It's Just Money

Car vs. House, good perspective

It's no secret that real estate is generally a good investment, while cars are almost certainly not.  I say "generally" for real estate because it is very possible to turn real estate into a terrible investment.  Flippers, sub-prime buyers who can't handle the payment reset, and someone who overpays in a hot market are cases where real estate could end up a poor investment.  When is a car a good investment?  Well, almost never.  I knew a guy in high school whose dad was a mechanic.  They used to buy used cars, fix them up and sell them for a profit.  In that rare instance, or perhaps selective collectibles, a car might be a worthwhile investment.

Otherwise, while they are both "use assets," a house is likely to make you better off in the long run, and a car is not.  Again, no big surprise.

I was listening to Dave Ramsey today, as I often do if I am in my car during the afternoon.  A 25 year old woman called in.  I don't remember her name, but we'll call her Kathy.  Kathy asks Dave if she should get an apartment or build a small starter house.  Naturally, Dave asks her two questions, "do you have any debt?" and "how much do you make?"

Not long ago she was debt free, but just recently purchased a new car, and financed the whole thing.  Also, she bought a small piece of land on which to build a small starter house.  The car was $31,000 and the land was $20,000.  She owes $31,000 on the car, and $16,000 on the land (she put $4,000 down).  Her income is $43,000.

You can imagine what came next.  "Sell the car," Dave instructed in no uncertain terms.  "Today."

"Well," she kind of pleaded, "does it matter what kind of car?"  Of course, we all know the answer.  It's really not difficult.  Spending 72% of your annual income on a car is just silly.

With the car payments, she would have a difficult time financing the construction loan for the house.  Essentially, she was sacrificing a house for a car.  Dave put her situation into perspective very effectively.

"You're 25 years old today, right?  Let's say you wake up tomorrow and you're 35.  Let's pretend that you're still single for the sake of simplicity.  You may be married with a bunch of kids, but that doesn't matter.  At 35, would you rather have a house that you are ten years into payments on, or a ten year old car?"

Well done, Dave.  We don't even need to wait for the answer.

Where is the outrage over gas prices? And how commuting saves us money.

About a year ago, gas prices in Los Angeles surpassed $3.25, and at some stations premium gas was closer to $4.00.  Of course, that was in Beverly Hills and other nutty places like that.  Nationally, prices had risen to about $2.90 per gallon.  The news media, the PF blogosphere, couldn't get enough of it.  For a while, it seemed like that was all anyone wanted to talk about.  Those outrageous gas prices.  Of course, nationally, prices didn't peak until July, when peak driving season combined with spiking oil prices drove gasoline prices over $3.00.

Back then, and still today, my Fiancee and I began carpooling to work a couple of days per week.  We both have a fairly lengthy commute.  By L.A. standards, it's not anything impressive.  But for the rest of you, it's probably unthinkable.  Her drive is about 22 miles from door to door, and mine is about 26 miles.  And it's not just the mileage.  This is L.A. traffic we're talking about here.  Without benefit of the carpool lane we're looking at about an hour getting to the office, and as much as an hour and a half getting home.

As you can imagine, sitting in traffic is not the most fuel efficient driving.  We are lucky to get over 20 miles per gallon in these conditions.  And we both drive fairly fuel efficient cars.  So, our commute runs us about a gallon of gas each way.  Probably more.  Two gallons a day.  At three bucks a gallon, we're talking about six bucks a day each.

Carpooling not only cuts out the fuel use and the addition of miles on one of the cars, but makes the drive itself more fuel efficient.  We carpool about three days per week.  Running some rough math, this is a savings of $18 per week.  $936 per year!  Holy crap!  I'm rather proud of us now.  And that's just the gas savings.  If I drive every time, she is saving 22 miles each way.  That's 44 miles per day, 132 miles per week, and 6,864 miles per year.  That saves her two oil changes per year.  Probably saves her other maintenance costs that arise out of driving high miles.  Also, when it comes time to sell the car, the resale will be higher.  Or, she can drive it longer for the same resale.  Frankly, I like the latter option.

Added bonus:  time.  By cutting our drive home in half, we have time to cook dinner, take a nap, write blog posts, whatever!  We also have time together.  Both in the car and at home.

Here's a chart of Los Angeles and National gas prices according to GasBuddy.com:

Buy versus Lease Part 1

If you spend any time reading personal finance books, websites or blogs, you will quickly see that buying a car outright, in fact a reliable used car, is considered favorable to leasing a car.  I have always believed this to be true, but have never done the math.  So, last night, I took some time to research how lease payments are calculated and the tax treatment if the vehicle is used for business purposes.  Lease payment calculators are available online, but none of them breakdown the math involved.  Believe me, understanding the math is critical in not getting screwed if you plan to lease.  You can check out my buy vs lease calculator.  It may need some work, but it definitely does the math.

The results are complicated because there are sooo many variables.  For example, higher interest rates favor buying, while shorter loan/lease terms favor leasing.  Lower down payments favor leasing, while the ability to deduct a portion of your mileage from income taxes favors buying, unless the vehicle is used for small business purposes.  Fairly obvious, if you keep the purchased car for a few years longer than the loan/lease term, you come out WAY ahead.  That, to me, is the biggest benefit to buying over leasing.

But to get the argument for leasing, I found a site called leaseguide.com.  Their article on lease vs buy was clearly slanted to the leasing camp.  Not a big surprise considering they are a site dedicated to selling a "lease kit" for twenty bucks to help you make a good deal on your lease.  I took their article on the benefits of leasing, and respond to each of their points below.

Buy vs Lease Calculator

I created a spreadsheet to compare the total cost of buying a car versus leasing one.  I will put up another post shortly with my findings, but let me explain the fields and methodology behind the calculator.

The calculator is actually an Excel spreadsheet saved as html with interactivity.  So, you can alter the cells to do your own calculations.  This is the first time I'm doing this, so I hope it works well.

Here's how you use it.

1. This must be viewed in Internet Explorer.
2. Enter only in the unshaded areas.  The gray cells have formulas.
3. The calculator does not assume you will keep the car for the same amount of time whether you buy or lease as most similar calculators do.  Enter realistic lengths of time, both for the loan/lease term and the years to own.
4. The total cost numbers at the bottom are for the period described.  If you plan to buy a car and finance for five years or lease it for four years, leasing will appear cheaper.  But you have to figure out what you will do at the end of the fourth year if you lease.  I cannot create a calculator for that, as the options at that point are infinite.

Please let me know if you are able to use the calculator and if it makes sense or needs adjustments.  Also, if you know a better way to convert spreadsheets into html, I would love some feedback.  Either make comments here or send me an email.  Thanks.