I had a friend in college whose parents rented a luxury two bedroom apartment by the beach for over $4,000 a month, they had pools, movie theaters, weekly whisky and wine tastings, a gym, concierge, etc. However, they only stayed there two to three weeks out of the year as they spent 80% of their time traveling around the globe or staying at one of their three homes. We were allowed to come over and use the apartment whenever we liked. My friend and I tried to convince them that they were wasting their money on such high rent and that they should purchase a mansion by the beach, and of course, they should let us live there in the extra rooms. In return we would take care of the property, keeping it in tip-top shape, because you know we’re great like that. Eventually, his parents became annoyed at our pestering and sat us down to explain that they didn’t pay a dime for the luxury apartment and that they were not interested in owning another piece of property. “What do you mean you don’t pay for this place!” we said, “The rent is over $4k and you’re telling us you don’t pay a dime!”
They went on to explain how they had set aside a large sum of money that in return produced enough passive income each month to pay for the rent of this apartment and a large sum of their travel expenses. If they spent this money to purchase another house their passive income would dry up and they would have to go back to work in order to pay for their lifestyle. This became a major lesson in my life, that the value of money strategically invested trumps all other wealth management strategies like saving and cost cutting.
I took this life lesson with me, and recently replicated the strategy on a smaller scale to purchase a vehicle. I will never pay for a vehicle out of pocket for the rest of my life and I think this strategy is easily achievable for anyone who has patience, is disciplined enough to develop an action plan, and willing to save and investing their money. Here is how I accomplished this:
If you have read the Financial Samurai’s blog you have most likely read Sam’s one-tenth rule for car buying, if not I strongly suggest checking it out. Sam’s rule is to “spend no more than 1/10th your gross annual income on the purchase price of a car.” I’ve always held a similar rule, that my monthly payment should not be more than one-tenth of my take-home pay, and I should be able to pay the car off in less than 4 years. I am a strong believer in only purchasing used cars because the average value of a new car depreciates by 20% to 30% within the first two years regardless of mileage. Edmunds has a very educational infographic that explains the average depreciation of a new vehicle, but I digress, you are here to learn how it is possible to gain a free car for the rest of your life.
My previous car was a 2006 Toyota Prius that I purchased in 2010 with 60,000 miles and drove to 267,000 miles. I had purchased the car for $13,000, paid off the loan in 2013, and I had not experienced any issues with the car until the AC went out last year, but since it was the end of the summer I decided to milk it through the winter before searching for a new car. This summer was not that hot, and I decided to push my luck for as long as I could tolerate the heat before purchasing a new car. Unfortunately right before the summer ended the battery began to fail, and so I decided it was time to purchase another car.
Save and Invest:
In 2014 I realized I would eventually have to purchase another car when my current vehicle reached 250k to 300k miles. I knew this was a reasonable goal for the mileage of the Prius because there is an entire forum thread of drivers who have driven over 299K miles without any major problems. Once I realized that a major purchase was on the horizon, I began putting aside $300 a month to get myself use to making car payments again. Rather than put the money into a savings account, I placed the money into my LendingClub account and began investing the money each month into Peer2Peer loans. In addition to this, I purposely hide money from myself through my W-4 employee withholding allowance in favor of a significantly large tax return. Part of the money received from these tax returns in 2015 & 2016 were then placed into my LendingClub account as well. Over the 30 months from inception of this savings plan I have totaled $25,936.76 in capital in LendingClub. This money now generates about $205.11 a month a passive income at an average 9.49% net annualized return, which will go towards the monthly payment of my recently purchased vehicle.
I began researching vehicles three months before my purchase, and I was very tempted by the new Jeep Grand Cherokee Limited SUV’s! However now matter how many times I ran the numbers on the total cost of ownership, I couldn’t justify the purchasing this vehicle. I decided to step back, review the basics and determine what were my true needs in a vehicle. As an avid surfer and outdoors junky my biggest needs are security, cargo, and low maintenance. I checked out several different hatchbacks, wagons, crossovers, and mid-sized SUVs in person to get a feel of what vehicles I would be content driving, then I began researching the prices for both new and used inventory. I found my best resource comparing car prices was TrueCar.com a free online service that helps new and used car buyers connect with a network of over 11,000 Certified Dealers across the U.S. True Car put me in touch with Enterprise Car Sales the used car dealership of Enterprise Rent-a-car. At first I was hesitant about purchasing a used rental car, but after meeting with their staff I learned that they inspect all of their cars and only keep the top 2% of their cars for sale, the top 10% go to used car dealerships like CarMax, and the remaining 90% are sent to auction.
In October I was able to trade in my existing Prius for $3500 and purchased a late model 2014 Prius with 38,000 miles for $14,500. The car is less than 18 months old but is considered 2 years old by valuation standards. I took out a 60 month loan for the remaining $11,000 and because of my immaculate 828 credit score I negotiated a 3.08% interest rate which put my monthly payments at $198.05.
My investments are bringing in $205.11 a month in perpetuity and the cost of the car is $198.05 a month for a fixed period of time. I hold on to all of my money which will continue to make me more money long after I sell this car. If I had paid cash for the car, I would have spent $14,500 on a depreciating asset and have to eventually start saving money again for my next car in 6 to 10 years. Rather, I plan to continue investing additional funds into LendingClub or RealtyShares so that my gas, maintenance, and car insurance will eventually be covered as well, at which point I will no longer have any out of pocket vehicle related expenses. Or maybe I’ll get greedy and use that money for free vacations to Bali where $500 can last a month!
Update: 2 months later, I am now seeing 2015 models with similar mileage going for the same price on TrueCar.com