My Recent Car Dealer Million Dollar Solution

I recently had to replace my wife’s car for a bigger, safer car that could be used for longer drives. The hope is that next year we will be taking more vacations with a newer family SUV. 

I am accustomed to finding used cars directly from car owners in the $5,000 dollar (US) range. This time I was willing to spend around $15,000 dollars for a four year old, one owner Japanese SUV. I decided that the best place to find one of these is from a dealer who takes in this type of car on trade-in.

Why Not a Tesla Model X 

I’ve written before about my admiration for Tesla automobiles, which pointed me in the direction of buying TESLA stock.  

https://financialsombrero.com/tesla-stock

It appears that everyone around me is buying a new Tesla. However, the Model X would set me back around $128,000 dollars. It would be a fun car to own if you could stomach the opportunity cost of that amount, which apparently I cannot. 

Business write-off. 

If your business buys the car, then that’s another story. Leveraging depreciation, and more specifically using the car to make money, such as in the case Youtubers is a great idea. Although for regular W2 employee’s, this strategy might not work. 

Trip to the Dealer: 

I went to a BMW dealer in my area that had a 2016 Japanese SUV for sale for $15,000 dollars. It was a one owner car in the color, spec and miles I was looking for. I took the car home to show my wife for a few hours, and then returned to negotiate a price. 

(Full disclosure, I’ve owned a 5 series BMW before, and I really enjoyed driving it, they are incredibly nice driving cars that maintain very good brand loyalty for a reason) 

The new car dealer experience was interesting. Everyone there was buying a new BMW which ranges from around $35,000 - $150,000 dollars. I was there on a Sunday, and there were plenty of people around me buying new BMW’s. Here is a summary of what I heard while waiting there to negotiate my purchase. 

Buyer #1: 

A buyer sitting next to me was talking to his bank via cell phone trying to figure out how he could use his checking account’s overdraft protection to put a $5,000 downpayment on a $50,000 dollar car. He told the banker that he didn’t have the money for the down payment. My advice to him would have been simple- you can’t afford this car, return to the dealer when you have cash. 

Buyer#2: 

A second buyer was also attempting to buy a very expensive car. He as well could not qualify for the financing. In his case, he called his friend via cell phone and asked his friend to lie for him, and tell the dealer they owned a car detailing business which made a certain amount of money per month. Again, the advice from me would have been the same- you can’t afford this car. 

Buyer #3: 

A third buyer was also attempting to put together enough money for a down payment. This person was calling friends and family asking for a loan so that she could buy a new BMW SUV. She called her parents, uncles, co-workers, friends. She was basically begging others for money, which means she had no business being in a new car dealer that day. 

Average US car payments: 

According to Credit Karma, the average new, used and lease price is around $477.33 dollars per month in the US, which is $5,727.96 annually. That’s money going into a depreciating asset that could be used elsewhere. What if these three buyers I mentioned above put $5,727.96 into a Roth IRA long term and opted to forgo the expensive car. 

The Alternative 1 million dollar solution. 

Given that the average American is not financially prepared for retirement, take a look at this scenario someone reminded me of recently. 

Instead of buying new cars every five years with a $477 dollar monthly payment, these three potential new car buyers could invest this car payment money into a Roth IRA. With just a projected 6% annual gain, this money invested would yield $910,591 thousand dollars tax free in 40 years, which at a 25% tax rate really means that you have made $1,138,237. 

No Picture for You:

I thought about this million dollar solution when I listened to the three car buyers work to negotiate their down payment sources. All three buyers ended up buying their new BMW’s; They even had their pictures taken with their salesperson, smiling and showing everyone how happy they were with their purchase. Note that my salesman said that they only take pictures with BMW purchases, so apparently I missed out. 

Just Let me Give You the Check:

In my case I was able to negotiate the price, and I listened to all of the financing offerings for a loan, paint covering, seat covering, extra warranty and so on. I declined all of these offers and simply wrote a check for the balance of the car plus taxes and registration fees. I can tell you that writing a check for the full amount is a very rewarding experience. I believe the three other buyers at the dealer that day would agree with me had they saved for their purchases instead of looking for others to help them..