There isn’t a whole heck of a lot to say about this car. It served me well until it didn’t which is just the life cycle of any car.

Mistake #1: Thinking My Car Didn’t Reflect My “Status”

There is one thing, however, that always makes me chuckle when I think of this vehicle. When I moved to CA, I continued my career in hospitality management. Every person I supervised had a nicer car than me. On the day I had this epiphany, I messaged my good friend in AZ so he could laugh at my expense… at least I thought I did. Turns out, I sent it to Ms. TTF, who was not Ms. TTF quite yet… I did my best to play it off, but I am sure she knew enough to call my bluff. If she didn’t know then, she will know when editing this post.

But for someone who has always touted themselves as one who just needs a car to get from A to B, I wasn’t very open or willing to truly explore what that would have looked like. I wanted a car that “reflected” I was in management and well on my way in life. In retrospect, I know now that I was simply hiding the fact that I wasn’t. I knew how to make money, but I didn’t know how to grow wealth. I was clueless to that end. What I should have done, and what I did do, are completely different.

Mistake #2: Succumming to Lifestyle Creep

Then lifestyle creep happened for exactly 36 months. Lifestyle creep occurs when your expenses rise in tandem with increased wages. Essentially, since you have more money in your bank account, you spend that money “because you can.” Lifestyle creep happens when you stop paying attention, when you stop being intentional. I was making more money than I had ever made. It was not a lot by any means, especially in Southern CA, but it was more still.

I had been tipped off to leasing a vehicle, a relatively simple and “affordable” way to get into a brand new car. It is basically an extended rental. So again, I was looking for an SUV, a Ford Escape since my parents had one and liked it. I could not get it to a price that I was comfortable with. I spent most of the day at the dealership going back and forth with the Salesman; he was definitely ready to shake me, but it was the end of the month and you could tell he was motivated to close out one more sale. Eventually, we agreed to disagree on the Ford Escape price. I was ready to leave, but he had one more trick up his sleeve.

Mistake #3: Paying for More Car than I Could Afford

He wanted to take me on a test drive of just one more car…. weary from the 15 round negotiation, and influenced by the idea of sunk cost with my time that day, I agreed. Damn, if it didn’t work.

This car had everything I had never had before. A smooth, quiet ride, a backup camera, a nice sound system, comfortable seats, Sirius radio, and I could connect my phone and participate in some luxurious hands-free calling; I felt like I was piloting a spaceship. He knew what he was doing and it worked. I wanted the car and he knew it. I didn’t just concede to the list price. We went another 15 rounds and they spun the numbers into something I became okay with along the way.

What was the car? Well, it was a 2016 Ford Fusion; brand-spankin’ new!. It would take me three years, but I would end up paying $12,025.35….I will be right back, I am not feeling well after typing that figure….

$4,500 was due at signing

$1,500 of which was cash

The rest came in the form of “rebates” and my trade in for the RAV. The remaining $7,525.35 came by way of 35 recurring monthly payments of $215.01. The first month’s payment was included in the $4,500, thus 35 payments instead of 36 months. So yeah, they won. I rented a car for three years, loved it, but had nothing to show for it but a $12,025.35 bill. Ouch!

How to Avoid the Top Car Buying Mistakes

If I could go back in time, slap myself in the face a few hundred times, and perhaps perform the ice bucket challenge before buying – I mean leasing – the Ford, there are three far superior options my present-day self would have considered (but really one that stands out among the rest as the front runner.

  1. Purchase a used car for approximately $5.500
    • the price I most recently paid for my new but used, 2008 automobile
  2. Buy a new car for approximately $12,025.35 using the Costco Car Buying program
    • the total amount I ended up paying for the leased Ford over 3 years
  3. Purchase a $1,500 used car in cash
    • the cash I had on-hand to put towards the down payment for my lease

1: Purchase a Used Car for $5,500 (with a Small Loan)

TrueCar pops up a bunch of cars under $5,500 and you can sort by mileage! This 2012 only has 63,000 miles on it and is great on gas mileage (29 mpg city and 40 highway), saving you even more money.

Prior to turning in my lease, I purchased a 2008 VW. All in, the vehicle cost me about $5,500.00; I paid cash. Back when I opted to lease the Ford over three years ago, I was not in a position to pay outright for a car at this price point.

It is interesting that I decided to lease a more expensive vehicle at a time when I was not in a financial position to do so. That is exactly what the dealership hopes for. They want you to leverage your few dollars to buy more car than you can afford. I did just that. As you will see though, buying more car than you can afford has a much greater cost than the sticker price alone.

In the table below, I demonstrate the opportunity cost that I lost out on by leasing a $12,025.35 car versus purchasing a used car for $5,500.00.

In this scenario, I assume a few things.

First, I am assuming that I put the same down payment of $1,500 and that they gave me $500 trade in for my RAV, which they did when I signed the lease. The registration and tags were included in the purchase price so I am also pulling out $462 for that. Subtracting all of that out, I have $3,038.00 to spread out over 36 payments; this would result in a monthly payment of $84.39. This is a far better payment than the $215.01 per month and would have allowed me to put $130.62 per month to work for me in a brokerage account.

As usual, I am assuming this savings would be invested in an index fund that tracks the S&P 500 with an approximate 7% annual return adjusted for inflation.

The Compounding Results

After one year of contributing $130.62 in the said brokerage account, I would have had a year-end total of approximately $1,677.00:

  • $1,567.00 (93%) would have come from my own contributions
  • $109.00 would have come from growth (7%)

After a second year of contributing $130.62 per month to my “would have, could have, should have” brokerage account, on top of the $1,667.00 balance, I would have had approximately $3.471.00 by the end of the year:

  • $3,244.00 (93%) would have come from my own contributions
  • $227.00 would have come from growth (7%)

After a third and final year of contributing $130.62 per month to my brokerage account, on top of an approximate balance of $3,471.00, I would have had approximately $5,391.00.

  • $5,039.00 (93%) would have come from my own contributions
  • $352 would have come from growth (7%)

Now the kicker. I would own the car and get to keep the car, whereas, with the lease, I had to turn it in after the 36-month term. Not only would I have the $5,391.00 working in the brokerage account, but I could also tag the $5,500.00 earmarked for the purchase of my new car to join the compounding party.  For those keeping track at home, that is:

$5,391.00 + $5,500 = $10,891.00.

What would that $10,891.00 in the brokerage account, with an annual return of 7% adjusted for inflation, look like after 40 years of compounding? Well, the answer to that is right around $163,086.00.

A whopping 93% of this would have come from growth, $152,195.00 to be exact, and would have only required me to contribute 7% of that total, $10,891.00. Aaaahhhhhhh. So, in effect, that $12,025.35 rental was more like a $175,111.35 rental when compared to purchasing the moderately more reasonable $5,500 car. There are words that come to mind, but they don’t belong on this page.

Moving on to Scenario 2 (insert Charlie Brown walk here).

2: Purchase a Car for the Total Cost of My Lease

Costco Car Buying?? I know, they sell everything damn it. Now, you certainly can’t pull up on their lot and start shopping for cars. You would get a lot of funny looks from the owners of those vehicles when they returned from their shopping extravaganza with more shit than they can fit into the camper they don’t own.

You: “Did you find everything okay?”

Them: “Yeah, apparently so, I just spent $7,824 on shoes, paper towels, vodka, and chocolate covered Vitamix crackers!”

Nonetheless, Costco works with local dealerships to create a no-hassle buying experience. Now if they could only partner with dentists…

It is as simple as submitting a request and “an Authorized Dealer Contact will follow-up to schedule an appointment at the dealership.”

Now, I don’t advise this option because I don’t advise spending beyond your cash on a vehicle. With that said, it is worth noting that I had a good friend who utilized this program. For damn near the same amount, $12K, they owned a very reliable Toyota Corolla after three years.

See the difference? They owned a car outright after three years. A car that would last them many, many years to come. I walked away with nothing and had to purchase a used vehicle. This is like the best worst-case scenario. This would have, at the very least, spared me the $5,500 I had to deploy to purchase my VW.

Compound Effect

I could have invested that $5,500 in my brokerage account and left it to sit and work day and night for me for 40 years time.

Assuming an average return of 7% annually. I would be eyeing an $82,359 balance at the end of 40 years, turning that $12,025.35 rental (lease) into a $94,384.35 rental. Mind you, this was the best worst-case, scenario!!

Alright, two scenarios down, and one to go. This next one is what I actually should have done… and you will see why… the numbers are alarming.

3: Purchase a Used Car in all Cash

$1,500 Car is possible to find. Look at this 2000 Jeep Cherokee Sport, with probably 100,000 miles on it! The first one to pop up on TrueCar.

Before I bought the VW, before I leased the Ford, I had a decision to make. It was clear I could no longer drive my RAV, that much I knew for sure. Why oh why, after seeing my parents purchase two used cars for me with cash, and I, myself, had purchased two used cars with cash, did I not even think to do the same a fifth time? Why did I get caught up in the consumerism that has this world in record levels of debt?

The truth is, I don’t know. I didn’t journal at the time so I can’t go back and see what was on my mind way back when. I have a notoriously fickle memory for whatever reason, something Ms. TTF can attest to and quite frankly, gets a kick out of from time to time. But if I had to guess, there were a number of reasons.

First, I really didn’t have a lot of money. As I mentioned in Part 2 of me falling on my face, I had paid rent on my own for many years in AZ. When I moved to Southern CA, I made the same amount and continued to live on my own for essentially double the price.

In fact, I had $1,500 and what in the heck was that going to buy me? Not much, I thought, but at the same time, it was certainly enough to buy me something.

I should have bought only as much used vehicle, or even a little less, as I could with the $1,500 I had. Instead, I leveraged that $1,500, spent beyond my cash, and “bought” far more car than I could afford at the time. The numbers are gut-wrenching.

My Savings

So with that said, let’s take a look. Had I purchased a used car, inclusive of tags, taxes, and registration, I could have saved $215.01 into a brokerage account each month for 36 months (certainly longer, but this is just for comparison sake). No loan, no monthly payments, perfecto! After one year of investing $215.01 per month into my hypothetical brokerage account (earning 7% per year on average, which accounts for inflation, I would have had an approximate balance of $2,760.

  • $2,580 would have come from my own contributions (93%)
  • $180 (7%) would have come from growth

After a second year of contributing $215.01 per month to my brokerage account, on top of the $2,760 balance, I would have had approximately $5,713 by the end of the year.

  • $5,340 (93%) would have come from my own contributions
  • $373 (7%) would have come from growt

After a third and final year of contributing $215.01 per month to my brokerage account, on top of hte $5,713 balance, I would have had approximately $8,873.

  • $8,293 (93%) would have come from my own contributions
  • $580 (7%) would have come from growth
Compared to the $5,500 Car

As you can see, simply by purchasing the $1,500 car over the $5,500 car, I have an extra $3,482 in my brokerage account at the end of three years:

$14,373 – $10,891 = $3,482

To me, that is a lot of money in and of itself. That is just the tip of the iceberg, however, because not only do I have that extra money in the brokerage account, but that money is now available to work day and night and to compound over a 40 year period. With an average return of 7% annually, the result is an extra $52,141 after 40 years

$215,227 – $163,086 = $52,141

That is just from the extra savings. As a result, the approximate brokerage balance, after 40 years, is even more profound. Remember, since I purchased this $1,500 vehicle, instead of leasing a vehicle, I would have owned the car after 36 months. Again, this is great news. The $5,500 I had actually used to buy the VW after turning in my leased vehicle, I could have invested on top of the $8,873 brokerage account balance. This would bring the total brokerage balance to $14,373.

Now here is the part where I highly recommend sitting down. When I ran this calculation, I was standing up and let me just say, the end result wasn’t good… thank goodness Ms. TTF is a rock star when it comes to First Aid. If I had made such an objective, intelligent, FI-focused decision to purchase that $1,500 used vehicle, that $14,373 could have worked for 350,400 hours (40 years) and the approximate balance after that time, with an average annual return of 7% accounting for inflation, would be…

$215,227!!!!

That means, $14,373 of my own contributions (7% of the total balance) returned $200,854 of growth (93% of the total balance)!!!! Wwwwhhhhhaaaaaatttttttt?!?!

That is a 1,397% return on your contributions!!!!

This is the thing. We make decisions like this on a regular basis and very rarely think of the long term impact. Most will think a $12,025.35 vehicle cost just that, $12,025.35. But money, and compounding, and time = opportunity cost is rarely if ever factored in. When it is, the perspective is flipped on its head.

If someone had told me that, by leasing a vehicle, I would be giving up $215,227, I would have never stepped foot on the car lot and would hold my breath every time I drove by a dealership from now until the end of time… But I didn’t know enough to make that decision. And just to show you the power of conventional thinking, my dad, to this very day, defends my decision to lease a vehicle.

But now that you have read this, and you know differently, you can make a much better decision than I did. When was the last time you were able to say you saved $215,227? Well hopefully now you can. But since we are talking about the pursuit of FI, we are all about optimizing and blasting conventional thinking out of the water. So here is what happens when you continue to invest monthly on top of that initial $14,373 contribution:

  • $100 monthly contributions + 40 Years Compounding = $471,559
  • $250 monthly contributions + 40 Years Compounding = $856,056
  • $500 monthly contributions + 40 Years Compounding = $1,496,885
  • $750 monthly contributions + 40 Years Compounding = $2,137,714
  • $1,000 monthly contributions + 40 Years Compounding = $2,778,542

Needless to say, I think it is a sound recommendation to invest more, and more, on top of that savings from purchasing a $1,500 car.

Conclusion

So there you have it. I easily fell into the traps of consumerism and committed all three of the top car buying mistakes. Hopefully these three alternatives help you focus your next purchase toward a much smarter financial decision. These were the three ways I could have saved a LOT of money.

I could have purchased a $5,500 car with a small loan. This would have been more car than I could afford, but I would have been far less leveraged than I was when I leased my vehicle.

I could have spent about the same amount of money altogether ($12K) by purchasing a vehicle via the Costco Car Purchasing program. At least, then, I would have owned the car outright after three years, instead of returning a car I had already spent $12,025.35 on….ugh still.

Or I could have done something crazy and not taken on debt (what a thought, I know). I could have chosen “c,” the answer to every college multiple choice question, and purchased the damn $1,500 car. Now that is a decision I could pat myself on the back for one day… especially on the day when I realized that such a seemingly inconsequential decision could have made the difference between having an extra $215,227 or not.

Never forget TTF family, that the only bad lesson is a lesson we don’t learn from. Learn from my mistake and save yourself $215,227.

How will you take these lessons into your own lifestyle and purchase your next used car? Tell us about it in the comments and please share all your past car buying mistakes too!

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