Many years ago, I saw a 60 Minutes interview floating around the internet with Jeff Bezos.

Interviewer: “Amazon just reached a valuation of $30 billion. That means you’re worth around $9 billion dollars today.”

Bezos nods.

Interviewer: “I only say that because I have a follow-up question.”

Bezos: “Okay.”

Interviewer: “What’s with the Honda?”

Bezos: (laughs) “This is a perfectly good car!

He’s right.

A Honda Accord is a great car.

Why would you need more than that?

When it comes to cars, this is common behaviour among people who understand money.

When I worked as a Chartered Accountant, I used to help my boss carry files to her car on Fridays (she used to take a lot of work home for the weekend).

My boss, conservatively, probably made around half a mil a year.

She drove a small Peugeot hatchback.

Then one Friday, I took some stuff to her car, and noticed a different car in her parking spot.

I clicked the button on the key and it unlocked.

Okay, new car. Nothing weird about that. Except for the fact that she had bought exactly the same car.

Well – maybe it was the next model up, I don’t know much about cars so I have no idea. But it was another Peugeot hatchback, definitely not brand new, and looked exactly the same.

Something like this:

Why is a partner at an accounting firm making half a milly per year driving a $7,000 car?

Why do wealthy people not buy expensive cars in general?

The answer is simple – cars lose money.

Nobody understands this better than an accountant.

Why?

Because it’s our job to work out exactly how much your car loses.

Let’s say you buy a brand new $60,000 car.

The moment you drive it off the lot, it loses 30% instantly.

In less than ten seconds you’ve literally lost $18,000.

In the words of Borat, what a great investment … not!

From then on, your car declines in value around 20% per year, all the way down to maybe $5,000, or even to zero if you drive it long enough.

It’s possibly one of the worst financial decisions people make.

Not only does it have a 99.9% chance of losing almost all its value, it also costs you a massive amount of money over its lifetime.

• Petrol
• Parking
• WOF
• Rego
• Service
• Repairs
• Insurance
• Cleaning
• Tickets

The catch is, the more expensive car you buy, the more expensive it is to service and repair, the more gas it uses, and the harder it is to resell down the line.

In short – the better the car you buy, the more money you lose.

I’m an investor. There are few things I dislike more than losing money.

So spending a lot on something where I’m guaranteed to lose practically all of my money?

That repulses me.

It’s no surprise that I have zero interest in cars, and certainly take no joy in buying them.

Now, of course, being carless is not practical in New Zealand – I’ve travelled to 60+ countries, and New Zealand has possibly the worst public transport system I’ve seen in the entire developed world.

Therefore if you want to have any semblance of a normal and efficient life (go to work, go to gym, pick up kids from school, go to grocery store, etc), a car is an understandable necessity.

However, it doesn’t need to be an expensive one.

My favourite cars are both Hondas and Toyotas, because they are known to have the best resale values. In other words, they lose the least money.

They are also known to be the most reliable cars with the best longevity (probably why they have the best resale value).

In fact, I’ve had one petrolhead friend who told me that if you drive a Honda Civic or Toyota Corolla, if you look after it properly, always get it serviced on time, don’t drive it on shitty roads, and don’t drive it for five hours every day, it should literally last you thirty to forty years.

So if I buy my first car at 20 and drive until 80, I’ll only ever need to buy two cars my entire life?

What a dream.

So what car do I drive?

You guessed it – a 2008 Honda Civic.

What Car Should I Buy?

It’s a simple answer.

Buy the cheapest, safest car that will get you from A to B, and use the least petrol while doing it.

That generally means a small car with a small engine made by a good manufacturer.

Remember, Jeff Bezos with a $9 billion net worth was driving a 1996 Honda Accord.

If you’re worth less than $9 billion, you have zero reason to be driving anything more expensive than that.

If you’re car shopping today, I would simply be looking for a low-end Honda or Toyota without a stupid amount of miles on it.

This is a perfect candidate.

Personally, I would go for something cheaper, because again – why spend any more than you need on something guaranteed to go down in value?

But anything more than $8,000 you should consider yourself living large.

If that’s what makes you happy, then do it! Live large. Nobody’s stopping you, certainly not me.

But let’s see what that really costs you (hint: it’s a lot more than you think).

Say we have a driving life of 60 years, so we need to buy 3 cars over our lifetime.

We have two options:

• Buy a brand new $30,000 car.
• Buy a second-hand $8,000 car and invest the difference.

A few generous assumptions:

• The brand new car we can trade in for $5k after 20 years, so the second and third brand new cars technically only cost us $25,000.
• The second-hand car is worth nothing at the end of 20 years.
• Running costs are the same.

On car one, we’ll be saving $22,000 (buying the $8,000 car instead of the $30k car), which we get to invest over 60 years.

On car two, we’ll be saving $17,000 (buying the $8k car instead of the $30k car less a trade in) which we get to invest over 40 years.

On car three, we’ll be saving $17,000 which we get to invest over 20 years.

Assuming we invest all those savings in either the S&P500 or NZX50 (both have returned around 10% per year over the long fun), here’s how much we would have.

Using our compound interest calculator, we get the following:

Car 1: Investing $22,000 over 60 years.

Car 2: Investing $17,000 over 40 years

Car 3: Investing $17,000 over 20 years

In total, you will have the following after 60 years:

• Investing the savings from your first car: $6.7 million
• Investing the savings from your second car: $770k
• Investing the savings from your third car: $114k

You will be around $7.5 million better off over your lifetime, just from buying second-hand cars instead of brand new and investing the difference.

That’s not a typo.

Over 7 million bucks.

Just from buying a different car.

That probably sounds ridiculous to many of you.

That’s not possible.

Yes, it is.

It’s exactly how compounding works.

Over time, money grows, and it grows exponentially.

But it only can grow if you save it and invest it.

Once you spend it, it’s gone.

The problem is – nobody knows this, because they didn’t teach us this in school.

But now you know.

The information is yours to embrace or not.

Would you like to drive a brand-new Rav4 and enjoy the new-car smell and the fancy dashboard?

Or drive a second-hand Honda Fit and have an extra $7 million to leave to your grandchildren?

Neither choice is right or wrong.

But, at least now you know you have that choice.

That’s the most beautiful thing about it.

With the right knowledge, your financial future is completely in your hands.

Wishing you success!

B