Last week I had to pay a $900 bill to repair my 99 Chrysler with almost 300,000 km on it. Ouch is right – but once the shock wore off and I wrote the cheque, I was actually quite happy about it. Let me explain:
I paid $10,000 cash for my car and have driven it for seven years now. Since then, normal maintenance aside, I’ve spent $2,500 on repairs and the car’s worth $3,000 right now. So with a $10,000 price, plus the $2,500 repairs, minus today’s $3,000 value, the car has cost me $9,500, or $113 a month.
One of my friends is in the car business. She gets dead cost, or less, for her vehicles and has leased around the same $450 a month payment, forever. When I bought mine, she had a three-year lease, then a second one, and is now on a third vehicle on a four-year lease. Seven years at $450 a month means she’s spent $38,000 as of today. Her lease balance on this one is way higher than the value, and when the lease is over she has nothing but the need for a cab ride home.
Compared to her $38,000 versus my $9,500 spent, I’m $28,000 ahead of her. Yes, she drives a cooler car, no doubt, but I’d rather have the $28,000 in savings.
Another friend takes some of what I’ve been teaching and won’t lease. He bought a new car about six years ago and just traded it for another new one. The first one was $25,000, taxes aside, and he sold it for $8,000. The new one was $27,000, and it’s depreciated at least 20 percent when his butt hit the seat. In about the same time-frame, he spent $17,000 on the first one, and the 20 percent depreciation on the new one of $5,400. So his two cars have cost him over $22,000, or $305 a month for the last six years.
Neither one of these friends is very rich, and neither one of them thinks they waste money needlessly. But I’m $13,000 ahead of one and $28,000 ahead of the other. Yes, they have cooler wheels but I’d rather have the money.
And you know what: Nobody in the world really cares what you drive. If cars are a status symbol, instead of reliable basic transportation, it’s gonna cost you a lot of money. After all, there isn’t a car around that’s worth more tomorrow than it is today, so why keep throwing tens of thousands of dollars of payments and interest onto something that you’ll never ever recover?
Oh, and two more things: The GM and Chrysler merger appears to be off the rails this week. I don’t see how two on-the-edge companies in big financial trouble will make one strong company anyway, but get ready for massive layoffs – merger or not. It doesn’t take a finance degree to see that GM can’t keep losing over $1 billion a month.
The holdup right now is U.S. government approval and support. (Make that, more bailout money in addition to the $25 billion the auto industry received from Congress.) There’s also the issue of the $7 billion loans Cerberus has for buying Chrysler from Daimler last year. You see, the banks, including JP Morgan, Goldman Sachs, Citigroup and Morgan Stanley have been selling off large pieces of their loans to raise cash. But it’s next to impossible to get all these pieces back together as now there’s dozens and dozens of lenders who have a piece of this. It’ll make it likely Cerberus will have to pay off this total and start with new loans that are easier to trace – but now much harder to obtain….stay tuned!
And with GM only having enough cash for this quarter, you can bet there’ll be another wave of bailout money. Will it solve much of anything? No, sorry. A bailout changes nothing structurally. It only helps the companies to tread water a while longer. It’s kind of like making your minimum payments for a while. When the money runs out, nothing has really changed.