Debt Free

It’s really bad. After the statement I made in my post yesterday regarding your car being a poor investment, I started thinking about just how bad it really is. Being a depreciating asset you pay interest on, it’s hamstrung, right out of the gate. Add in all the other expenses incurred by your average vehicle, and you can imagine how it fares compared to say, a nice mutual fund. This obviously ignores the transportation value of your vehicle, which is ostensibly why you bought it in the first place. Let me state right up front that I love cars, subscribe to car magazines, and am not some anti-car/SUV crusader. Vehicles are just, in general, a crappy place to put your money. 

Just as an exercise, I’ll use the 2007 Toyota Camry, America’s best selling car. It’s pretty representative of a nice, but not too nice, family sedan. The Toyota may fare better than many other vehicles due to its excellent resale value, which limits your losses to an extent.  I used the Camry SE, which is the middle of the 5 different trim levels offered by Toyota. I choose the 4 cylinder engine over the pricier 6 cylinder power plant, but did choose the automatic transmission, which is the way most Camry’s are sold. The price for the vehicle so equipped is $20,180, including destination and handling charges. Any applicable taxes aren’t included.

According to Toyota Financial Services, there is a special, 3.9%, 60 month financing offer in place right now, so I’ll use that for this example. That, of course, assumes you’d qualify for the special financing. If you traded in a paid off vehicle (you just lost even more money, but just try and sell a car these days) and received a $5,000 trade in allowance, you’d be financing $15,180 (plus taxes and licensing, of course). As an example, a 1999 Camry, in good condition, with a 4 cylinder engine and automatic transmission, a CD player and 85,000 miles has a Kelley Blue Book trade in value of $4,750.

Making all the above assumptions, your payments would be $278.88 per month. Amortized over 5 years, you’d pay $1,552.70 in interest. Your total of payments would be $16,672.70. In 10 years, if the 2007 Camry has depreciation similar to a 1997 Camry, it will be worth roughly $5,000. According to the Feds, the average operating cost for a car per mile for maintenance, gas and oil in 2006 was 16.1 cents per mile. If a 4-cylnder Camry is 25% better than that, you can expect to pay about 12 cents a mile. If you put 90,000 miles on the Camry over the next 10 years, your operating cost would be $1,080 per year. Figuring $1,400 per year for insurance and licensing, your total outlay for the next 10 years would be $41,472.

If, instead of trading it in on a new Camry, you sold the 1999 Camry and took the bus for the next 10 years, you could expect to receive about $6,380 in proceeds from the sale. If you spent $35 a month for a bus pass, you’d be out $35 every month, but it’s a far cry form the operating expenses incurred by a car.  If you put the $6,380 and the $1,080 annual operating costs, plus the $1,400 annually for insurance and licensing, into a mutual fund (minus the $35 a month for the bus) that returned 8%, you’d have $45,628 in your mutual fund. If not, you’d be the proud owner of an $87,100, 10 year old Toyota Camry! Not the best way to get debt free.