Really simplistic view: Before the hour of work I had $10003 of vehicle, $0 in my pocket, and an hour of time. After the hour of work I had $10000 of vehicle, and $3 in my pocket.
With the assumption that you are going to eventually pay that $3 back into your vehicle, by paying for repairs or buying a new one, you basically just "borrowed" money from your vehicle.
> you basically just "borrowed" money from your vehicle.
so wouldn't it then make more sense to just sell the vehicle for $10003, then place that money in an interest earning asset like a bond, rather than "borrow" from the value of the vehicle?
Most Americans can't manage daily necessities (groceries, childcare, doctor's visits, etc.) without a car.
Then maybe you ask why they don't have a cheaper car.
Generally, a cheaper car costs far more to maintain. The total annual cost of ownership of a 2-year-old Camry is far lower than a 10-year-old Camry. But to get that lower cost, you have to temporarily convert more of your money into that car asset.
End result: your cash is stuck in your car, and DoorDash/Uber/whatever lets you liquidate it without selling your car.
> Generally, a cheaper car costs far more to maintain. The total annual cost of ownership of a 2-year-old Camry is far lower than a 10-year-old Camry. But to get that lower cost, you have to temporarily convert more of your money into that car asset.
That’s a poor example, since a Camry is notoriously reliable and needs minimal maintenance. And ten years really isn’t that old. The depreciation on the two year old car would outweigh the maintenance on the ten year old car. I believe that 5-10 years old is the sweet spot for TCO.
I think it's more that dealerships usually carry newer cars, and it's a lot easier to get qualified for a loan at a dealership than for a private car sale (or at least it's perceived that way). The types of people doing Uber or Doordash aren't the type that can pay cash for a car (Uber even restricts you to newer cars last I checked).
A lot of people see car payments as being "normal" and a necessary expense. I have never had a car payment, so adding $200+/month is not something I'm going to consider. However, many people don't have any real cash in savings[1] 40% would struggle with an unexpected $400 expense, 20% don't have $400 in the bank. Personally, I keep at least $500 in cash at home, and I keep enough to cover my single largest "expected" sudden expense (e.g. replace my car), or last at least 3 months without pay (6 months right now since I'm a contractor), whichever is bigger.
The culture around debt is truly alarming. People pay $20k+ at 4+% to drive a car that may be more "reliable", when they could pay ~$10k at 0% (or enter your opportunity cost here for keeping cash) for a car that's approximately as reliable over ~5 years. If both follow the same depreciation curve, buying an older car with cash is way better than buying a newer car on credit. My advice is: buy a cheaper car, pay yourself whatever the car payment would've been on the more expensive car, and use that fund to replace/repair your cheaper car (never pay more than 50% of the value of your car for a repair). I would be very surprised if the majority weren't better off buying older cars with cash than newer cars with credit.
Definitely agreed. A cheaper car can be a better deal, however anyone who's poor isn't necessarily going to have the resources (time, secondary transportation, and $650 for a water pump repair) to manage it safely.
A financially well-off family may have multiple cars, a garage, and some spare time. They can incur the risk of an old cheap car much more easily.
> The total annual cost of ownership of a 2-year-old Camry is far lower than a 10-year-old Camry.
Really? Maybe 10 years ago but cars have become remarkably good recently. I wouldn’t expect a 10 year old car to give you many problems beyond maybe the difficulty of sourcing parts.
A lot of the push towards fuel efficiency led to tech that was in some ways or another half baked.
Examples:
- Direct Injection : Good for Emissions and Fuel economy, but many first generation systems have carbon build-up issues (Toyota D4S and -newer- Ford Ecoboosts don't have this problem because they have 2 sets of injectors)
- All the transmissions: Ford's DCT is notorious at this point for reliability issues, Hyundai's DCT is not looking so hot so far, Nissan's CVT is a joke, Subaru's CVT is a bit of a diceroll as to whether it blows up at 100k or not, the ZF 9 speed that many manufacturers uses has issues...
I'll note that SOME of these are newer problems, but most of them started happening around 10 years ago and are only finally getting smoothed out.
As a counterpoint, however, the costs of all of these newer safety systems is driving up repair costs in accidents, as well as the insurance premiums for newer cars.
Re the direct injection comment.. one small trick can save you $300 on engine flushes from carbon buildup: you can get an oil catch can installed for under $100 that solves this problem.
But you can’t argue direct injection is worse than older fuel injection. You save more gas, get better performance (even though you don’t get as many valves), and have a cooler running engine with direct injection. That’s a net positive for the environment and your wallet over the life of your car
And this is why working under this scenario, the vehicle is a money losing asset (where every dollar you earned driving costs a dollar in vehicle depreciation, even with a tax deduction, it's still a money losing asset).
The deliverer has to be able to earn $1.15 (at least) per dollar depreciated from the vehicle for the work to be "worth it".
The other issue is uncertainty - you have no idea how much you will earn on a given day or if this will be the day your car finally hits one pothole too many and dies.
But you can estimate it. Record your earnings every day, any compare it by the hour, day, week, and month, as well as miles driven each day. Estimate the total cost of driving (IRS estimate of ~$0.50/mile is a good place to start). Use this simple formula:
(Income - expenses) / hours worked = hourly wage
Is your hourly wage reasonable? If so, it may make sense to optimize away your expenses and generally stay the course. If it's not, would changing your work hours or location make it reasonable?
Unfortunately, I get your feeling that people only look at the income and ignore the rest of the equation (hey, I got $50 tonight! I had to drive 100 miles though...). If you're making $3/trip, you had better drive less than 6 miles or you just lose.
The problem is how to turn car-value into cash. You have a car worth $10003 and your current needs can be filled by converting $3 per hour.
chii is suggesting you sell the car. That converts the entire car at once. Then you don't have to spend any hours! As an optimization on top of that, they suggest you store the value in a bond, and pull $3 per hour out of the bond instead.
The real problem with this idea is that selling the car leaves you with no car.
Your objection that "you need the cash now" is based on a misunderstanding of chii's idea. chii's idea does get you all the cash now. It gets you the cash far far faster than $3 per hour. It gets you the cash so fast that you could actually invest almost all of it and pull out $3 per hour and do things you actually want to do during those hours.
It's not "buy a bond, have no money today, have more money tomorrow".
It's "buy a bond, drain the bond for $3 an hour today, have more money tomorrow".
Compared to having 10k under your mattress, the bond has no downside.
What do you need a car for? If it's just to go shopping, consider paying for delivery services instead of being the delivery service. If it's to get to a day job, compare car ownership to mass transit or bike committing. All of these cases can be estimated fairly easily (IRS allows deducting ~$0.50/mile, which is a good first estimate for total cost of ownership per mile).
Unless a car is a certain model, it's a liability instead of an asset, so it should be treated like any other expense. If you only use the car for local trips and commuting and taking the bus/biking is doable (perhaps less convenient), then buying a cheap car, keeping a few weeks of food on hand, and taking the bus to work whenever the car breaks down is likely way cheaper than buying a newer, more reliable car.
I used to have two cars (married with kids, so one car for each parent), and then decided to start biking to work to improve my health. I noticed that I can bike most days, and the insurance alone was enough to convince me to deal with the occasional inconveniences (e.g. when it snows, I bike to the bus stop).
The problem is that most people don't actually do the math and just assume that owning a car is better, when it's not most of the time.
With the assumption that you are going to eventually pay that $3 back into your vehicle, by paying for repairs or buying a new one, you basically just "borrowed" money from your vehicle.