“When it comes down to it, at this point in my life if I have to choose car payment or plane tickets… I’m taking the tickets every time.” – podcast listener Mikey
Ian here! In my short time on this planet I’ve owned over 20 cars– everything from Subarus to BMWs. I’ve worked as a mechanic, raced competitively, and read just about everything printed about cars that I can get my hands on.
By far, my favorite type of car is an “entrepreneurmobile.” Back on episode 239 we started talking about our favorite “entrepreneurmobiles.” We think owning one is something of a status symbol! I’ve started to hash out a definition of the term, here’s the best I’ve come up with so far:
Entrepreneurmobile: A vehicle that has almost fully depreciated. They are reliable cars that are generally inexpensive to maintain and fix. They can often be sold several years later for the same price they were purchased for. Now seen as status symbols of the new rich, these vehicles free us from a prison of payments and allow us to focus on real wealth and asset generation.
Status Symbols of the New Rich
As an entrepreneur, I’ve come to realize that my status symbols are freedom of time and the opportunity to work on projects I’m passionate about – not my BMW M3. Auto payments are a form of debt and debt can cost us opportunities. Debt has the ability to cause irrational decisions around our businesses, which can negatively impact our trajectory and potential.
Whether you are considering buying a new vehicle or financing a used one, be aware of the costs associated. As an entrepreneur, they can put you at a disadvantage. For those earning a salary I give the same precaution, these payments can be the reason you are never able to leave your job and pursue a life of entrepreneurship.
The idea is to have your cash work for you in investments and your business. In most cases a car is not a good investment, it’s a depreciating asset (usually depreciating very quickly). So we should treat it as what it is and try not to lose our ass during the course of car ownership.
The real costs of car ownership are hidden in simple math. The first thing I tell someone considering a new vehicle or financing a new or used vehicle is that the true price of an automobile can be opaque. A lot of people have a hard time stomaching the simple math because, emotionally, it’s not what they want to see. They want to see a car in their driveway that has free maintenance for 100,000 miles and only costs $199 a month. That’s not how it works. Regardless of what the television commercial says, there are hidden costs.
Also worth mentioning, you can not walk away from these payments. The earlier in the depreciation curve that you try and exit, the more you are going to lose.
Basic New Car Math
Let’s assume you buy a new car and plan to keep it for 10 years. We’ll use a Honda Accord, one of the most popular cars on the road, as an example.
- 2014 Honda Accord LX w/ automatic transmission $23,545 + California sales tax 8% = $25,429
According to Edmunds, the real cost to own a 2014 Accord for 5 years is actually $43,158. That includes fuel, insurance, and maintenance. You’ll have to pay for these with every vehicle, so we can back those out. But the biggest expenses in that 43K come in the form of depreciation, tax / interest, and financing for a grand total of $16,281 for the first five years. In the next five years it tapers off but what you are left with, according to KBB.com, is a car that’s worth about $6,777.
That’s right, the going rate for a 2004 Accord, 10 years later is $6,777 or 26% of the initial purchase price.
So what’s the actual cost per month?
Let’s figure out how that works in terms of cost per month. We’ll leave out the gas cost since it’s virtually the same for all mid-sized cars.
- Your 2014 Honda Accord costs you $25,429 + average $9,107 in maintenance, tax, interest over 10 years = $34,536
- If you sell it in 10 years you get back $6,777, so net total spent = $27,759
- $27,759 / 10 years = $2775.90 per year or $231.33 per month + $176 insurance = $407 per month
For a comparison, let’s look at the 2004 Honda Accord. Here is the breakdown:
- Your 2004 Honda Accord costs you $6,777 + average $3000 maintenance = $9,777
- If you sell it in 10 years you get back $2,500, so net total spent = $7,277
- $7,277 / 10 = $727.70 per year or $60 per month + $75 insurance = $135 per month
It Gets Worse
The math gets even more scary as the purchase price increases. The baseline BMW 325i costs almost $10,000 more than the Accord. Yet, according to KBB, at the end of 10 years it’s only worth $5,904.
Also keep in mind that replacement parts and insurance generally cost more for newer cars. They are more complex to work on and you’ll want to carry liability and comprehensive insurance coverage. I pay $29 a month for insurance for my 1998 Acura. For a 2014 Honda Accord, it would be $176 per month or 6 times as much.
Are you getting three times the car with the 2014? Both the 2004 and the 2014 Honda Accord received the top 5-star safety rating from the NHTSA.
The 2014 gets only slightly better gas milage. If you drive primarily on the highway the average savings would be less than $100 per year.
What happens if the first 2004 Honda Accord you buy ends up in a lake? Buy another one. You accidentally put diesel in the gas tank and lock up the motor? Buy another one. On your third Accord you will still be in a better financial position than if you’d bought a new car.
By the way, these examples are fairly absurd and usually covered by insurance. Even if, in a rare situation, you needed to replace all of the major components on the 2004 that were not covered by insurance such as the engine, transmission, suspension parts, exhaust, etc., it wouldn’t be more than 5k. You are still way ahead than if you’d bought a new car.
Let me say that again– maintenance costs on an older vehicle will not outpace the depreciation of a new vehicle. In another 10 years that 2004 turns into a 1994 Accord. Going rate for one of those bad boys with about 200,000 miles is $2500. These are fully depreciated at this point. Let’s assume there are a few sets of tires in there and maybe even a head gasket for a total maintenance cost of $2000. Let’s also assume you keep this one for only 5 years.
- Your 1994 Accord costs you $2,500 + average $2000 maintenance = $4,500
- If you sell it in 5 years you get back $1,500, so net total spent = $3,000
- $3,000 / 5 = $600 per year or $50 per month + $29 insurance = $79 per month
The 1994 is about five times cheaper than a new car and about two times cheaper than the 2004. Both the 1994 and the 2004 are also cheaper than using Uber and Car2go (although I expect this to change in less than 3 years). Before buying my latest entrepreneurmobile, I was spending about $200 a month on those services. In some instances those services are less expensive depending on your city/ gas consumption. You’ll be limited in your travel range though, and that’s important for me right now.
Here is a simple chart showing the depreciation of the 2014 Honda Accord. You can see most of the depreciation has set in around year 6 and by year 10 the curve really begins to flatten out.
The Hard Truth
Car ownership, anyway you slice it, isn’t cheap. As you can see though, you are much better off buying a car that has gone through most, if not all, of its depreciation cycle. Buying a new car in cash helps a bit but still the depreciation lost will never be recovered.
Most cars are going to require gas; all require maintenance, insurance, and attention. It may not feel like you are paying for maintenance because you have a warranty on the newer car. As I’ve shown above though, you are actually paying more in depreciation than you will to replace nearly every major component on an older car – at 5x over!!
I get a lot of resistance when I mention that you can buy a very good car for less than $5,000. Objections are usually centered around safety and reliability. It’s true that new cars have to conform to stricter safety standards, but that doesn’t mean old cars are unsafe. 9 out of the 10 cars on this list have airbags. All of them have crumple zones and must pass federally regulated safety standards. I have never once (knock on wood) been stranded on the side of the road driving one of these cars.
Cars are machines and most machines give you several warning signs before they break. It’s a matter of interpreting the signs and being proactive with maintenance. Have a good mechanic you trust and follow the maintenance schedule. Every car has a designated schedule that, if followed, will usually result in a modern car lasting 200,000 – 300,000 miles.
Most stories I hear of people who constantly have their car in the shop with large repair bills are those who haven’t done proper maintenance. Either that, or they are buying cars that are genuine pieces of shit and poorly designed/manufactured (you’ll find those on the dog list).
Finding Your Entrepreneurmobile
Here is the 1998 Acura Integra I just bought for $2,200 with 193,000 miles on the clock. It has dual air-bags and ABS brakes:
If you’re worried about having a modern entertainment system, here’s a handsfree bluetooth aftermarket stereo that’s only $129. It’s the same one I just put in my car.
It often takes me two weeks or less to find the right entrepreneurmobile. Two weeks spent searching can save you thousands of dollars per year and, most importantly, keep you out of debt and your money working for you in real assets.
It’s important to know where the car came from and its history. The Acura Intergra was an ideal candidate. It was a one-owner car with complete service records, new tires, and a new timing belt. The car was previously owned by a family that could afford a much more expensive car. That generally means there is money left over to maintain the vehicle properly.
There are a few prototypical scripts I look for when checking out a car:
- Family looking for a bigger car
- 1-2 owner car (have owned the car for several years)
- Moving, can’t take the car
- Owner deceased
- Female owned (generally follow maintenance schedules better than know-it-all dudes!)
There are several cars/ scripts I stay away from:
- Cars that are owned by young people (under 25)
- Anything with a salvage or rebuilt title
- Owned less than 1 year without a good explanation
- Without some maintenance records (anything with 1/2 the records in addition to a good memory on the owner’s behalf works for me)
- Lots of dents/ scratches/ dirty (generally indicates lack of care and is probably the same for the mechanical components)
- Cars sold by dealers (they eat up all the margin)
Questions I ask sellers on the 1st phone call before taking a look:
- Why are you selling the vehicle and how long have you owned it? (good opener and feeler for the situation)
- Has the car been in any kind of accident? (if so, was it just a fender replaced, or was there frame damage?)
- Where did you have it serviced? (dealer serviced cars are preferred because they stick to the manufactures guidelines)
- Do you have the maintenance records? (if it was serviced at an independent shop, were they doing the scheduled maintenance on time?)
- Do you have a current Smog or Emissions test? (this is a good baseline indicator of the engine’s health)
- Is there anything right now that you feel the vehicle needs? (a moment of honesty)
Don’t feel like you need to know anything technical in order to inspect the car, there are people that can help. Most neighborhood shops and dealerships will offer a pre-purchase inspection for less than $100, or you can use a checklist like this one. Obviously you don’t want to pay this for several vehicles. If you can get past the basic requirements and questions above to feel comfortable with the seller though, then maybe it’s time to set up an appointment.
I’ve compiled a list below of cars that I think make good entrepreneurmobiles. The make and model of the car you pick is very important. Most of the cars on the list have been in production for a long time or the motors/ transmissions have a long history of being reliable (credit natasha at www.dresshead.com). For example, the 2.5 liter motor in the BMWs has been in development for nearly 30 years. That means when you own that vehicle, you are benefiting from 30 + years of design, engineering, and innovation.
It’s all about getting your reps in. Companies like BMW and Honda have been produced millions of millions of cars and they have a long history of racing programs. This technology and legacy gets dripped down into what we drive today. When was the last time you saw a Kia on the racetrack?
Some cars are just downright bad investments or garbage. If they are prone to repairs or don’t have a good reputation, you’ll see them on the list of dogs. Most of my top cars under 5K get around 30mpg combined city/ highway driving. These cars are relatively light weight which means they are easier on consumables such as gas, tires, shocks, and brakes. Don’t see a car on this list? It probably fits somewhere between the categories or I forgot it.
Top Cars Under 5K
- Honda Civic
- Honda Accord (4 cylinder)
- Acura Integra
- BMW 3 Series
- Toyota Corolla
- Toyota Camry
- Nissan Altima
- Nissan Sentra
Bigger Vehicles Under 5K
- Honda Element
- Honda CR-V
- Toyota Rav4
- Acura MDX
- Scion Xb
- BMW 5 Series
- Honda Odyssey
- Toyota Sienna
- Toyota Truck
- Ford F150
- GM Silverado/ GMC Sierra
Take a look around your neighborhood the next time you are walking. When is the last time you saw a 1994 Hyundai Excel? Never, they are all in the junk yard. Now count how many 1994 Honda Civics or Toyota Camrys you can spot in 10 minutes with your fingers and I guarantee you’ll run out of hands.
Although Korean automakers have made very impressive strides in the past 20 years (more than most US automakers), they still don’t stand up to a Japanese vehicle in terms of their required maintenance and resale value – often these two factors are intertwined. Although I love me some Mustangs, American manufactured cars, in general, pale in comparison to most Japanese cars in terms of reliability, resale, and overall value (we’ve still got the best trucks!).
I think within the next 10 years we’ll see some of the 2014 model American/ Korean cars retaining their value with low maintenance costs, but it’s too early to say. Same goes with Audi and VW. Audi, until very recently, were very big piles. VW is a step above Audi. When you count the number of VW Golfs still on the road though, it’s far less than the Civic. If you’ve got a good VW mechanic though, it’s possible. In general their history is patchy, so it’s much easier to drive something on the list above and just avoid the risk.
- Chrysler/ Dodge, Avenger, Charger, Caliber, Daytona, Neon
- GM – Sunfire, Caviler, Malibu, Grand Am, Cobalt, Cruze, Saturn
- Ford Contour, Focus, Tempo, Fusion, Escort ZX2
- Volvo post 1995ish
Since we started talking about this concept with friends and peers a few years back, people have responded with their own stories and experiences. Here are a few we’ve received in the last week.
Making it work with a dog
Have you found yourself the perfect entrepreneurmobile yet? Got any experiences with the cars on the dog list? I would love to hear your stories and opinions.
P.S. Many moons ago we were thinking about making an information product based around flipping cars (facepalm!). It’s unfinished and will never officially see the light of day but I attached it because there are some good tips on what to look for in a used car. You can download it here – How to Flip Used Cars. Also here is a 37 Point Checklist for when you do an inspection.