I am being a devil’s advocate here, and just nitpicking on JD of Get Rich Slowly’s endorsement of a Dave Ramsey concept of “Drive Free, Retire Rich“. I will always have the utmost respect for JD and his Get Rich Slowly blog, so please view this post purely in terms of numbers…there is nothing personal against anyone here.
I am not convinced by Ramsey’s “Drive Free” theory. I am sure there are others who are not convinced. If you know something more about this, kindly leave a comment so that we all understand this better.
Ramsey say’s this as a part of his arguments:
You want a brand new sports car that would normally cost you $475 a month. The car you are driving now is worth $1,500.
If you take that $475 and pay yourself instead of paying the dealer, you’ll have $4750 in just ten months. Add that to the $1,500 you can get for your current car, and you can pay cash for a used $6250 car. That’s a major upgrade in car in just 10 months-without owing the bank a dime!
But let’s keep going. If you kept saving at that rate, you’d have another $4750 in another ten months. Chances are, less than a year later, you could sell your $6250 car for about what you paid for it. This means that you can step up again-with-cash-into an excellent $11,000 used car just twenty months from today! Not Bad!
Yeah..not bad…but not feasible either ! Especially, this part: “Chances are, less than a year later, you could sell your $6250 car for about what you paid for it.” Details are given later in this post.
Using this Ramsey theory as the base, JD says:
Here’s where it gets interesting. If I kept making $250 payments to myself, I’d have another $3,000 saved at the end of the second year. Let’s say the $6,700 car lost another $1,000 in value and was now worth $5,700. I could trade it in and use my saved money to upgrade to an $8,700 used car.
…I can continue this cycle until I reach the level of car with which I’m comfortable. After that, the amount I need to save each year would decline sharply….
Taking some of JD’s numbers, let’s run a few calculations for a used Honda Civic and see where JD may land. I am using Honda Civic as an example car, because it’s one of the top “least-depreciating” vehicles. Most other vehicles may give worse results. Given below are two tables. The first table lists prices of used Honda Civics sorted year-wise. The second table gives the difference between the prices of Civics in consecutive years. All values are taken from Edmunds.com.
Table 1. Year-wise Prices of Used Honda Civic (LX)
The above table is indicative of the “market depreciation” of the car. This has nothing to do with how much (or how little) you have driven the car. For example, suppose you buy a 2002 Civic for $10,375…and in the next instant try to trade it in for a better car, you will get only $8123 for this trade in. This means you will lose $2252 on this transaction even without putting any additional miles on the car.
Table 2. Price Difference Between Two Consecutive Years
This table is indicative of the “mechanical depreciation” of the car, that is depreciation due to usage and wear and tear. It assumes a 12,000 miles per year average usage. It is clear from the table that on an average, Honda Civics would lose about $1353 per every year that you use it.
The total depreciation that JD would face if buys a Honda Civic and tries to sell it the next year would be around $3500 and not $1000 as he estimates in his calculations. I am doing these calculations using “trade-in” values, because JD mentions that he would trade it in for a better car. A hypothetical case of JD buying a seven year old 2000 Honda Civic is tabulated below. The table is pretty self-explanatory so I won’t put any efforts on that part.
It is obvious that JD will not be able to buy a similar quality car after the end of one year. To buy a similar quality car (a seven year old car), JD would require to increase his monthly contribution and that would make this a loss making cycle. And btw, all this is with pretty conservative numbers.
What about Ramsey’s numbers?
I ran the same deal for Ramsey’s $475 a month that he uses in his presentation, and the details are tabulated below:
…but there must be a catch. 
Here, the catch is in the monthly payments itself. If you are ready to save $475 a month for a year and upgrade, then pay another $475 a month and upgrade….you might as well pay that amount a month and get a brand new Honda Civic and just be done with it (no need to drive a junk for 4 years and turn yourself into a annual car salesman trying to buy and sell cars every year). Take good care of the car and it will serve you almost flawlessly for at least 10 years and make the investment worth it.
Overall, I am not convinced about this “Drive Free” theory. But that’s just my opinion. I would be very glad to see someone come up with numbers to support this stuff …or I am going to stay unconvinced.
Other considerations
I have not even considered the cost of repair headaches for used cars….which can sometimes run into thousands. Repairs are required for new cars also, but for used cars they run into a lot more sometimes because you don’t have any idea about how the previous owner used the car.
You can try selling to and buying from private-party (individuals). However, even if you run the numbers for a private-party deal rather than a trade-in, things don’t really add up very well. Also, the moment you start buying/selling cars from individuals, you run the risk of buying a lemon. Not to mention the amount of time you spend in trying to locate a prospective buyer for your old car and a prospective seller for your newer car.
Dave Ramsey mentions in his presentation that average Americans pay 9.6% APR on car loans. I am not sure if that is true…but if it is true..then average Americans are not really getting themselves good deals on car loans. Just a few weeks ago I was involved in a car loan deal for a guy who had a credit score around 670-ish and was approved a loan at 5.99% APR.
I have some more issues, but this post has gotten darn long…so everything else will have to wait
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Great post. I hadn’t actually run any numbers yet, just roughed it.
In reality, I’m torn. I’m one of those who buys a new car. I like to own my car from start-to-finish. I really do run them until they won’t go any more. But I hate to spend a lot on a car, so I end up buying crap vehicles. This isn’t good, either. I’m toying with the idea of buying a 2-3 year old car now, and then running it into the ground. We’ll see.
The point is moot since my Focus is only seven years old and still runs (mostly) fine. I hate the thing, but won’t consider getting a different car until it dies, which probably won’t be for a l-o-n-g time.
I was sceptical of this from the beginning, but was too lazy run the math. You can’t just make money come from nowhere to make owning a car happen for free. You have to work really hard to sell your current car for more than it’s worth or buy the new one for less than it’s worth. Or else you can save the $475 as Ramsey suggests, but at that point you are aren’t driving for free, you are using that $475 to drive.
I think the whole thing is too danged much hassle. I hate buying and selling cars so I hang onto mine as long as possible. We paid mine off last January and have saved $400 per month on not having a car loan (or in Ramsey-speak, $4800 interest) and I suppose my vehicle would fetch about $8K at trade-in. Given that I bought it at about $13K two years ago, I suppose it would be an equitable trade for the same car two years younger. Why bother? This one runs fine, may as well just keep socking away the $400 so that we can get the next car without having to finance much if anything.
Thank you for disproving this myth. I was going to challenge this but I’m tiring of responding to these “Wild E Coyote” schemes.
You remember Wild E. Coyote from Saturday morning cartoons don’t you?
Poor Wild E Coyote would spend thousands of dollars ordering elaborate kits, equipment and spent hours scheming, diagramming, and setting up stuff to catch the Road Runner so that he could eat him.
You have to wonder why the Coyote just didn’t stop at KFC and buy himself a whole chicken rather than torturing himself all those years with disappointment. Lol! Perhaps he should have ordered a road runner through ACME Co.
If you want a new car, earn yourself 30k trading or doing something beneficial to the economy and skip the schemes.
Actually, I buy the theory. Mainly because I don’t have a car payment and have that extra $450 a month to stash for either a car or whatever the heck I want I guess. Of course, I am a Dave Ramsey fan and have been on his program for just over a year.
One of the key things most people don’t get about Dave is that he’s not just about the numbers. He’s about changing behavior toward borowing money.
Your numbers look great and almost convincing. The thing you missed is that Dave’s numbers aren’t based on trade-in values. They are based on Kelly Blue Book, individual sale. Rarely can you get the full value of a car from a dealer. They want to get it cheap so they can make a profit. The concept relies on the fact that you must SELL your car first.
Either way you look at it, Dave’s main push is to get people to save for a car as opposed to borrowing and owing more on the car than it’s worth. When was the last time you actually saved money to buy something?
“Take good care of the car and it will serve you almost flawlessly for at least 10 years and make the investment worth it.”
Any finance person will tell you that cars are not investments. Investments go up in value, not down like a rock.
Emma: I am glad you spoke for Dave here. I have absolutely no issues with the fact that Dave Ramsey is about chaning behavior towards borrowing money.
I think he is impressive on that part.
My issues are only with this particular theory. I do acknowledge the fact that you can deal with private-parties in the “Other Considerations” section. But the hassles are just too much, when you consider that you will have to do this dealing every year. Also if I were to sell the car, I would want to sell it above the KBB value; if you were to buy the car from me, you will want it below KBB value…the deal can go either ways here. Also, when you are trying to sell a 7~8 year old car…the burden is more on the seller than the buyer to make sure that things work perfectly fine with the car, which means more money to make it “sale-able”.
I am all for saving money before buying things, but I still don’t agree with this concept.
About investment, cars are investments…they are just poor monetary investments. Every machine ever made is a poor investment if you just look at the monetary value. The worth of a machine investment is determined by how you use it. Worth not just in terms of money, but also in terms of time and efforts. At least in my opinion.
I thank you Emma for debating the issue…that always sort of refines thinking on either side. Sorry about the awfully long reply.
thanks for the info. when i first saw the heading, the thought of depreciation entered my mind. as i continue to read the article, your math obviously backup the thought. great post!
Great post! The better half and I were discussing this over the weekend and realised that the math doesnt pan out. Thanks for working out the detailed numbers, golbguru.
Another thing that bothers me about this is the use of the phrase “drive free”. If you are still making the monthly payments for the next 4 or 5 years (albeit to yourself), it is not “drive free”! Yes you are saving on the interest, but with some ‘creative financing’ you can keep the interest really low. Rather than worry every year about ‘creating marketing’ to make sure I get back what I paid for the car, I would prefer to spend time once at the beginning getting a low interest loan, juggle some 0%BT etc to ensure I pay next to nothing in interest. But thats just me. I am a PF blogger, what can I say
Bravo for the breakdown!
“If you are ready to save $475 a month for a year and upgrade, then pay another $475 a month and upgrade….you might as well pay that amount a month and get a brand new Honda Civic and just be done with it ”
I agree with you 100%.
Cars are not like houses, no matter if you buy a new or used car they are not equip to last for a lifetime.
Im not a HUGE fan of DR although I agree with some of his advice.
Being a “numbers” person, this is yet another case where I don’t agree with Mr. Ramsey. You are certainly not “driving free” if you are saving money to pay cash for a car. And in my experience selling two gently used Hondas myself, you are dreaming if you expect to get Kelly Blue Book value for the private sale of your car.
I HATE buying and selling cars, so my strategy is to buy new and keep driving the thing until it is unsafe/unreliable or family circumstances change (we sold each of our last two cars when a new baby was born). I also try to minimize costs by doing as much maintenance myself as possible.
Right now, I drive an 8 year old car that is paid for and my wife drives a 3 year old car financed at 3.74%. I could have paid cash for the newer car, but instead chose to park my money in I-Bonds, T-Bills, and CD’s that have yielded more than 3.74%.
Wonderful post!
Also if you put a monetary value to the non-tangible pleasure you derive from using a new car, the engine smoothness, the better pick up, the better ride comfort, and yeah the pleasure of showing off a new car to the neighbour… that would further dent the ‘drive free’ theory.
Of course, this could vary from person to person
I agree with Emma!
I think it’s great that you did your math but I really the point of Dave Ramsey’s message is to stay out of debt. Borrowing money is bad math which ever way you look at it.
It’s a mindset not a mathematical equation. It may be that the figures Dave Ramsey quoted don’t jive, I will give you that (not that I completely agree just don’t have the time to research it) but the decission to stay out of debt is a much better choice then getting a new car that you may or may not be able to pay off.
How many times have people defaulted on their loans? Too many. So taking Dave Ramsey’s advice of buying a car with cash is much wiser than borrowing money if you really think about it. My advice to anyone and everyone is -Don’t Borrow Money! and buy that “junk car” if you have to.
I hate DH’s 7 year old focus, it sucks. Anwyay though I guess we’ll be driving that car forever, of course it won’t last as long as my 99 corolla. So we both bought new cars. But I don’t like DR’s math, because you are constantly saving a lot of money a month to keep upgrading cars. I’m more a buy and keep it forever car person. Of course I can say that because I still have the one and only car I’ve ever owned. Maybe I’d be different if my parents had bought me a used car and turned me on used cars. But they didn’t. Thus, without much car experience, I only know that I like having a new car that I know I have taken care of and maintained. It’s also had less trouble because of my care.
Ignore all of this silliness. Buy a late-model used car (something that just came off of a lease) and drive it into oblivion (say, 8 years). When it’s paid off (after, say, 4 years), keep making that payment into a savings account. Then when you go to the dealership, you can trade in your used up car for at least a little bit and, if things have gone well, pay cash for another car. Keep saving those payments each month. Then, eight years later, go get another car, trade in your used up one, and you can either get something very nice or else you can lay off the monthly savings for a while. What’s the benefit? Instead of paying interest to the car dealer, the bank where you save the money is paying interest to you. In other words, instead of losing 7% a year to the car loan, you can gain 5% a year in the savings account.
Buying a car really isn’t a huge hassle. I have bought a sold a car about every 6 months in the last 15 years. I have only traded in a car once. I have Never lost more than 1000 a year to depreciation. Most of the time I have at least sold the car for what I paid for it, and on a few occasions have made a $1000 profit (on a $1000 and $5000 car respectively).
Just go buy a clean used car from a private individual. You are at no more risk of buying a lemon than from a dealer (unless you are going really old, which dealers don’t sell). You will buy for cheaper than a dealer (then spend $200 getting it detailed, which is all the dealer does anyway), as they don’t make their profit, and in many states you don’t have to pay sales tax on private party transactions. Private party deals are less stress anyway - not as much haggling, a normal person to deal with.
When you sell - just sell the car for a reasonable price and it will sell quickly.
If numbers are all that you care about when it comes to personal finance, then you have to factor risk into the equation. Risk has a quantitative value. Any of you that have taken a business finance class know that the beta coefficient is typically used in equations to factor in risk. I don’t know how to factor it into your numbers to “debunk” the drive free theory, but my point is that it is hardly ever considered by pure numbers conscious financial thinkers. My problem with many personal financial theories is that no one thinks about the risk that it puts into a family’s life when they take on $30,000 in car debt. The household becomes more volatile. I’d much rather have a $5000 paid for car than a $400 payment if I were to lose my job tomorrow. Because we all know that the shiny new car is upside down on the loan for at least the first two years depending on how much your down payment is.
Maybe someone needs to run the numbers on how much interest you’ll pay in a lifetime for owning new cars with 5 - 7 year loans. Why are so many of you obsessed with helping the CEO of Bank of America pay for his new yacht?
Ok, I have something of a unique car situation I wanted to share and comment on:
My company provides me with a car allowance, which is essentially non taxed dollars in my pocket. This intended to cover gas, maintenance, and mileage.
I put about 30k on my vehicle every year.
I MUST have 4 wheel drive.
The truck must be light enough to not get stuck in the mud and durable enough to go hundreds of highway miles and 10s of offroad miles in the same day.
The only vehicle I could find that met these requirements to MY satisfaction was the Tacoma. I researched them for a couple weeks and a Tacoma with 30k miles was about $1500 less than a brand spankin new one….
so I bought the brand spankin new one.
In addition, I will be able to deduct the depreciation on my taxes this year.
So… I have a pretty big payment for the next couple years, but the following will be a result:
1) don’t have the transaction costs of buying another vehicle every year (TT&L)
2) If the truck has been torn up off road I want to be sure I’m the one that did it and not the previous owner
3) tax-free dollars pay the note.
4) depreciation is tax deductible, which should add about $1500 to my refund every year (depending on all other tax figures.. this is a very rough estimate)
Thanks for the thoughtful comments guys. Here are some attempted answers.
Jay: If you are making profit selling used cars, I have to say you are a very smart man. But let’s consider this, if the guy who buys from you is equally smart, he will sell it after one year for the same price (if not for profit). That would mean that after two years the car still retains it’s original value :). Obviously, you could stretch that for a few years and we will run into some ridiculous proportions very quickly. The fact is that the car has lost value over the time you used it and if you are not paying the price, some one else down the line will certainly pay for it. The point being that, this might work for you, but it’s not how it will work for the rest of us. Personally, I have found private party dealings more time consuming and less easy than you potray them
Erik: You got a valid point too. But don’t you think the beta factor applies to “each” car buying and selling transaction you will do when you go the Ramsey way? Also the risk factor is pretty big when you are buying a fairly used car from a dealer or an individual (in terms of monetary value and also the mechanical quality of the car). Also, like others have mentioned you got to take into TT&L for each transaction. Of course you are paying the bank some interest (thanks for mentioning that…I do need to calculate it to put things into perspective), but you are getting a brand new car in return.
JD (the latest one): Thanks for the practical insight :). When you say “If the truck has been torn up off road I want to be sure I’m the one that did it and not the previous owner”, I hear you :). I have had so much car trouble with used cars that I am going to think really hard the next time I buy one.
Also, if we may refocus on the point in contention…there is no such thing as “free” driving. Someone has to pay somewhere
The secret to retaining value is hitting cars that have all the depreciation out of them. For example I bought a 15 yr old honda accord for $1000. I fixed the tire, cleaned it and sold it for $2k. I wouldn’t be surprised it if sold for close to that a year, 2 years or 3 years later.
The other car I sold for a profit i actually bought from a dealer! It was a 8 yr old plymouth acclaim (an underrated car). I bought it for $4800 and sold it for $5700 a year later. It helped that I bought it during the winter (when everyone was buying 4×4s, and it was a little old fogey) and it had low miles and it was really clean. I still sold it below bluebook cause i had to move.
I don’t think PP are that much more time consuming, unless you don’t really care what you drive and just go to the dealer and say - what do you have for $6k.
I have also found that ebaymotors is a great way to buy a used car. Check the feedback and make a phone call to actually talk to the person and then bid away. Especially if you are looking for a particular make and model that may not be in high supply in your area.
Thanks for the numbers. I’m one of those who bought new for cash back in 1982 and still am happily driving that 24-year-old Toyota Supra to this day! She’s near body perfect except for a nonworking sunroof, still flies down the highway and just needs me to watch the oil. Think of all the savings here!
Just a couple things…not that anyone here probably cares.
The biggest chunk of depreciation occurs in the first year of ownership, so I’m not sure why anyone would want to take on that financial butt kicking. I found a local guy who goes to the big car auctions. He gets cars coming off lease, 1-2 years old, with less than 25,000 miles on them, and with a factory warranty still on it…for all practical purposes they are “like new”. The last one I helped someone else get from him was a 2005 Pacifica with 24,000 miles. It’s retail value was somewhere between $18k-$20k and we got it from him for $14,500. You just need to know where to find the good deals. At a dealership you end up paying retail….and who wants that?
Dave’s example is a little extreme yes (with getting another car every 12-24 months), but I think it was done that way to prove the point. You COULD upgrade cars every 1 to 2 years, if you wanted to deal with the hassle, and still come out ahead. But a wiser choice would be to find that really great 1-2 year old car, and drive it for 7 or 8 years.
If you are(and always will be) a new car buyer, and your payments are $300/month for example. If you were to pay cash and drive the same car for 8 years, that’s a total of $28,800 not counting any interest. Do you need a $30,000 car? Probably not, so go get another $15k-20k car and save the rest for the next one. You could lower your payments to yourself too if you wanted.
Stop using the “what about car repairs” excuse too…it’s a straw man argument. Under Dave’s plan you would already have 3-6 months of expenses in an emergency fund anyway. Car repairs? It’s a minor annoyance…just pay it. If the repairs are close to or over the value of the car, it ain’t worth repairing…go get yourself a new(used) one with the cash you’ve saved.
Same with depreciation. By the end of 8 years I just don’t think it’s going to be enough to matter.
Don’t be lazy and go to a dealer. They’ll just rip you off on the trade-in. Private sale is where you’ll get the most for your old vehicle.
I guess that’s enough from me…
But what’s with the payday loan advertisements at the bottom of your blog. Is that actually encouraged here? No wonder you all are gung ho on the new cars.
-matt
The whole point was to show that Dave’s example is a bit extreme. My attitude towards addressing the concept is clear in
“Overall, I am not convinced about this “Drive Free†theory. But that’s just my opinion. I would be very glad to see someone come up with numbers to support this stuff …or I am going to stay unconvinced.”
And probably you may have realized that it’s not “free” after reading some of the comments above. But, your point of view is appreciated and disagreements are welcome on this blog in the spirit that they help in refining thoughts.
I don’t see how my thoughts on Ramsey’s theory has anything to do with advertising. My thoughts against payday loans are clearly expressed in posts like this and this. I believe my readers know enough about it through those articles to understand the difference between “encouraging” and “advertising”. Having said that, you still have the right to disagree, but I would appreciate if you email me your concerns about it. That way the discussion in the comments will be relevant to the post.
It’s good to crunch numbers. It’s very important. Because once you crunch the numbers you can use the emotion and mental motivation that Dave Ramsey gives you in his plan to beat the numbers. Check out my story to understand what I mean.
http://www.petpeeving.com/2007/03/it-pays-to-drive-crap.html
I have to put in my two cents. . .
Dave doesn’t advocate selling your car every 10 months and moving up in “car”. It’s getting you from a $1500 beater into a $11,000 vehicle, that is probably worth $12-13 (my opinion, if I have cash I can negotiate a better price with a seller) in twenty months rather than saddle yourself with a 72 month note.
The remaining 62 months, he assumes you drive the same vehicle until the wheels fall off (the aforementioned behavior modification - you won’t be buying this years BMW) and invest in a nice mutual fund that runs approx. 12% a year (think S&P 500 Index fund).
I noticed you left off the rest of the story. . . which is that 62 months later you’d have over $30,000 in your car fund account, and you could pay cash for another vehicle for approximately $13k or so. Then leaving it alone, and not adding one additional dime, and letting it appreciate, you would be able to pretty much replace your vehicle every few years.
The awesome part is if you continued to invest that $475 forever (let’s say you’re 25, so until age 65 - 40 years) at 12% it would be worth $5 million dollars.
Then you can go buy whatever you want.
It’s a lifestyle choice.
Earlier I typed within 62 months. That’s a typo: it shoule read 52 months.
Hmm…that’s ok ryan. I understood what you are saying and I am thinking about a good reply to your comment. For now, your theory sounds like David Bach’s theory.
But I will have more to say on it soon. Thanks for the input.
What the drive free “Program” consist of is
Save $475 a month in a good mutual fund earmarked as car fund for 52 months. at the average rate of growth of 12% annually that should be about $32K. Then Buy a car for $12K. With compound interest if you never put another dime in to the Mutual Fund you should be able to buy a 14-18k car every 5 to 6 years. If you decided to keep paying into that fund $475 a month for the next 40 years you should have approx $5Million saved. This is all based on a growth of 12% in long term and compounding interest.
OOOPS! When I wrote the above post I did not see Ryan’s Post and posted the exact same thing.
Ryan and Eric: I quoted Ramsey in the post. He specifically talks about changing cars in 10 months. My issue (and all the math) is with concerned with these specific words. I will paste his words here again:
Another, simple question. Forget about money for the car, have you tried investing in the stock market (S&P 500, or any other ETF or index fund) and received a 12% rate of return consistently?
Plus there is a risk factor which is two-folds the normal risk factor. 1st risk factor is in assuming that your old car will work 5 years without major repairs (remember you don’t know how it has been used before you bought it) and the second risk is whether your invested money will continue to earn the promised return. You will probably realize that neither of them carry any kind of guarantee.
There should also be some thought to efficient leveraging of debt. I can easily extend Ramsey’s arguement and tell you that if you keep putting $800 a month for the next 30 years you will save so much that you can buy a house just from the interest earned on those savings. What’s wrong with the argument? Would you try doing that?
Believe me I am not trying to claim that a new car is *cheap* (I drive a used car because I can’t afford a new one), at times it does makes sense to buy *only certain* used cars…but you can’t keep buying and selling like he suggested and make money from doing it, it doesn’t make sense that way. What I am trying to point out is that the picture is not as *rosy* as Ramsey makes people believe. May be his intention was something more noble over the long term, but that is not very clear from his talk.
I could go on and on and on…but I need to stop here.
Thanks for putting some life into this topic again
I had almost forgotten about this post. Feel free to speak your mind. 
One more example. Two colleagues of mine bought the same model car last year. One paid $44,000 for a 2006, while the other colleague paid $23,000 for a 2005 lease-return.
Both vehicles are identical, except one had 7,000 km (4,300 miles) on the odometer!
You can save a LOT of money by only buying secondhand cars through private sales. And paying cash, because it’s never a good idea to get into debt over something that depreciates!
The key is to research the car to make sure it’s a not a lemon (Phil Edmonston’s Lemon-Aid Used Car Guide, published annually, is a terrific resource), have the car thoroughly inspected by a certified mechanic, and run a check for liens, accidents and registrations.
In my case — and all these numbers are in Canadian dollars — I bought a 2004 Toyota Echo hatchback for a grand total of $8,934. My expenses were as follows:
$100 for the mechanical inspection
$60 for the lien/accidents/registration check
$8200 for the car
$574 PST (provincial tax)
If I’d bought the car from a dealer, there likely would’ve been a minimum two to three thousand dollar mark-up, plus I’d have to pay $533 GST (goods and services tax).
To put this into perspective, the fellow I bought it from still hadn’t finished paying the car off when he sold it to me. He had been paying $415 a month for almost three years — a total of $13,791 — and the balance owing on the loan was $6,129!
In stark contrast, I paid for the car in cash (well, actually two bank drafts — one to the creditor for $6,129 and $2,071 to the seller).
As long as I take the car in for regular maintenance, there is absolutely no reason — touch wood, I don’t get into an accident — I should be able to drive my “new” little car for at least a decade. Probably longer, since my last Toyota lasted well over 16 years.
Furthermore, my insurance rates are significantly lower than if I’d bought a new vehicle.
Claudia: I won’t debate your point.
Used cars are no doubt cheaper than new cars. But used cars are not *free* as the theory suggests. You have to pay for it, in some way or other. Also, you can’t keep buying and selling them..that’s not reasonable. As for buying it for cash or bank loan, it is a matter of individual perception. If I get a car loan for 5% APR and if investing in stock market is getting me 8% APR, I would go for the car loan and invest available cash in the market.
Rest of my comment is just about my thoughts on your comment and not related to Dave Ramsey or his theory…
You know, every machine ever made depreciates (except when it becomes antique). The real worth of the machine is in how well you use it. And in addition to the utility, I would include peace of mind, warranty, and reliability as factors in calculating a machine’s worth.
About this thing: “One paid $44,000 for a 2006, while the other colleague paid $23,000 for a 2005 lease-return.” That much depreciation just sounds like an extremely bad car. I would *never* recommend buying a car that depreciates to almost half the value after 4,300 miles on it…not new, not second hand, not third hand…never buy such a car. Not all cars depreciate like this…this is just an extreme example.
Also, from personal experience (I bought a used Nissan from a private party…and I am still driving it), I have decided that I will never buy a car from a private party again…I won’t mind paying the extra premium for getting a certified used car from a dealer with a considerable warranty on it (If I don’t buy it new). I won’t get into a debate about why *sometimes* a new car might turn out to be better for some people…there are a variety of reasons why this might be the case.
The car that depreciated by almost half was an American SUV, but I forget which make and model. American cars tend to depreciate far more rapidly than their Japanese counterparts, because the latter tend to be far better-built.
I’m sorry you had such a bad experience with private car sales, because I personally find the slight inconvenience of having a mechanical inspection done and ordering a lien search (I got mine through carproof.com) is worth it — in my case, I saved more than $3000!
I didn’t feel the need for a warranty, because I had the car thoroughly checked before purchasing, and also because that particular make and model is known for its reliability. My last car was a 1992 Toyota Tercel; in the last couple of years, I did start having to pay about $800 in repairs annually but that was after the car was over a decade old, so that was be expected and was still very reasonable. (My main reason for buying a newer Toyota was because I wanted an air-conditioned hatchback, as opposed to a sedan where I could only cool off by rolling the windows down!)
In terms of loaning vs paying cash, I agree that it’s a real matter of preference. Yes, you’re right: Potentially, you could invest that money for a higher rate of return. But a lot of people aren’t that disciplined
As for Dave Ramsey’s point, well. I paid $8200 for my car and the equivalent make and model (with similar mileage, bells and whistles) sells at most dealerships from anywhere from $11,000 to $15,000 — so I could probably trade my car into a dealership for more than I paid and iteratively keep doing that (buying privately, trading in through a dealership) until I had a free car.
But the PITA factor would be ridiculous. I find making big ticket purchases like that stressful, and much prefer to only go through the ordeal every decade or so!
Correction: The iterative process would be buying privately, trading in for a new car, driving that for a few years, selling it privately, buying a newer car privately, trading that in for a new car, and, and, and. The process only works if you only go to the dealership when trading in a privately-bought car at a profit to buy a new car that you sell privately (thus not getting dinged as badly on depreciation).
But, yeah. What a hassle. Some people might find it fun to drive a different car every few years and might even enjoy all the negotiations involved with the constant buying and selling, but I’m not one of them!
My take on all this is Golburu is a car salesman or banker who deals in car loans and just wants to feel ok with what he does. If you read his second to last paragraph he talks about getting someone a loan.
Dave Ramsey is great. I love his teachings. Dave doesn’t advocate buying a car every 10 months. You are taking a quick little example of his and trying to say Dave expects you to buy a car every 10 months. Also trading a car in is foolish.
Selling a car as a private party might take some work, but I will be happy to do a little work and get 2-3k more out of my used car than a dealer would give me.
Good luck at the car lot or bank golburu.
JJB79792: lol !
that’s funny. I am a graduate student who is not even allowed to work more than 20 hrs a week.
The post is my *quick little example* response to Dave’s *quick little example* about free driving…a bit of questioning never hurts.
And if that can be misconstrued as me being a *car salesman* …then I can safely misconstrue certain people as “Dave Ramsey salesmen”
…but I won’t do that.
What everybody is missing here, is, “the Borrower is Slave to the Lender”
For me not to have a car payment to any lender, I am driving FREE!! You can take the time to work the numbers all you want, but if you have payments you are “Slave to the Lender”!!
Nice Post Jake I agree
Why were you involved in a carloan?
your quick little example goes on for a few pages and involves spreadsheets. Not exactly a quick little example. Plus it is built a few faulty premisses.
1. Dave doesn’t expect you to buy a car every 10 months
2. Dave doesn’t recommend you trade your car in to a dealer
golbguru I like dave ramsey he has great advice. In a way I guess I am a salesman for Dave because I do think people should read his material & listen to his radio show. It doesn’t profit me if you do, but it would profit you.
You talked about being involved in a car loan, and your posts seem to be slanted in favor of just let the dealer handle it all.
If you are not a salesman / loan guy you sure seem to like car lots / loans.
I forgot to say golburu after first line of previous post
I think Emma is the only one getting the point here. It’s not about the math, it’s about saving. God forbid you have to drive around in a piece of crap losing points with the opposite sex because of it. The ONLY reason anyone needs a brand new car is for the image. The image of success that the driver (notice I didn’t say owner!) wants everyone to see. I personally think that the people driving the crappiest cars on the road are sometimes the richest. When disaster strikes, it’s the smart ones that aren’t going to go into debt to get themselves out of it. Just think for a moment what it would be like not to have any debt payments? hhhmmmm, bliss, right? it’s attainable. I do appreciate the respectful manner in which the writer of this post presented their opinion, bravo!!
I need to chime in here.
What about the amount of mileage you
put on a car. I commute almost 500 miles
a week. That’s just over 25,000 miles a
year. I was in the process of replacing
my current car with a newer one. I was
faced with a decision to buy new or
slightly used and take out a car loan or
buy a 5 - 10 year old car with cash.
Now, in my situation, any car is going
to depreciate even more because of the
amount of miles that is put on the car.
I’ve decided to purchase a 8 year old
Toyota Camry with cash with under 78,000 miles. My reason? Well, it’s because the
majority of the depreciation has already
happened. I knew I was going to loose
money with a car. Especially one that
is driven with so many miles. The idea
is to loose as little money as possible.
Here’s a buying and selling comparison for a 4 year span for my situation.
(1)Brand New 2007 Camry (0 miles) $24,000
2007 Camry (4) years later (100k) $11,300
Money lost: $12,700
(2)Used 2005 Camry (30,000 miles) $16,500
2005 Camry (4) years later (130k) $8,300
Money lost: $8,300
(3)Used 1999 Camry (75,000 miles) $7,000
1999 Camry (4) years later (175k) $2,500
Money lost: $4,500
So, I think the #3 option was the best
for my situation. I know they are just
estimates but I think I’m pretty close.
Yes, the 1999 Camry may have more repairs
but I’m not paying any interest with option 3.
My 2 cents.
This topic generates almost as much debate as money itself. We obviously have very emotional attachment to our cars in this, and other countries. Bottom line is, anyone who has managed to build wealth will tell you, minimize liabilities and maximize assets. Your income and investments are assets — it’s money coming in. Your car is a liability — it’s money going out. Why would you trade income for a liability? If you want to understand how to save and manage money, spend a little less time at car dealerships and a lot more time finding people who’re self-made millionaires — And they love to tell you how they did it.
This isn’t rocket science, and nitpicking about interest rates about that great car loan you got being lower than your mutual fund is leaving you dead in the water - You’re paying money every month for the privilege of driving a car that’s worth a little less every morning that you drive it to work.
But most of us still need (not just want) cars. In my case, I commute 45 miles to work. I work in Chicago but I choose to live an hours drive away from downtown because housing is less expensive. And using public transportation does not make sense for me because it would take me two hours to get to work. So, I choose to buy a relatively low mileage eight year old car. It made sense for me because I don’t get hit as hard with depreciation. Yes, cars are a big liability but most of us still need it.
1. After 5 years of regular listening, I have never heard Dave Ramsey offer-up anything called “Drive Free” as a theory. I don’t know if you rolled him in with some other guy or what. He suggests paying yourself the payment and using compound interest to your advantage instead of your detriment throughout your life.
2. Dave Ramsey will verbally flick you on your ear if you even suggest you are thinking about trading in a car instead of cleaning it up and retailing it to a private buyer.
3. The 10 month example is purely to show Twenty Somethings how fast things actually can move in your favor if you do smart stuff. The point is you can get yourself into a reliable little paid-for get-around car very quickly (10 months of bumming rides with friends or family). That car will serve you well for a couple of years, then you can move up into buying a $13k car for $10k range for a few years and literally your 3rd car is pretty dang nice.
4. Note that at any time in this process you can…..STOP. Got job problems? Need to help out a family member? Decide to go back to college? Want to go on a mission trip? Guess what? You have ….MONEY!! All you do is rename it and decide to drive what you’ve got for a little longer. Compare that paradigm to that of having to schlep off to a job you hate to make the money to write the check for a freakin Mustang that was oh-so-cool when you bought it but now just bores the snot out of you, and it’s worth way less than you owe on it.
5. Selling and buying cars from private parties is way easier than people are led to believe. Hmmm.. wonder who led them to believe otherwise? Think it might have been… hang on… thinking…thinking… car dealers? Banks? ‘It’s too much hassle’ is a nice rationalization and it might even sound sophisticated if you say it dismissively enough. But it’s still financially stupid.
6. As was mentioned before, you simply can’t keep paying way too much for stuff and expect to come out ahead. It’s simply not possible for you to beat me if you’re buying new Ridgelines for $35,000 plus tax plus financing charges while I’m buying a 5,600 mile Ridgeline for $29,000 plus (way less).
You can’t drive free unless you’re the absolute buying and selling master. Ramsey never said you could. But most Americans operate their vehicles under a series of disasterous delusions - like; “I can’t drive a used car cuz they’re unreliable”; another is “I’ll always have a car payment, so I may as well drive whatever I want”; yet another is “I traded-in my truck to get something that gets better gas mileage”.
Pay yourself the car payment. Money flows in. Money flows out. In is better.
Corndogdriver: I hear you. I remember when I heard the “Drive free” presentation on Ramsey’s website - and honestly you say it better than him.
I have linked to a presentation on Dave Ramsey’s website that runs with the title “Drive Free, Retire Rich” - that’s what I call his “Drive Free” theory. My main objective was just to show that there is no such thing as “drive free” - the way Ramsey explains in the presentation. He tried it to sell it in a *rosy* way and I didn’t like it.
Although, I still do not agree with some of the points - through personal experience. For example “Selling and buying cars from private parties is way easier than people are led to believe.” - I am still a student and drive an used car that I bought a few years ago. Everyone around me buys used cars and I know how difficult that gets when the deal doesn’t go your way - which happens often. Where do you place the accountability when things go wrong a few months after you buy it? Perhaps I am more critical of the problems because I have faced them myself. So that’s where I am coming from. Of course, depending on personal experiences things can be skewed - and I accept that.
Anyways, on a lighter side here is an argument on this issue that you raised “It’s simply not possible for you to beat me if you’re buying new Ridgelines for $35,000 plus tax plus financing charges while I’m buying a 5,600 mile Ridgeline for $29,000 plus (way less).” ….I think I can beat that with brand new Honda Civic anyday.
and I will be driving it 15 years from now while you would have changed 3 cars without getting to use a *new* car. Of course, I can save a few thousand bucks by buying a used Honda Civic - but that’s with the full acknowledgment that I am still not driving *free* and with the acknowledgment that I don’t have the same reliability as a new car would have. Again, take this as a light-hearted argument - I am not backing up numbers here. 
Forget about the example I ran in the post specifically for Ramsey’s theory - here is what I think of the whole issue. I am not trying to generalize that all used car deals are stupid - it’s just that whether you buy used or new, there are tangible and intangible costs associated with both - just let it be known that there is no *free* driving.
I appreciate your thoughtful comment.
If you buy a new Civic and drive it for 15 years, 2/3 of that span of time will be spent driving a 5 year old or older Civic. Why not just buy a five year old Civic? Why would you pay an extra $10,000 every time? See? I’m gonna win.
it’s pretty simple, and math isn’t my strongest area…
car payments are why so many Americans are b.r.o.k.e.
Avoid car payments and financing, save and pay cash for used cars….
I admit I had to watch the video a few times until it sank in.
Personally, I did buy a new car 3 years ago (Honda Civic). I bought it based on Total Cost of Ownership (it was the cheapest listed), the fact that it gets good gas mileage (38 MPG listed, but I get 39+ MPG), and it meets my needs (carpool to work). I paid just above dealer cost (using the fax-attack method) financed it for 3 yrs at 3.8% interest. When I am done paying for it in Sept., its payment will be saved so that I can pay cash to replace my wife’s van.
Dave Ramsey’s whole day is spent dealing with people who give no thought to finances, get new car fever, buy more than they can afford, and then wonder why they are in debt. (Hence the Proverbs 22:7 reference: The rich rules over the poor, and the borrower becomes the lender’s slave. NASB) That is why he is in favor of paying cash and cutting up the credit cards. The Drive Free video is just an extension of that. It is trying to get people to realize that financing (or leasing) a brand new car is a great way to get yourself into debt. Why not just live below your means for a few years (drive a junker), save the money, and then buy a car. Hence his catch-phrase: Live like no one else (now) so that you can Live like no one else (later).
You will notice that with my choices, I choose the pay $475/mo for a Honda Civic (actually $503/mo), and did not follow Dave’s Drive-Free plan. Three years later the Honda is about paid off, and I will drive it for another 7 years or more. But I am following the “live below your means” advice. I did not get that advice from Dave, but from my Dad.
But dude, you’re still paying your bank account $475 a month to save up for your next car. That’s not “driving free” at all!
@Kenny
But dude! Those $475 are yours! Then you can go ahead and buy whatever you want, without having to borrow!
Plus, if you don’t have to borrow money for that second car, you’d have money laying around, that would normally be used for a car payment, that you can save, invest, or put aside for car repairs (which, I agree, would be more likely to happen if you’re driving an older car).
Lifegaurd and Trent make good points.
The whole idea of drive free is geared toward people who usually buy new cars with credit when they can’t afford them. Drive free tries to show them that they can have what they want, just through a different route. The goal is to get them going down a new/better route. Drive free attempts to change behavior. Most people will drive a decent paid for $6000 car realize that they probably don’t need to step up that much more, when the see the benefits and cash flow that come from having a paid for car. I know that totally worked for me, before I read Dave. I bought on credit a 94 sentra when I wanted a 99 celica. Once the sentra was paid off in 1.5 years, I realized I would rather have the 300 a month cash flow rather then step up to the car I ‘really wanted’. I am still driving the sentra, and have had 5 years of an extra $300 dollars a month and minimal repairs.
As a side note too, you do get interest from the money you ‘pay yourself’
I wasn’t actually familiar with Dave Ramsey’s Drive Free theory until I read your article. I do have to agree with you (and you do a fantastic job of proving your point) and note there are several flaws in Dave Ramsey’s theory. I’m really just too lazy to constantly buy a new car (or a new to me car). I’ve had the same car for about 4 years (it’s 7 years old) and I plan to have it for at least another 4. It’s not the coolest, it’s been rear-ended a few times, and it’s not as nice as my friend’s cars…but it’s mine. Plus, it gets pretty decent gas mileage.
Some people enjoy buying and selling cars–I’m not one of them, but I have an uncle who is. He buys and sells used vehicles from and to other private individuals on pretty much an annual basis, and more often than not sells vehicles for more than he paid for them–much like Claudia and Jay S. report. He’s also able to do most of his own repairs.
Emma:
If this is only about behavior, then why does so much of the video focus on….ehm…..the numbers?
Dave is a numbers guy. You could have all the behavior change in the world and if the numbers don’t add up, in Dave’s favor, Dave ain’t interested.
That’s why Dave is writing books and we’re buying books. It’s about the numbers.
Now I’m not saying that Dave has a bad program and much of what Dave teaches shouldn’t be followed. But there are times when the facts aren’t always in alignment with the teaching.
Dave’s a real estate man. The technic he uses is an old real estate (sales) technic called puffery. There’s enough of the facts remaining to not be able to be accused of not telling the truth.
I love a lot about Dave. But like this video, sometimes you need to look a a little deeper than just the skin of the message.
For most people, when the numbers don’t add up similarly to the example Dave uses, but look more like the example in the original post, a persons behavior is not going to change in the manner Dave is “teaching”.
As a matter of fact, most would give up and revert to old habits.
What everyone is missing here in this argument is the opportunity cost that paying for a car in cash is costing the consumer who doesn’t finance. In economics class I was taught that you can never buy a used car at the correct price in the first place. Either the car will be worth more than the average asking price or the car will be a lemon and it will be worth less than the going price for the make and model. Either way you’re always getting screwed regardless of whether you finance it or not.
Many here whine about the hassle of selling a car to a private party and having to buy a car every year. This is the attitude difference between the rich and the poor. The rich understand the value of the hassle, the poor just want it easy and will pay a dealer a few $1000 by selling their car at retail. So even if you loose some value and the numbers don’t come out and Dave is half wrong after 20 years you’d still have about $225,000 instead of $470,000. If you look at it that way the hassle starts to seem worth it.
Poor is a state of mind.
“I would prefer to spend time once at the beginning getting a low interest loan, juggle some 0%BT etc to ensure I pay next to nothing in interest”
Great reading. I probably wouldn’t suggest this, as #1 it could potentially hurt your credit moving balances around, #2. If you totaled that vehicle and had it on a credit card, chances are you’d be paying on a vehicle you no longer have.
Mostly I buy Junkers for less than $2000 and drive them till they die. I’m good enough at taking care of most mechanical problems that that expense is minimized and I usually get at least a year out of each vehicle. So take my latest vehicle a pickup for which I paid $1500 cash. If it lasts me a year that’s $125 per month and during that time I’ve had transportation to work.
It’s not free but it’s pretty close.
The other itme to thnk about is when financing a vehicle you are requried by the lender to carry full coverage on the vehicle. I preffer to carry comprehensive with collision insurance which is signicatly cheaper saving me almost 1,000 dollars per year in insurance costs.
I can provide hard numbers that it works.
During school and a few years after I drove a total beater and took lots of public transit. I scrimped and saved and after the numerous repairs to the beater I managed to save $8K.
With that I bought a 2001 Cavalier in 2005.
So for two years now I’ve been saving $300/mo. I now have $7,200 in a bank account. I use this account for any freak repairs needed but general maintenance and oil changes comes out of my regular spending money.
I estimate that since I’ve been taking good care of the car, it will last me at least 2 more years, so (not including interest), I’ll have $14,400.
Now say I want another car in two years from now. Let’s be totally conservative and say I can only get $1000 for my old Cavalier.
That means I’ll have $15,400 cash for my next car. Actually I’ll have more since I’m earning 4% interest on the account, and my car will sell for more than $1k. So I’ll be able to get a one or two year old car that has low KMS and is better quality than a Cavalier for my next car purchase. Sounds like an upgrade to me and I didn’t have to pay a dime on any debt. Plus a paid off car gives your more flexibility. I can sell it in a crunch. No debt = flexibility.
There’s hard numbers for you.
What is funny is that when the dust settles…. He that is resposible will have no financial worries. After living humbly and driving less than new vehicles his family is insured financial freedom. He that worried about everybody else and did fancy math problems to justify why he borrowed his way through life and pimped himself out to every bank in town won’t have a pot to piss in, but he will be carried by the people who saved their whole life. That sucks. Thats life.
How did you completely miss the fact that you don’t have to keep buying cars every year?
Basically this plan builds up a $20,000 mutual fund account. Every 6 years you buy a car with ONLY the interest on ONLY that money. You can buy a car every 6 years for ETERNITY with ONLY compound interest/investment earnings. That’s as close to free cars as you can get.
Hi! We have a 1994 Oldsmobile Cutlass Supreme 4 door. It is a good running car.We get 30 miles to the gallon and this is a car with a little over 251,000 miles on it.I don’t realy think the difference of 9 miles to the gallon is worth the car payments every month or the big price.lisa
Hi,
Okay, I have a question for you all out there. I am in the process of getting out of a lease, or turning it in for some overage charges at the end of the lease.
Now, basically, right now all of my extra cash is going to pay of CCs from the debt snowball plan.
So I only have my “emergency” fund (I picked $700 instead of $1000 because at my age, and my income, it takes a bit to get to a grand) while I’m paying off my credit cards. The thing is, the lease is up before my credit cards are paid off.
So, I’m not gonna have any money to “pay cash” for a car with. And if I buy a car for $700, you can bet there’s gonna be some pretty expensive problems pretty quickly down the line.
So, do I finance? What if I finance and get like, a decent car for 5K? (I could pay that off in three years.) But then there’s surprise mainetenance costs…
Or do I just go the other way, consider a car as a utility, and just always have a car payment of some sort (with leasing, or buying, and financing). Because, I’m sure it’s great if you can get into this plan if you aren’t already attacking debt, or you can save a few grand to buy a “junker” that will last a few years. But what if you’re going to be carless before that point?
Best advice?
Maybe we’re missing the point of the free part - it’s not FREE as in you will never spend money again on a car - but DEBT FREE - free from the burden of having to make that monthly payment to your lender.
About 6 years ago my wife purchased a car for getting around (for her job) at the time. We didn’t want to spend much on this car. We ended up buying a 1995 Geo Prism (same as a Toyota Corolla) for $600. All it needed was a $100 alternator. So, the total initial cost was about $700. It had 190,000 miles on it. We were only going to keep it for a year. However, we ended up keeping it for 5 years and put another 60,000 miles on it before finally getting rid of it about a year ago. The car only needed a clutch, tires, shocks, and basic maintenance during those 5 years. I realize we were fortunate, but it is possible to get a reliable car for under a grand. You just have to look for models that are reliable. Also, don’t be afraid to look at high-mileage cars as long as they were taken care of.
i think you are over thinking this issue. The gist is NO PAYMENTS. DON’T BUY UNLESS YOU CAN PAY FOR IT.
FJH
daveramseyguru.com
I’m a big Dave fan, but I also think that trading up cars every year is silly. Just pay cash for decent used car, then drive it for as long as you can while saving up for your ideal car. Don’t trade up constantly, just be patient.
The problem with your argument regarding- you might as well use that monthly money and buy a new car right away, is the same argument that people everywhere tell themselves, but you’re missing something important. Hold debt involves risk. What if you buy that new car and lose your job shortly after? Or have medical bills? Or another emergency? Suddenly you’ll be wishing you had the cash, but you’ll be upside down on the car.
Debt has risk- people always leave that out of their calculations.
I think Dave has some neat stuff going for him. And I think the comment that buying cars is a hassle is spot-on. And probably intentional.
Let’s say I’m a super-Dave fan (I actually just think he’s a good place to start, for beginners). I decide to buy a junk car. I get to the point where he suggests trading up, but just don’t get around to it. I keep putting my $475 in the bank until the car breaks down, possibly years later if I got a great deal but probably at least months later (if it hasn’t broken down yet).
At this point, I finally get the better car - but if I slipped on buying more than four months, I either don’t spend all of the money, or get a better car, because I’ve been saving longer. I drive this newer car until I “should” trade it, but get busy. I keep cashing the $475. I also start to realize . . . A $6,000 car is actually pretty okay. The delayed purchase of that $11,000 car gave me time to consider what a car is really worth to me, especially when combined with the rest of Dave’s advice. I may realize that I can drive my $6K car for five to seven years (this is how long the $3K car my parents bought me in ‘00 lasted) and feel good abut it.
This “get rich quick” scheme is more about hooking people into healthy spending habits, I think, than about attracting an audience. Although it probably does get Dave an audience, too.
At the same time, I bet we could make $1K off of this minivan we bought for $1.5K and paid 1K to repair - because the owner didn’t want to take the trouble. It’s actually in great condition after tuning and a few parts. So Dave isn’t entirely insane, you can sell a car for what you paid or more - but you have to be smart.
I also think Dave targets newbies to finance who don’t always make good choices and want to change - not super-smart, super-serious investors. He’s the stepping stone to becoming a smart investor if you’re at the opposite end (or at least, he was for me). But once you get a feel for the water, there are better advisors to follow. I think. I’m still figuring out where to go next.
The “free” part is in six years - as I think he points out quite clearly when I’ve heard him explain it. From the interest off of investing the payments you would have made on a car loan. Basically, the money comes from not paying interest on a loan (question: do you spend the interest money on more repairs, though?) and from getting interest instead. Which does add up eventually - the real question, I would think, is whether this plan works as quickly as Dave suggests it does.
Maybe I’ll do the math someday.
I didn’t read all the replies to know if somebody has already said this but you have to understand dave ramsey. He’s an entrepreneur and when he says sell your car, well by god, you get out there, do the leg work and sell it for as much as you can get for it. Then, go and find a steal of a deal on a newer car so that in another year you will be able to sell that car for what you bought it for or just a little less. It could work for a person with the right mindset and obviously it’s not for everyone. But, remember, there is always somebody out there desperate to sell their car and those are the ones you look for when purchasing your next vehicle. Low ball is the name of the game. This is not some get rich quick scheme. It would take time and effort. Some people don’t mind the time required, some do. It will never work buying a car from a dealer and then in a year turning around and trading it in on another car from a dealer. You have to buy private
I am sitting here looking at the numbers and then thinking to myself, “how could not paying interest on a car not benefit someone?” You are saying rather than save for a car to just go get a loan on a new car that will depreciate far more quickly than a used car that you paid for in cash?
I did not read every single post in detail, but I got the general idea of the arguement against the “Drive Free Theory”. A big part of Dave Ramsey’s theorys are behavorial. Sure, his plan isn’t perfect..you may not be able to sell a car for what its worth in 10 months, he doesn’t take into account county/state sales taxes on new car purchase and I think you would be hard pressed to get a consistent 12% return. However, it comes down to a behavior change. Too often in this country we buy things without having the money to pay for them. The world tells you that car payments are “normal”. They do not have to be though. It really comes to down to delayed gratification. If you just sacrifice for 5 years or so and drive cheaper, used cars when you are young, you could drive cars for “free” the rest of your life while contributing that old car payment into a retirement account that could be worth millions. One more quick point…the author of this site uses a brand new Honda Civic as an example of the math behind Dave’s theory. Sure, you could buy a brand economy car and drive it for 10+ years, I don’t have a problem with that. However, I would like to enjoy life and have a nicer car. I recently bought a well cared for Lexus that was a one owner with all maintenance and service done at the dealer. The car has 100k for miles, but for those who don’t know, Lexus makes some of the most reliable cars on the road today. I paid $7,500 for this car and borrowed just a small amount that will be paid off in just 1 year. After that, I can expect to drive a nice, luxury car without any more maintenance and upkeep costs than the Honda Civic used in the example. I am very confident that the Lexus will go to 200k for miles without any major problems. That would equate to nearly 10 years of driving for me. When the car is paid off next year, I will continue to pay myself the payment which will grow to over $30,000 over 9 years (not including any compound interest). I will then start the process over and buy another well taken care of Lexus for $10,000 or so and still have $20,000 in cash earning interest that can buy me free cars the rest of my life. Which would you rather drive day to day…a Honda Civic or a Lexus? I choose to be smart financially and still enjoy life and the fun of driving a nice, luxury car.
Sorry. That was an accident. I am disabled. My wife makes just above minimum wage. With have two children. We can’t realistically do this. Yet our church has told us if we don’t take the course they will no longer help us if we need it. I’m thinking about becoming Catholic because they get it. At Catholic Charities I took one 3 hr budgeting course and got help.
Dont buy your vehicles from dealers EVER. do your research and buy when you find a great deal. I’ve made money. patience
Ramsey is a Jesus guy. There is nothing wrong with that in and of itself. However in the same breath he talks about saving money, he tells his disciples (listners? readers?) to give 10% (of pre-tax earnings) to the church. TEN PERCENT. Ouch. For that much, I could be a Catholic!
That is a lot of dough to give to a church, IMHO. And some of these churches…..remember Jim and Tammy Faye? I don’t mind giivng money to a church that helps the homeless or runs a soup kitchen. But not to a church that buys lear jets for the Pastor and a boob job for his wife. Like anything else, with churches, you have to shop carefully and read the fine print.
So his writings have another angle, I think. Churches love his seminars, as if you can get parishioners out of a monthly car payment, well that’s more money they can tithe to the church! Praise Jesus!
His message boils down to “less for yourself, more for the church.”
That being said, he probably helps some people get out of perpetual debt. But most of his advice is common sense and can be obtained elsewhere at no cost.
My take on all these financial Gurus is this: If you want to read their advice, check their books out of the local libary - it’s free. You can’t spend your way to wealth, just as you can’t eat your way to slimness. So spending money on books or seminars when you are in financial straits is the wrong way to go about it.
The writer of this blog got totally owned. You cannot tell me by retirement age you will have more money by making car payments vs doing Dave’s plan. If you think so, you are …mentally challenged.
Of course you won’t be able to sell the “beaters” for EXACTLY what you paid for them. It’s not about perfect math, if it were why the hell would anybody pay interest on something that is worth less every second of the day?
Interesting how you point out the flaw in math with the used cars but totally ignore how much a new car is when you buy it, when your done paying for it and how much it’s worth when your done with it. You are almost always going to be in the red.
Dave’s plan works, for everybody. It won’t work if you care about what other people think about you.
I couldn’t agree more with the previous post. The blog writer does not fully understand the power of having excess cash flow. Instead of continually sending car payments to the bank each month for the rest of your life, you can use your excess cash flow to make more money while preparing yourself and family for a prosperous future. All it takes is discipline and few years sacrifice of not driving a nice car.
I had to comment again on the author’s theory. In June 2008 I purchased a 1999 Lexus ES300 via a private party sale. The car was a one owner with just 105k for miles and all service was done at the dealership with records proving it. Since the car was nearly 10 years old, it already took the bulk of its depreciation hit. The car was nearly $40k brand new and I paid just $7,500 to purchase it. I took out a short term car loan and just paid it off a few days ago. The car is running great and currently has 112k for miles. Since it is now paid for, I will no car payments for the immediate future while driving a very nice luxury car. I drive about 10k miles per year and based on my car’s condition and reliability record (it is an Edmunds.com used car best bet) I am confident I can drive it for at least 5 more years without any major problems. Taking my old car payment of $300/month and saving it on my own for 5 years (60 months) would give me $18,000 (not including any compounding interest). Let’s say I can get $2,000 for my car after those 5 years, I would then have $20,000 of which I could use to pay cash for a different car. I could easily get a very good car for as little as $10,000, which would leave me with $10,000 left over. Yes, I would me technically “making car payments to myself” during those 5 years, but I’d much rather do that than have to send a payment to the bank. Plus, if I ever lost my job or anything, I would have cash I could draw on. Regardless of what you think of the “drive free method” the key thing is that buying a new car is not smart because of the depreciation hit and the fact that you will be making payments for 3-5 years. Be smart and buy a resonably priced used car for cash or pay it off in less than 12 months and enjoy not having a car payments. It feels so much better to make that payment to yourself than to the bank:-)
the only problem with your method is, you say go ahead and pay the monthly car payment instead of driving a junker for 4 years. thing is what happens when you lose your job and cant afford the car payment. eventually you get so far behind and your car gets repo’d. if your paying $475 or whatever to your own piggy bank and you lose your job, guess what, you can afford to skip out on paying yourself that for a few months until you can get another job. it will take a little longer to get another car because you stopped paying yourself for a few months, but its better then losing a car, screwing up your credit and getting yourself into a huge mess.
Michael (the previous post) has it right. What he is referring to is risk. There is risk in owing money to a bank on a car. However, most people do not properly take that into account before they buy. They focus only on the monthly payment. Just like Michael said, if you lost your job with a car payment and were unable to keep up with payments, you would get your car repo’d. However, if you owned a paid for junker for a few years and had saved up the money that would have gone to your car payment and then suddenly lost your job, you would get to keep your car plus you would have cash to tap into until you found another job. Risk matters and the author of the original blog fails to consider that in his argument.
Dave says:
Debt is Dumb. Cash is King.
Only idiots pay retail, which is why your math has no bearing. If you look in your newspaper, there is going to be a price range on a 2006 Accord. Some will be due to features, color, damage, etc. Other variance will be due to the fact that, sometimes people just need to sell their car. If you’re the guy with the wallet full of cash ready to make a purchase, you’ve got the power. Guy wants 13k for his car, well I’ve got $12.5k in crisp $100 bills, what do you say?
I believe Dave’s whole point in all of this is to give an example of how you can have a nice car within a 5 to 7 year period and never borrow a penny from anyone.
If you buy a car and have a loan for 5-7 years, you have paid a lot more money over that time period than you would have by using Dave’s method. From interest and the car dropping it’s value. Plus using Dave’s method would allow you to decide what you wanted to do with your money. You are not stuck for 5 years paying on a loan. How depressing is that???
We as a country need to understand that the barrower truly is slave to the lender and that trumps any calculations you can do with the numbers. How can you feel free if you owe someone something?
This is funny. If people put the effort they put into making excuses and actually executing a financial plan like Ramsey’s they would see that it is not perfect but it works. I didnt know about his theory but had been applying a similar financial method my father started me on.
I went from an old $1500 buick Skylark to an nicer Audi a4 within a year, to a 2001 Audi A6 in just two years. PAID IN FULL.
The Audi A6 was good to me for 4 years, I had around $15,030.54 saved according to my bank. And i only had it sitting in an online savings account with HSBC that is currently earning just 2.26%
So do the math. in 6 Years, I had a nice car i found a good deal on eBay and i had 15K in the bank. Right about now, you would be had been paying off your loan and i had 15K in the bank.
Year 7, i drove the audi to the ground and ended up donating it and had a good tax write off from it. Payed $9K for a 2000 Jaguar S-type and been driving for about a year.
I still have $21,200 in the bank, now im not going to get rich from it but i can certainly tell you that im saving money and driving decent cars at the same time and at this rate by the time i retire, i should have good chunk of change in the bank. i do have to spend some money repairing them every once in a while but i can assure you, it feels so good to pay cash to fix them instead of using a credit card and to know there is lots more cash left where that came from.
That is just my 2 cents.
Oh yeah i forgot to add, that the car i recently purchased, i should be able to drive for another 3 more years. By then I should have saved another $15-16, Worst case scenario $12K on top of the $21K i have today.
Even if worse comes to worse, I should have $33-35K, Im not even including interests to that. Even if I DO NOT TRADE MY CURRENT CAR. I will buy me another 10K decent car and have 25K still earning me interest in the bank and a very good TAX WRITE OFF from my donation.
People get caught up in the TRADE IN and DEPRECIATION EXCUSE but its nothing more than an excuse. I plan on donating every car i buy from here on out til i retire and I can assure you, i still will accomplish a better financial plan than all of these people here making excuses to not get started into some kind of financial plan and alternative lifestyle than the good ol’ CREDIT way of life.
Mark,
Thanks for your comments. I am currently doing something similar to your plan with my 1999 Lexus. I really like your idea of donating the car as well.
You hit the nail on the head regarding repairs. Paying cash for the occaisonal repair is a lot easier than being stuck with a monthly payment for 5 years. The whole “repairs excuse” is something I hear a lot about it and its really lame. You pay a lot more making a fixed monthly payment for 4-5 years with the average car loan than paying cash for the occaisonal repair. I would strongly argue that car loans are one of the biggest reasons why people do not become wealthy because they continually look at car payments as a “way of life”. It does not have to be like that and if you look at things from common sense standpoint and just sacrifice for a couple years, you can be much better off.
Ramsey approach is indeed feasible. The diffeence in depreciation is essentially the car dealers profit when you get to models that have so much of their depreciation taken out already. So skip the dealer. Buy your car direct from craiglsit etc. People complain that they don;t know what they are getting. You don;t at a dealer anyways. Give yourselkf the deler’s profit and you have the money to replace the engine or transmission anyways. You ahve to jsut think outside the box roll up your sleeves and use some common sense and you are able to amke the math work out even better than he says.
Great post Delmer. Craigslist is a gold mine in terms of used cars. Spend some time searching and you can find a good deal on a private party sale. In many cases, these people have detailed service records that show the work done on the car. Case in point on my 1999 Lexus ES300. I bought it locally via craigslist from a man who had bought the car brand new. He had all service records from the local dealer and I got the car for $2,000 less than it would have cost me retail at a dealer. You really don’t get any peace of mind buying from a dealer, unless they give you some sort of warranty and even if that is the case, there are usually several strings attached.
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