And an experiment that leads to class consciousness.
I sold my car in March 2021 and have (mostly) never looked back as part of a one-car couple, but my husband and I have been dabbling with the idea of getting a new car this year. Unfortunately, 2022 is…not a great time to buy a vehicle, as anyone who’s perused the used car market knows.
It inspired this episode in which we break down the lease vs. buy decision in today’s car market with guest Jorge Diaz, author of Car Leasing Done Right (https://www.leasecosts.ca/en/book).
As part of the episode, I wanted to do an IRL lease vs. buy comparison with a luxury car—so I reached out to a Porsche dealership to pull numbers on a 2023 Macan. What I wasn’t expecting as part of my number-crunching journey: being immediately plunged into an inferior sense of class consciousness as a result of the interaction. That’s…a fun bonus in the episode. 😂
Mentioned in the Episode
- Car market prices up 24% in 2021 (via The Washington Post): https://www.washingtonpost.com/us-policy/2021/10/28/used-car-prices-chip-shortage/
- Rule of thumb for paying for a car: https://www.nerdwallet.com/article/loans/auto-loans/much-spend-car
- “Why Leasing a Car is Like Setting Money on Fire”: https://moneywithkatie.com/blog/why-leasing-a-car-is-like-setting-money-on-fire
- Study: Driving fewer than 10K/year: https://www.rockethq.com/learn/personal-finances/how-expensive-is-uber
- Pregnancy Discrimination Act: https://www.eeoc.gov/pregnancy-discrimination
- Listen to Money with Katie here: https://www.podpage.com/money-with-katie-show/
- Read Money with Katie: https://moneywithkatie.com/
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Katie: Welcome back, #RichGirls and Boys, to The Money with Katie Show. I'm your host, Katie Gatti Tassin. And today we are going to talk about likely one of the largest purchases you will make in your lifetime: your vehicle. In 2021, I sold my used 2017 Audi A3 for almost the same price that I paid for it when I bought it a year earlier, despite having roughly $4,000 worth of body damage after cutting the turn into the garage a little too closely a week into the panorama. The sale price illustrates the bizarre nature of the used car market mid- and post-pandemic. Not that the pandemic is over, but the height of it is hopefully behind us now. So why are things so jacked up? Well, for one thing, there's a chip shortage and cars are loaded with microchips. So there are fewer new cars on the market. This means that the market for used cars is hot, and in 2021 prices were up 24% according to the Labor Department via The Washington Post. It seems like a continuation of this broader theme, the pandemic and its second- and third-order effects turning things on their heads and making us question what has been previously unquestioned fact: In other words, used cars are always cheaper, better and more prudent.
When I first got into financial independence, the advice around buying a car, if you wanted to build wealth quickly, was pretty straightforward. Buy a used, inexpensive sedan from a brand like Honda or Toyota in cash. Aim to spend no more than five to seven grand and resume your life in the 1999 Honda Accord, and pretend that you're not jealous of Candace and her new Range Rover, which she insists on parking next to you at work. It made sense, right? A car is a depreciating asset and pretty much a money pit on wheels, definitions that we will explore momentarily in more detail. So it's not wise to establish an ongoing outflow of cash around one. You will know in your heart of hearts that you are building stealth wealth while Candace makes her $800 monthly payments on her new Evoque, or at least that is how the thinking goes, mostly fueled by the reality that you could get a used Accord for $5,000 in 2018 when I was listening to these podcasts. Not only that, but that used Accord would likely outlive you, your children, your grandchildren, with little more than an oil change or two, while Candace shuffles back and forth between home and the Jaguar Land Rover Porsche dealership for yet another faulty transmission issue.
That has changed a little. Take this excerpt from The Washington Post about a used car auction last year. As a new car, the Honda Civic would have a sticker price of around $21,000, but within seconds at a wholesale auction, a two-year-old model with 4,000 miles sold for $27,200. Soon after, a Nissan Rogue fetched what it would have cost new in 2018, a three-year-old Toyota Camry with large dents and scratches on its hood sold for $14,200, nearly twice what it would've brought in just a few years ago, and a 2015 Kia Sorento sold for $12,600, a staggering amount for a six-year-old car with 83,000 miles.
Listen, I can get on board with buying an unsexy practical used car in cash when it's gonna set me back a small four-figure sum, but if I'm spending $12,000 or $27,000 to own a seven-year-old Kia, probably gonna say “Fuck it” and spend a little more to get the new car I actually want, right? So how does the reality of what we are experiencing now change the calculus both financially and psychologically?
If you're in the market for a car and you can't wait for things to cool down, I think first it makes sense to talk about the American obsession with cars. I would argue that most of us are driving around in cars that we can't actually afford. And by that I mean, there are best practices and guidelines that help us understand how to best utilize our income. The rule of thumb for your cost of housing, originating from the National Housing Act of 1937, is that your housing costs shouldn't exceed 30% of your take-home pay. In other words, if more than one third of your income goes to the roof over your head, you are typically going to feel squeezed. Lowering your structural expenses and/or increasing your income is the biggest part of getting un-squeezed. No amount of cutting back on lattes can compensate for high structural expenses.
So what's the deal with the car? The rule of thumb that I believe in, from NerdWallet, Balance, Investopedia, and more says that your car payment plus car insurance payment shouldn't exceed more than 10% of your take-home pay. Again, this is a more conservative figure, but it's conservative in the sense that I'm suggesting you get a regular Coke in a world where extra-supersized drinks are deemed standard. The worst thing that we can do is allow a consumerist society to define for us what makes sense in our own checking accounts, right? Unfortunately, I know most people are probably doing the quick back-of-the-napkin math with their own situation and probably reacting like the white guy blinking meme.
I'm not telling you to sell your car, but I might be telling you to sell your car. More on that later. But I do get that most of you probably need a car, if for nothing else than to make that open mic night every other Friday at Cafe Joe's on the corner of Seventh and Main.
MC: Please welcome to the stage Brooklyn's very own Nick Torres.
Nick Torres: Thank you. The sound of fire. More money to retire. Early independence, fire movement. Does it burn? Pare down today. Increase your returns.
Audience: That's so good.
Nick Torres: Stocks going up and stocks going down. Stay the course 'round and 'round. What is that sound? The sound of silence. The sound of finance, nothing by chance, alas, risk averse, no need to rehearse. High net worth!
Nick Torres: Want one more score? Keep your ear to the floor. High interest savings. Nay, I say, compounding disinterest. Thank you.
Katie: Today's episode of The Money with Katie Show is sponsored by Sakara. I feel my best when I'm eating quality, tasty, and healthy food, but that's not always easy to balance during the workweek, which is why I like Sakara. Sakara's mission is to transform lives through the power of plant-rich nutrition, giving you the tools to be in the driver's seat of your own health. Their high-quality meals and wellness essentials are delivered ready to eat right to your door, and designed to boost your energy and metabolism (yes, please), support gut health and more. And right now Sakara is offering our listeners 20% off their first order when they go to sakara.com/money, or enter code “money” at checkout. That’s sakara.com/money to get 20% off your first order. Sakara.com/money.
Okay, what were we talking about again? Ah, yes. Coffee, I mean cars. So my previous car, with an MSRP of $35,800 that I purchased three years old for $19,500, cost $316 per month. And my car insurance was 111 bucks. I spent $427 per month for the sheer privilege to move around the same square five mile radius. That is almost $15 per day. Luckily my interest rate was objectively low, like 2.9% compared to the current super prime rate of 3.61% or just the prime rate of 5.38%. And my total car expenses accounted for about 10% of my take-home pay, but still it felt ridiculous. And that was February 2020. So things are a little different now. I would've never entertained the idea of leasing a car as financially prudent. In fact, I have a whole blog post about it that I'll link in the show notes, but I think it's worth the discussion given the current state of the used car market.
So let's talk about the few pros of leasing. For those who are not as familiar with the lease versus buy decision, let's revisit some of the fundamentals. I have compared leasing a car to setting money on fire in the past. And I promise that I'm not just walking that back because I'm suddenly interested in acquiring a Porsche Macan, though I realize it is kind of fishy timing that I abandoned my ultra frugal ways and then suddenly was like, but wait, maybe it is permissible to lease an expensive luxury vehicle, right? Maybe? But no. Let's chat really quickly through the commonly espoused pros of leasing, because it is admittedly a short list.
Number one: Not always, but in a lot of instances, leasing a car means the dealership will cover the maintenance costs for the duration of the lease. So usually leases are three years long, and there's an agreed-upon annual mileage that you're paying for. It's usually like 10,000 to 12,000 miles. This is a crucial piece of what we'll get into momentarily. So put that in your back pocket. Particularly with luxury vehicles, and typically the brands for which maintenance costs are the most likely to resemble getting a root canal without anesthesia, the maintenance costs are gonna be covered by the lease agreement.
Number two, if you are a car person and you have the disposable income to spend, leasing a new car can be a good way to always guarantee you've got the latest and greatest without the hassle of having to sell and buy cars every 36 months. Obviously this can have the financial ramifications that aren't great, but if you are wealthy and you prioritize having a nice car, it is probably the least annoying way to achieve that. Hashtag #goals. Lastly, the monthly payments are usually…no, not always, but usually lower than if you are financing a new or even used vehicle. Since the dealership probably wants you to lease a car, they will typically incentivize you with offers like no money down, super low rates, and low-ish monthly payments.
This is the paradox of leasing. It is simultaneously the most and least expensive way to pay for transportation. Most expensive in the sense that you never own the car outright, so you always have a payment. And least expensive in the sense that your monthly payments and costs of maintenance will be lower than if you buy. You're also likely to get to drive the car during the least annoying part of its life, which is, surprise, when it's brand new. Driving a used car, especially a used luxury European vehicle, means you gotta be ready to fork over some serious cash in maintenance costs. For example, we will extend my Porsche commentary. A family member had a 2008 Porsche Cayenne. That's the big SUV, and for my Kardashian fans, it's the car that Kourtney cried about getting in Miami when she had Mason, because it was too much of a “mom car” (hashtag #neverforget), that I borrowed for our cross-country move. And shortly after, it ended up breaking down on the side of the highway, and in a frantic effort to find the user manual and also call my dad, I also found years worth of maintenance paperwork. So I flipped through it. And I noticed that the average maintenance costs after around 2014—so when it hit the six-year mark, give or take (ironically, this is usually when most people have outright paid for their car) were around $2,000 a year minimum, on random things that were breaking.
I have never had a vehicle break down on me before. So I know some people like leasing because it means they don't have to deal with that kind of stuff. And if you like paying for convenience, it might be for you. Or you could just buy a used Honda or Toyota because you will likely have very few issues. So that mostly sums up the arguments for leasing over buying.
But what about the primary arguments against it? I would say the loudest argument against leasing is that before 2021 and 2022, cars were depreciating assets; their values did not go up year over year with more wear and tear. But now…well thank you, chip shortage. So “depreciating asset” is code for “expensive thing that eventually becomes worthless over time.” Cars are about as depreciating asset-y as it gets. You've probably heard the phrase “a car starts losing value the moment you drive it off the lot,” but I want to pull in some example evidence of this to make it real with regards to leasing. So when I bought the Audi in 2020, I paid $19,500 for it. And the MSRP new was $36k. The car was only three years old and its previous owner was a woman who leased the vehicle brand new. That means she made payments on a car that was valued at $36,000, and just three years later, it was worth less than $20,000. So in the first three years, it had lost almost half of its retail value. If she put a thousand dollars down for a lease on a $36,000 car and got an interest rate that was very low of 2% (we’ll, you know, give her the benefit of the doubt), that means her monthly lease payment was likely around $430 for three years. The person who leased my car before I bought it probably spent a thousand dollars down, $430 a month for three years: Call it, I don't know, 17 grand total, to basically rent a car that I purchased for indefinite use just three years later for about $2,000 more than that. So the way the dealership calculates the lease payments is by assessing the value of the car and subtracting the residual value. In other words, what they think they can sell it for three years later, and then dividing that depreciation by 36 months or the length of the lease.
So they probably said, all right, this car is worth $36 grand. We're gonna be able to get $20,000 for it in three years from now. So whoever leases it needs to pay for the $16,000 difference, plus interest. This is the key: That depreciation curve is steepest in the first few years. And when you lease a car, you are paying for the steepest depreciation hit, and then you're giving it back, and around year 10, the value of the car starts to bottom out a little bit, which is why if you're going to buy a car, buying a car that's a few years old and will last at least 10 or more is one of the best ways to mitigate the utter thrashing that you will take by buying it new or leasing it.
But this doesn't solve the problem we're facing right now, which is that used cars are irrationally expensive at this moment in history. And when you buy a car, you typically have to put a few thousand dollars down and make the monthly payments. So when you add in the cost of insurance, the gas, the maintenance, this can become a huge expense. The reason that I sold my car? We were moving to a smaller town that was bikeable (shout out, Fort Collins, beautiful beer-filled paradise). And when I did my end-of-year spending analysis for 2020, I realized that in just nine months of car ownership, I had hemorrhaged a little more than $6,000 on my vehicle. And as I sat back in awe at this flashy red jellybean of a money drain, I reflected on all of the great memories with my car during the pandemic, aka driving it four times a week for a total of eight cumulative miles. It was not hard to come to the conclusion that I was not getting $6,000 worth of value from this car. So I decided to sell it.
And that brings me to the totally unorthodox section of this episode, which is, maybe you don't need a car. And I know many of you are probably like, no, I definitely need one. But hear me out. With the shift to work from home and the increased flexibility for people with work from home jobs, you might not need your car for a daily commute anymore. That was the biggest shift in my life. I became a fully remote employee and we became a one-car family. Here's where I do get the marriage benefit. My husband does commute to work five days a week to an office that's 50 miles away. So he has a car and I use it on the weekends or after work. And I structure most of my appointments and errands accordingly. I won't lie. There are certainly times where it's a little bit annoying to only have one car, but I personally cannot justify the cost of paying for two cars right now. When I can mostly get around town when needed with my bike or Uber, we probably spend $30 to, you know, on the high side, 50 bucks a month on Ubers, which is substantially less than the $467 I was spending on my car payment, car insurance and gas before. So if you're trying to free up room in your budget and you work from home, you may not need your own vehicle. Especially if someone else you live with has access to a car.
This is the closest thing to blasphemy we have in the US, a country where we are reliant as hell on the personal automobile, thanks to a shameless lack of investment in public transportation. But I would just say, consider it. If you're only driving a couple days a week for a couple miles, you actually may save a ton of money by just selling your car or not buying a new one, and just Ubering. There are studies that have shown that if you drive fewer than 10,000 miles per year, and you live in a densely populated area, rideshare services are net cheaper than owning your own vehicle. So we'll link that in the show notes, but regardless of how you travel, you should still be able to make that open mic night every other Friday at Cafe Joe's on the corner of Seventh and Main.
MC: Okay. Up next we have Fort Collins’s very own Katie Gatti Tassin.
Katie: Thank you. I wrote this haiku yesterday during my podcast recording. The FedEx man brings a brown package from afar. Bean Dog barks again. Thank you.
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Today's Money with Katie episode is brought to you by Caribou. You've surely noticed that the cost of literally everything is on the up and up. I have been constantly tinkering with our budget to account for extra spending on everything from our gas to food, while still hitting our savings goals. It kind of feels like it's getting impossible to keep living your life according to our old budgets, and big items in your budget are often a good place to start. Enter Caribou. You can refinance your car through Caribou, especially if you got a high interest rate from dealership financing. Caribou helps you take control of your car payments. The application is super easy, and you can even pre-qualify for loan offers without impacting your credit score or entering a social security number. Caribou customers save, on average, a hundred dollars a month on their car loan when they refinance through Caribou. See how much you can save by checking your rate at caribou.com/MoneywithKatie. That's caribou.com/MoneywithKatie. Terms apply. Visit caribou.com/MoneywithKatie for details.
Welcome back again. Hope to see you at Cafe Joe’s sometime. So back to it: cars. To reiterate, there are studies that have shown that if you drive fewer than 10,000 miles per year, you live in a dense area, rideshare services are net cheaper than owning your own vehicle. But if you are pretty convinced you need one, though, this is where our discussion is gonna take a bit of an interesting turn. Originally, I wanted to do an example where leasing made more sense than buying myself. Now I'm gonna let our guest, Jorge Diaz, do that, but because I am all about manifestation, I was like, all right, let me use a drum roll, please. White Porsche Macan, a car that still feels so far beyond my level of comprehension that it's probably insulting to Porsche owners everywhere, but it is my dream car, okay, so please suspend your judgment. To begin gathering data for my example, purely in the name of science—I am dedicated to all of you—I reached out to a local Porsche dealership and I inquired as to the cost of a 2023 white Porsche Macan with the basic trim, aka the cheapest one. And the exchange became interesting for a reason other than what I had originally anticipated. So let me set the stage. With a thousand dollars down, I was told that my monthly payment for 36 months would be $1,061. The price of the car new is $59,000, and the residual value of the vehicle three years from now was placed at $36,000. That means in the three years between, I would need to pay the cost of the depreciation, about 23 grand, plus interest. But $1,061 seemed high to me. When I calculated my own estimate, I arrived at $700 per month, not a thousand. So I asked the man I was talking to how he was arriving at that figure. Allow me to read you his reply. “First off, there is a lease acquisition fee of $1,095. Your monthly taxes work out to $75 per month. Lastly, there is the money factor, which would be equivalent to 7.44%. That rate assumes tier one credit.” Okay. More like mostly okay until right now, but get ready for this. “Porsche is an aspirational brand and the intention is to keep it exclusive. No one buys a Porsche because it's a good deal. You really have to want it and be willing to pay what it costs.” Uh, okay, sir. So my original plan when I set out on this journey to pull numbers was to conduct a simple compare and contrast analysis of leasing versus buying a luxury car for the sake of the episode. And instead, this interaction plunged me into an unfair sense of inferior class consciousness.
I grew up in rural Kentucky. I did not grow up around Porsches. In fact, I had only ever seen one in real life before I grew up and left home. And it was my friend's dad's car. One of our primary pastimes in those days was riding around in it, a Porsche 911 Turbo, a car whose name I recounted with so much pride and gusto, you would've thought I purchased it myself. And the first time I saw it, we took pictures in it. We took turns, perching our Abercrombie-clad bodies on the headrests of the backseat and turning theatrically toward the camera, arms outstretched faces, arranged in self-important grins, and we snapped pictures of each other. Simply having a Porsche was a photo-worthy event, and it was the most expensive car I had ever touched with my own hands. So while I now somehow find myself in an income bracket capable of purchasing a car like that—one of the cheaper models to be sure, I'm definitely not looking at a 911 Turbo—I was reminded by this message that I still very much feel like an outsider in the luxury anything world, a girl from rural Kentucky trying to hold her own in an email exchange with a guy named Phil, who assumed wrongly that I could not afford the car that I was inquiring about. I was surprised by how much his condescension bothered me.
And I was wavering somewhere between diluted motivation to just spite purchase a Macan in cash just to singularly prove this guy wrong, and a deflated sense of inferiority that no, I don't belong in this world that I was hypothetically considering purchasing entry to. And you know what? Maybe I don't even wanna be a part of it if this is how people behave here.
And I include this experience because these are the deeper undertones of the decisions that we make with our money. Sure, it's a financial decision, but it's also an emotional one. What does the car I drive say about me? Why do I feel so out of place in this car dealership as a woman by myself, and why does it feel like these old men working here assume that I don't have any purchasing power? Are my coworkers or my clients going to think less of me if I pick them up in an old falling-apart junker? Interacting with a car dealership in any capacity in some ways feels like going back to 1974, when you were a woman who needed a man's signature to open a credit card. It can feel strangely embarrassing to be forthright or firm about your budget. Like it's somehow an admission that you aren't drawing from a bottomless pit of funds. And I almost didn't reply, but then I decided to double down and reaffirm for this person that no, actually I can afford this car, but just because I can afford it doesn't mean I wanna overpay for it.
So now that I have sufficiently bared my soul and expressed my own rage at how fraught my experiment has become, let's switch gears and let's chat with my guest, Jorge Diaz, the author of Car Leasing Done Right, a book that consolidated 15 years of research into a very persuasive point of view that we will link in the show notes. So Jorge, welcome to The Money with Katie Show. Thank you so much for being here.
Jorge Diaz: Thank you so much for having me. It's my pleasure to be here too.
Katie: Absolutely. So the idea that leasing a car is ever under any circumstances a good idea was something that I had written off a long time ago, but I was listening to The Rational Reminder Podcast a few months back, and they mentioned you and your book. And they offhandedly noted that you had included some pretty compelling math around when leasing might be the cheapest way to procure a vehicle. Can you give us an overview of what your general thesis is in favor of leasing?
Jorge Diaz: Sure. So I'm not a lease defender. So basically I'm more an advocate of doing it properly from both a financial and consumption point of view. So my thesis realized that if you do the lease correctly, it just competes pretty tight with other kinds of vehicle consumption models, such as financing new and used. So basically it provides a convenient, expected, and a low-cost solution for solving your transportation needs from a cashflow point of view. So I like to compare it with two models. So the first one is the “buy versus rent” discussion in the real estate scenario. Some people buy the place where they live, but they have to deal with all the expenses related to ownership. So they have to deal with property taxes, maintenance costs, depreciation—and I'm referring to the structure, not to the land itself. So actually the structure depreciates, and they're okay with that. So you're basically acquiring assets and assuming all the risk it takes. And then on the other hand, there's some other people who like to optimize for convenience and cash flow. So you don't want to own that kind of asset; you want, you prefer to rent, maybe because of a location preference. So you don't have to deal with maintenance repairs or any unexpected situations, even insurance. So you have no other liability than just to continue paying while the asset owner assumes all the risks. This is kind of the closest to the car leasing way. So you don't own the assets, just solve your transportation needs.
Katie: Would you say there is a right time to lease rather than buy your vehicle? Any sort of qualifications or attributes that might make somebody a better candidate for leasing?
Jorge Diaz: So when I said consumption before, I meant mileage, the main aspect of the appreciation is mileage, there's also age and many other components, but I'll break it down in a spectrum. Let's say we have people who doesn't drive too much, people who drive a lot. So I'll start with the top edge of the spectrum. We can call it up as the business vehicle. Let's say your vehicle is an important piece of your income source. Maybe you're doing taxi or doing Uber, Lyft. Basically, your only option is to finance. Why? So first you're gonna be making a lot of miles. So leasing is not gonna work for you. Usually leases are limited to a specific set of miles. I met some full-time Uber drivers that could easily make 80,000 kilometers a year, which would be about 50,000 miles per year. So basically they depreciate the asset pretty fast at the speed that actually the manufacturer's engineers cannot accurately estimate. Second, there's a lot of regular maintenance to maintain both the reliability of the assets and the value of the vehicle itself. You need to be repairing it constantly. Just for context, if you drive for Uber and you get a brand-new car, after eight and a half months of driving 50,000 miles per year, your warranty expires. So basically if you buy the car in January, by mid-September, that's it, you're on your own. That's the only option you have. You have to finance the vehicle.
Now I'm gonna go to the other edge of the spectrum. I like to call it the family vehicle. Let's say you work from home. You have a short commute. It's just a few miles from your home. You travel less than 10,000 miles per year. So you do some family trips in the summer. So in this case, the vehicle won't depreciate as much as a business one; the maintenance horizon extends. So you're not expected to do a lot of maintenance soon. It's kind of a mix. I'll say, if you drive a lot, you need to finance. If you don't, you can evaluate either of the two options. So what actually leads to the decision between financing and leasing? So this is kind of a general rule of thumb that I've seen over the years. Basically it comes to the monthly cost. So for the same amount of money that you can lease two cars for three years, you can finance one for six years.
Katie: Yeah, that totally makes sense. So are there any examples or math that you can walk us through? I have a hard time really wrapping my brain around the idea that leasing could be financially prudent, but you know what they say: Unique times call for unique analyses.
Jorge Diaz: I just took a look at some US manufacturer websites a few days ago. So this is all July 2022 prices. So for example, 2022 Honda CRV, which starts at $26,800, which is the top selling Honda in the US. If you wanna lease it for 36 months, it's gonna cost you $391 a month. So it's close to $400. Then if you wanna finance the same vehicle for six years, which is 72 months, it's gonna cost you $464. So it's kind of close, but yeah, understand the terms. So in the first option you lease it for three years, then you lease a second car. And the second alternative, if you go to financing, you can buy the car in the same period of time. And then if you go high end, you can see the like Mercedes Benz E350, which is $54,000 MSRP. Also the top selling Mercedes in the US. The lease for the 36 months is $1,042 and the financing for 72 months, it's $1,014. This is kind of a general rule of thumb when it comes to leasing. You can go on any manufacturer website, you can open the calculators and then you can see actually what they're offering to the general public. What you have access to. Obviously there are opportunities of negotiation.
I won't go into that side, but I want to jump into another one now, which is the used car option. This used car obviously is gonna be without warranty. You're gonna have to deal with a few different unexpected things. Let's say, finance the vehicle for six years. Now I own it. I don't have to pay anymore, but now I own it. So six years, all Honda CRV LX. So if I were to buy a car like that, that's gonna be worth $9,000, and then driving it up to 12,000 miles per year is gonna cost me a yearly maintenance cost of estimated $1,980 US, plus a depreciation hit of $2,150. Remember, if you don't fix the car, it's gonna depreciate even further because it's getting older. You need to repair parts. You have to fix it. So basically if you don't do anything, it may lose 50% of its value. After that period of time where you drove it for 20,000 kilometers or 12,000 miles, and even if you do fix it, it's also gonna lose 24% of its value because you're adding 12,000 miles. And also it's a seven-year-old vehicle at the end of that term. It's hard to analyze this now because the used car market…
Katie: It's a weird time.
Jorge Diaz: It's completely upside down, but there's one thing. According to the Manheim used car index price in the US, the used car prices peaked between January and March this year. So this has been steadily going down since then. So obviously inventory issues persist, but not as bad as six months ago, like wait lines are shorter right now. And as a matter of context, so in 2021, the semiconductor sales, which is one of the main triggers of this situation, reached half a trillion dollars for the first time ever. And the global production grew year over year at 26%. This is completely unprecedented. We need more, way more semiconductors than we needed before. Modern society was completely reconfigured by the pandemic, consumption habits and many other things. So obviously what's a problem for someone is an opportunity for someone else. So history has proven itself that markets correct themselves, but vehicles don't fix themselves. They will lose value. So in the end, it is what it is.
Katie: One thing that I noticed between the Honda example and the Mercedes Benz example, I think if I heard you correctly, that the Mercedes financing cost was actually lower than the Mercedes lease cost, which was the opposite of the more, I'll call them like functional or standard brands, as opposed to the luxury brand. Is that something that you see regularly, that the luxury lease costs are actually higher than the financing costs? Or do you think that was a bit of an anomaly?
Jorge Diaz: I would say it's kind of an average point where it's kind of close. This is why the kind of rule is that it's kind of close, the three years/two compared to the six/one.
Katie: Oh, I see. Okay. And I think the thing worth calling out there is if you are in the market for a luxury vehicle, I think the difference between the maintenance that it takes to maintain a Honda and the maintenance cost to maintain a Mercedes are going to be very different. So if you're looking at, I think you said $1,800, and calculating in the depreciation as well, as like a cost, which is really fascinating—I hadn't thought about actually baking in the depreciation, but it makes sense. One thing that you had mentioned that I wanna circle back to and just make sure we're heading home is this…I'm sensing that there is this idea of the number of miles that you are driving, and you framed it as consumption, which I think is really cool that you…as you consume a car, really that means you are putting miles on; every mile is consumption.
Jorge Diaz: Now that you mentioned the math, there's another option I wanna discuss with you. I mentioned before that you have the option of leasing and financing when you are under that specific range. So let's say if you're under 16,000 miles per year, you can either finance or lease. So I'm just gonna go through an example I prepared with the same math that I did a few days ago with the July 2022 prices for the Honda. So let's say I'm gonna lease the Honda for three years, and you're gonna buy it for six years. So we're both gonna get the same vehicle. We both have the same driving routine or commute. So we're gonna be consuming both vehicles at the same steps. So obviously I'm gonna be leasing two cars in the next six year, and you're gonna be financing only one. So in those three years, assuming an average 3.27% inflation, which is the average in the US from the last hundred years, so once my lease finishes, I might expect to pay about $442 in three years. So for my second lease, I'm gonna obviously expect to pay more than now. So that's also added into the calculation I'm gonna present. So for the 36-month lease, I'm gonna pay $402 a month, because I'm also gonna add the wear and tear coverage. I don't want to have to deal with any scratch or any issue in my leased cars. You're owning your financed car. So instead of paying $391, which went before, I'm gonna pay now $402. You're gonna be paying $464 per month. That will make $62 difference on the first three-year period. And then adjusted for inflation, it will make about $22 different on second period. So if we add all that up, I'm gonna be saving around $3,200. If I include, I quoted the prices in Florida state. So if I include Florida state taxes, I'm gonna end up paying in the entire period around $3,200 less than what you pay for your financed car. So that's the first step. Then we will both arrive into the year six and day one. You will be with a used car. You're gonna have a used car already paid with 72,000 miles, because we're both driving the same, and I'm gonna be without a car. I'm gonna need a car, but I'll be with an extra $3,200 in my pocket. Okay?
Katie: Oh, I see.
Jorge Diaz: So that's the first step. Now, if you're go into Honda.com and you do an estimation on the calculations that they have on their site, Honda estimates that your car, after 72,000 miles, is gonna be worth about 34% of the current MSRP value. They can estimate since they know how much you're gonna be driving it, how much your car's gonna be worth. So 34% of about $26,000 is about $9,100. So if you do the math, you'll still $5,900 ahead of me regarding the equity you have in the car and the cash I have in my pocket. But now we need to go back in time and see one small detail, which is in the last three years of your financing, you were driving a car without any warranty. So if you want to arrive at that moment with the $9,000 value of the car, you need to make sure to first get a new set of tires, because according to Consumer Reports, tires last about 50,000 miles with proper rotation. So the average cost of a full set of tires in the US, including labor, including at least two rotations, is about $1,350. So you have to do it. I didn't have to do it because I switched from one car to the other one.
Katie: Oh, I see. 'Cause you had two leases. So you surpassed the 50,000, but you weren't paying for the tire replacement. I see. Okay.
Jorge Diaz: That's correct. So remember, I'm not accounting for fuel cost, sales taxes, time cost of doing any of these jobs, we’re going to the service to do it. So additionally, you need to do a shock absorber and spring replacement, which is part of the regular expected maintenance of vehicles. So shock absorbers, for example, need to be replaced every 50,000 miles. Springs need to be replaced every 50,000 miles too. So this is around $900 in the US, including pieces and labor. Additionally, you have to also do the brake maintenance. So that's around $650. And then comes the battery, which is also expected to last between three and five years, which costs about $150. So every single one of these items we mentioned are expected maintenance costs that you need to deal with without any warranty. So if I estimate all around, it's about $3,000 in total. So you were about $5,900 in equity ahead of me. Now, if we take off $3,000, we end up with a final $2,900 equity compared to my leasing approach. That's how much you are ahead of my leasing kind of model. So once again, I'm assuming nothing else breaks, no dashboard warning with any lights, no scratches, no bumper replacement, not a minor accident at Carfax, which directly impacts on the asset value itself.
So just imagine, the AC compressor is about $1,200. Alternator, it's close to $800, a brake bump, like a backup camera, hybrid car battery is about $6,000. So there are a few things I'm assuming they're all gonna work properly during those three years.
Katie: Right. Yeah. So this is like a generous comparison. This is like, everything goes according to plan. It's pretty close. That's much closer than what I would've thought it would've been.
Jorge Diaz: Yeah. Indeed. If I break down in those six years, the $2,900, if you add it per month, is basically an additional $40 per month. So I'm paying an extra $40 per month for having the convenience of not dealing with any of those unexpected issues. Plus the expected ones, not the expected ones, just the unexpected ones, the expected ones are already priced in on this comparison. So basically that's where the final decision comes from. If you're willing to go with an additional $40 per month payment on this Honda CRV case, to not having to deal with all of that and having your transportation needs solved, that's it. If you prefer to deal with the financing side and then dealing with the used car from the year four to the end of the sixth, that's it too.
Katie: Wow. Okay. That was amazing. Thank you for walking us through that. And I think it really highlights that these decisions that are usually treated as very black and white, cut and dried…I always focus on the “rent versus buy the home” conversation because I'm always like y'all, it's a lot more expensive to own a home than you think. It's not just that monthly payment that you have to worry about. I think this is amazing, amazing analysis. So Jorge, thank you so much for joining us today and sharing this with us.
Jorge Diaz: It's been my pleasure. I love your podcast. I've been listening for the past few weeks and I'm amazed with the quality of the content you're making. So keep it up. I really appreciate it.
Katie: If you're in the market for a car right now and the price of the used vehicles you're considering is offensively high, you can run the numbers and see if it makes sense to lease for the next 36 months until the chip shortage situation gets straightened out. You will lock in the residual value and the buyout number with the lease. And you'll give yourself the opportunity to wait out the supply chain issues with a potentially lower monthly payment in the meantime, rather than locking in a used car price that's gonna be 24% higher than it was last year and likely a higher interest rate. For leasing, per Forbes, if you were considering leasing, be sure to check under the “special deals” or “local offers” tabs on automakers’ websites, entering your zip code to find any promotional lease deals that are on offer locally. They often vary by region to account for local supply and demand issues. It also helps to check local dealers’ inventories via automakers’ sites to see what's currently in stock.
I have a feeling that whether or not this will make sense depends a lot on the vehicle you are considering and your life circumstances. But if it works out such that you can get a cheap enough lease for 36 months that it buys you more time to wait out the inflated market, it might make sense. And again, it's unique times, and it might be rare that a lease will end up being net cheaper, but you never know, based on what Jorge told us. And right now, because of low inventory, J.D. Power found that the typical incentives you would find from leasing might be a little bit harder to find, that you are more unlikely to find super low rates or no money down offers right now, because demand is still very high. Kelley Blue Book found something similar, that, you know, the rising prices of these used vehicles haven't really been reflected in the residual values being assigned to leases, which might explain why a three-year-old Porsche Macan that I found on Carvana is going for $54,000, which is $5,000 less than its current new price and nearly $20,000 more than the residual value that the Porsche dealership gave me for my lease quote.
All right everybody, to close us out this week, we have got another Rich Girl Roundup. As a reminder, we will take listener questions about every month. I'll put out a call for questions on Instagram. So follow @MoneywithKatie on Instagram, if you're not already, and we will pick one that feels interesting and widely applicable and will answer it. As my standard cover your ass disclaimer, I am not a licensed financial professional. This is not financial advice. This is “What would Katie do in your situation?” This segment is brought to you by Betterment, giving you the tools, inspiration and support you need to become a better investor. Here's this week's question from Erin.
Erin: Hi Katie. I'm Erin, and I'm calling into Rich Girl and Guy Nation from Charleston, South Carolina. I don't plan on having children for a bit longer, but I'd love to know your thoughts on managing maternity leave with your finances and how future parents can plan ahead. My company only covers short-term disability and the weekly rate is less than what I make. So how can I ensure my savings stay intact through this time?
Katie: This is a great question. And I'm gonna do my damnedest to resist the urge to extol the virtues of countries where paid family leave and subsidized childcare is the norm. But if you do wanna hear me bitch about that, I have an episode for you. Anyway. So much like a lot of life in the United States, the best approach is planning ahead, financially. Obviously this is tricky. If you become pregnant unexpectedly, even people who are in situations where you would consider them more ready to become pregnant unexpectedly—for example, a married couple who owns their home, which is about as stable and predictable as it gets—can be caught off-guard financially by an unexpected tiny visitor.
But you mentioned that you're not planning to start a family for several years. So I'm going to go down that route. If you are planning to have a kid in the next several years, and you also intend to stay at your current company, it's amazing that you are thinking ahead and planning so proactively. So the way that I would approach this is I would look at the paid family leave options at my company. It sounds like you have short-term disability in lieu of a formal family leave policy. And I would determine the amount and the duration. So let's say your leave is $1,500 a week for 12 weeks before taxes. That's about $6,000 per month for three months. If you actually make, say $8,000 per month, and you would like to take six months off, not three, you can calculate the net costs out of pocket to replace your income. During that time, in this example, I think it works out to about $30,000 to supplement your income during the first three months, and then replace it entirely in the next three, when we'll assume that you will receive no paid time off, but would have the option to take unpaid time off. That in itself is a luxury. Some companies would not allow that. So it definitely makes sense to ask ahead of time and maybe even ask a trusted friend or a mother in your workplace, because while it is illegal to discriminate against pregnant people or employees who plan to have children, that doesn't mean it doesn't happen.
So that would cover replacing your income. But of course it is a savings nest egg that you would intend to spend, right? So if you're only spending $4,000 per month, not the full $8,000 that you're earning, A) Go you! 50% savings rate, that's what's up. But you could theoretically subsist on the short-term disability benefits for three months and then save, mm, $10,000 to $12,000 for the next three. It just depends on how much of your income you actually want to replace. But that really only scratches the surface. Having a baby, even with private health insurance, can cost thousands of dollars, as does outfitting your home for a baby, buying them food and diapers and a bunch of other baby stuff.
That's still way over my head since my only baby is Sam Cat. And yes, for millennia, people have been birthing children with little to no money saved, but obviously that's not ideal. So if you're able to put aside the amount using the calculation that we just walked through and then maybe pad it by 25% to 30% for additional health expenses, you will likely have a less stressful first few months with your future little one. Now, everyone say it with me: “universal paid family leave” on three. Ready? Okay. One…just kidding. Kind of. But really though, do you think if we framed our little chicken nuggets as future human capital for the capitalism machine, they would subsidize it? We'll workshop it. Anyway, thanks for the question, Erin. I hope that helped.
That is all for this week. I will see you next week, same time, same place, on The Money with Katie Show. Our show is a production of Morning Brew, and is produced by the wonderful Nick Torres, and me! Sarah Singer is our VP of multimedia, and additional content editing comes from our lovely senior editor, Henah Velez. Our video producer is the fabulous Christie Muldoon, and Sam Cat is, as always, our VP of chaos, while Jojo Beans is the chief of woof barking at any passerby, regardless of how well the recording is going…though today, she was pretty good.