How to AUTO-matically Not Become a Millionaire - Ep #85

Apr 28

Welcome to Episode 85 of the One for the Money podcast! Some of you may remember that best-selling book The Automatic Millionaire. It told readers how to easily become a millionaire with a few simple steps. But in this episode, I’ll reveal the sad truth: too many people aren’t becoming automatic millionaires because they’re spending too much money on automobiles. Yes, cars and trucks are putting the brakes on a better future for many Americans. I'll also share the massive benefit of driving one’s car until the wheels come off.

In the tips, tricks, and strategies section, I’ll share some car-buying tips.

In this episode...

Automating Savings [1:23]
The Financial Impact of Car Ownership [2:04]
When Is It Ok To Buy a Nice Car? [6:35]

MAIN
The Automatic Millionaire, written by David Bach, became an international bestseller because it gave us that magical formula for becoming a millionaire.
Bach’s magic trick? Automating your savings and spending. He basically tells you to set it and forget it. You set up automatic contributions to your 401 (k) or IRA, and it’s that easy to be on the road to riches. He even argues that you don’t need to be making a six-figure income to become a millionaire—you just need to make sure your savings and spending are adjusted on autopilot, and voila, decades later, you reap the rewards.
And yet, despite this brilliant advice, millions of people are still missing the automatic millionaire bus, and they’re doing it by throwing too much of their money at automobiles. While an automobile is designed to take you places, far too often, it takes owners to a future that is much poorer and less fulfilling than it otherwise could be.
Now, you might ask, is car ownership really that impactful? Let’s look at the numbers from 2024:
- Americans owe around $1.655 trillion in auto loan debt. That’s right, trillion with a T.
- Over 80% of new car purchases in 2024 are financed, and the average car payment is $742 for new cars and $525 for used ones. (That’s a lot of money that could be used to build wealth instead.)
Now, why is this a problem? I mean, cars are cool, right? But here's the thing—unless you’re driving a classic car like a 23-window VW van (I can dream), cars lose value. In fact, a new car drops thousands of dollars in value as soon as you drive it off the lot. So, people are paying $525-$747 a month for years... for something that’s losing value fast. In fact, over 30% of people with car loans have negative equity, meaning their car is worth less than what they owe. Here is something even scarier: When a car is damaged, such as in a natural disaster, insurance will either pay to repair the car’s damage or give the driver a lump sum equal to the value of the car. When the damage is severe, insurers usually choose the lump sum. That means if your car with negative equity is totaled. You will be out of a car and still have money you owe on it. Even when the damage isn’t severe, it can still pose a huge financial challenge. An Oct 2024 article from the WSJ featured a 34-year-old gentleman who had noticed the main display screen on his new vehicle would often disappear. The car’s backup camera didn’t always work, and the car would make a screeching noise when in reverse. He decided to bring the car into a local dealership, hoping to trade it in. Only to have the dealership tell him it was worth roughly $24,000, which was just under half of the roughly $50,000 he still owed on his loan.
Now, I should confess that I drive a 15-year-old Toyota Prius that I had purchased used. It’s been a great car, and I hope it will continue to be for years to come. My wife’s car is 7 years old, and it replaced her 16-year-old car at the time.
However, I must also confess that, like many others, I have also made a huge mistake when purchasing a vehicle. So I have been on both sides of the Automobile purchase decision. I’ve made both good decisions and bad.
Here are the details about my poor choice. A few years after graduating from high school, my twin brother and I purchased a used Jeep Wrangler. It had far superior features than a new Jeep model we were also looking at. The used vehicle had a lift, a hard top, and much better rims and tires. It looked so much better than the new Jeep with its rag top, smaller rims, and wheels. We were excited about the purchase of this cool-looking vehicle, but sadly, that excitement lasted for less than 24 hours when it broke down. The Jeep couldn’t drive, and so we thought we would be fine since we also had purchased drive train insurance. Instead, we were told by the dealership that insurance didn’t cover this particular issue. We continued to have numerous and expensive problems with the Jeep that the “drive train insurance” didn’t cover. Finally, when our speedometer stopped working, the dealership was quick to offer to fix it. We were relieved that, finally, this insurance covered something. Only later did we learned why: because a broken speedometer was evidence that the Jeep's odometer, which measures the mileage driven, had been tampered with and that the Jeep had tens of thousands of more miles on it than advertised. We were told by a friend of the previous owner that he had unhooked the odometer so he wouldn’t rack up tens of thousands of miles to preserve the value of the Jeep.
The moral of the story? You can lose a fortune over the years buying cars you cannot afford.
Does that mean buying nice cars is wrong? Absolutely not, provided you have all the other things in place first (emergency fund, on track for retirement, etc). I am personally enamored with classic cars. They made them with so much more style back then. In fact, every Spring, the City of Seal Beach hosts a classic are show, and my family and I enjoy going to it every year. There are some proud owners of these vehicles. Some inherited them, others rescued them from old barns, and others bought them. It’s really cool to see the cars parked from my office window.
But collector cars are different than daily drivers. Classic cars can be a viable investment, provided you have everything else in place, such as life insurance, your emergency fund, no high-interest debt, you are on track for retirement, and you can pay cash for the vehicle.
But interestingly, most wealthy people don’t drive fancy cars as their daily drivers. While some wealthy Americans drive luxury vehicles, an Experian Automotive study found that a whopping 61% of households making more than $250,000 don’t drive luxury brands. Instead, they drive less showy cars, like Hondas, Toyotas, and Fords.
Dave Ramsey noted that most millionaires don’t drive flashy cars.
While an automobile is designed to take you places, far too often, it takes owners to a future that is much poorer and less fulfilling than it otherwise could be. But if you plan to drive an old and not-so-flashy car, your life could be much wealthier and better because of it.
TIPS, TRICKS, AND STRATEGIES
Welcome to the tips, tricks, and strategies portion of the podcast, where I will share some tips regarding buying a vehicle.
The best thing one can do before buying a vehicle is to develop a plan. You need to determine what you can afford, the type of car or truck that meets your needs, and do a lot of online research regarding prices and features.
You need to have a firm number on how much you can afford. Without a plan, it is far too easy to walk out of a dealership with the keys to a much more expensive car than you can afford. In fact, it is far better to buy a used vehicle and pay for it entirely with cash. If you can’t pay cash, then that may be your first clue that you are very likely looking at a car that is too expensive. It can make sense to buy a used car at the dealership, as there can be risks with purchasing a vehicle privately, but there are likely added expenses with buying a used car at a dealership as well.
There can be a case for buying a new vehicle if you own a business. Normally, you can write off the purchase of a work vehicle over a few years, but using Section 179 of the Internal Revenue tax code, you can fully depreciate a vehicle in a single tax year, provided it weighs over 6000 lbs. This can save the business owner a lot on taxes. In fact, I knew a business owner who had the option to pay taxes or purchase a Porsche Cayenne. As a business owner, I would choose the latter as well.
But for most Americans, they will purchase a vehicle that won’t provide a tax deduction.
A nice car can be very exciting for a little while, but these have eroded far too much wealth for Americans who have automated their way to not becoming a millionaire by purchasing vehicles they could not afford. I know it's not the most exciting thing to buy a used car, but the best things one should do rarely are.
Well, I hope you found these helpful, and until next time, remember a better life is a result of better planning, and that must include better car buying. Have a great one!