Badass vs Dumbass
Master your Financial Kung Fu to be one and not the other.
Go to Sifu’s Notebook for the Case Study: New Car vs. Used Car Investment
Primer: Who are Sifu & Ronin
Episode 21: Harvey vs Mike – My Money’s on Harvey
Ronin: Sifu! I went over your Case Study Notes for today’s session, and your math must be wrong. The numbers are off the train. Are you sure your abacus isn’t cracked and missing a few beads?
Sifu: Ha! My trusty abacus runs circles around your solar-powered dollar store calculator, #1. But let’s get real here: I use proven formulas to derive the data I presented. There are 0 errors. Believe that. I do this for a living, you know.
Ronin: I dunno, boss. I still think you’re using some kind of wizardry to conjure up the numbers. They seem blown way out of proportion. Maybe a decimal place moved over by mistake here and there?
Sifu: Hahaha. You mean like the classic mistake your friends from high school made. Was it Al and Sal?
Ronin: Oh, those clowns. Hee-hee.
Sifu: Didn’t the conversation go something like this, after they got their tests back one day…
Al: Check it out, Sal! 91% on my test. Woooo-hoooo!
Sal: Dude, 9.1%. Decimal place, man.
Al: Ooooooooooh.
Ronin: Yeah, legendary story! You saying you didn’t pull one of those?
Sifu: Not possible, Ronin. You do know who you’re talking to you, right?
Ronin: Yeah, yeah. Just checking. Just like you taught me: “measure twice, cut once”!
Sifu: AIght – fair enough, Padawan. Not a bad rule.
Ronin: Ok, so if this is all true, then I’m starting to understand why you isolated this reason to go Used over New. The other reasons were great, but this one really is the difference maker, ain’t that right, boss?
Sifu: Yes, #1. The “Opportunity to Invest the Difference” reason is best demonstrated through those 5 case studies that I presented. Each scenario has Mike buying a new car. That choice is very typical. So the cases presented are reflecting what you see in real life, with people everywhere.
Ronin: What about this Harvey character. He takes the difference and invests it – is that common too?
Sifu: Ah! There’s the rub. Harvey, in the given scenarios is a total genius. Many people who buy used like Harvey, take their excess money and use it to buy other things, and rarely invest it.
Ronin: So Mike is a common dude, but Harvey is special?
Sifu: Indeed, #1. In this case, can we conclude Mike is a financial dumbass and Harvey is a financial badass?
Ronin: Fact! Hard to dispute.
Sifu: Just for fun, #1, shall we review some key details from the notes?
Ronin: Let’s go, my man. I’m in.
Sifu: Excellent. By 20 years, Harvey’s modest investment is worth nearly $237,000, while Mike’s still stuck in the endless cycle of depreciation. By 30 years, Harvey’s initial $42,000 has ballooned into $557,000. Meanwhile, Mike has burned through $228,000 on new cars. His only return? The faint scent of new car leather that’s long since faded.
Ronin: Phenomenal! And it’s not as if Harvey is suffering in a beater, just because his whip isn’t new. If he’s buying used the way you told me to, he could be driving a beautiful beast of a machine, worthy of a badass. Mike’s car is new when he gets it, but isn’t it old too, once he drives it for while?
Sifu: Excellent point, #1. Technically, Mike’s new car is old the minute he drives it off the lot. Hee-hee. You know the sad reality is: in either car, new or used, once the owner has it for a while, the novelty wears off and they take it for granted and it’s not special any more.
The joy of new things quickly fades, leaving behind only the dullness of routine.
Unknown
Ronin: The last case blows my mind. You sure about that massive number at the end, Sifu?
Sifu: Absolutely, Ronin. I don’t bullshit when I talk numbers – this is serious business. Harvey’s continued strategy brings his investment to a whopping $1.3 million by year 40, and only spent $97,600 for all his cars. Mike? He’s spent $304,000 on his rides, and has exactly $0 in his investment account.
Ronin: So, Harvey’s the guy sipping Cristal on the beach in early retirement while Mike is probably still on the job and showing off his latest ride, hoping someone cares.
Sifu: You got the gist of it, Ronin. It’s not just about the cars; it’s about the mentality. Harvey values long-term wealth over short-term YOLO and FOMO comforts. Mike… well, he’s in the rat race with the Joneses – not sure who’s winning there.
Americanism is using money you haven’t earned to buy things you don’t need to impress people you don’t like.
Robert Quillen
Ronin: I know this one! NO ONE WINS, am I right, chief?
Sifu: Who’s the genius now? Hee-hee. Exactly, my #1 student. Harvey is probably on FIRE, and taking in the best things in life, while Mike is still stuck in his déjà vu loop. Real freedom versus invisible chains – have you decided which path works best for you, Neo? Red pill or blue?
Ronin: Pffft. Good analogy, Morpheus. I’ll be sure to invest my next $42,000, the minute I get it!
Sifu: I will hold you to it, #1. Your life raft to leave the other rats on Dumbass Island is starting to take shape.
Ronin: Hey hey! I feel you, bro. My destination is an island with gorgeous beaches and alluring honeys, not one littered with rat feces.
Sifu: Word.
Sifu’s Notebook
Case Study: New Car vs. Used Car Investment
Let’s compare the financial journeys of two friends, Mike and Harvey, over a 10, 20, 30 and 40 year periods. We’ll explore 5 scenarios to see how their choices impact their finances. In Case 1, their cars are kept for the whole period and sold at the end. In Cases 2 through 5, their cars are swapped every 5 years.
Case 1: The 10-Year Comparison – Keep for 10 Years
Today: The Initial Purchase
- Mike: Buys a new car for $60,000.
- Harvey: Buys a 7-year-old car for $18,000 and invests the difference of $42,000 at a 9% annual growth rate, compounded yearly.
Depreciation and Maintenance Costs
Over the next 10 years, both cars will depreciate and incur maintenance costs. Let’s break down these factors:
- Depreciation:
- Mike’s Car: New cars typically depreciate about 60% over 5 years. After 10 years, the car is worth approximately 20% of its original value, or $12,000.
- Harvey’s Car: Used cars depreciate more slowly. Assuming a 40% depreciation over 5 years, after 10 years, the car is worth about 36% of its original value, or $6,480.
- Maintenance Costs:
- Mike: New cars generally have lower maintenance costs. Let’s estimate $4,000 over 10 years.
- Harvey: Older cars often require more maintenance. Let’s estimate $10,000 over 10 years.
Investment Growth
Harvey’s $42,000 investment grows at 9% compounded annually. After 10 years, the investment is worth approximately $99,429.
Year 10: Selling the Car
At the end of 10 years, both owners sell their cars.
- Mike: Sells his car for $12,000.
- Harvey: Sells his car for $6,480.
Final Financial Standing
- Mike:
- Total spent on car: $60,000
- Total maintenance costs: $4,000
- Total value of car sold: $12,000
- Net expenditure: $60,000 + $4,000 – $12,000 = $52,000
- Investment value: $0
- Harvey:
- Total spent on car: $18,000
- Total maintenance costs: $10,000
- Total value of car sold: $6,480
- Net expenditure: $18,000 + $10,000 – $6,480 = $21,520
- Investment value: $99,429
Case 1 Summary
- Mike: paid $52,000 in 10 years to drive his car, and has $0 invested.
- Harvey: paid $21,520 in 10 years to drive his car, and has $99,429 still invested.
Case 2: The 10-Year Comparison – Swap Car in 5 Years
Today: The Initial Purchase
- Mike: Buys a new car for $60,000.
- Harvey: Buys a 7-year-old car for $18,000 and invests the difference of $42,000 at a 9% annual growth rate, compounded yearly.
Year 5: Selling the First Car
After 5 years, both owners decide to sell their cars and purchase new ones.
- Depreciation:
- Mike’s Car: New cars typically depreciate about 60% over 5 years. So, Mike’s car is now worth $24,000.
- Harvey’s Car: Used cars depreciate more slowly. Assuming a 40% depreciation over 5 years, Harvey’s car is now worth $10,800.
- Maintenance Costs:
- Mike: New cars generally have lower maintenance costs. Let’s estimate $2,000 over 5 years.
- Harvey: Older cars often require more maintenance. Let’s estimate $5,000 over 5 years.
- Investment Growth:
- Harvey: The $42,000 investment grows at 9% compounded annually. After 5 years, it is worth approximately $64,622.
Year 5: Buying the Second Car
- Mike: Sells his car for $24,000 and buys another new car for $60,000.
- Harvey: Sells his car for $10,800 and buys another 7-year-old car for $18,000. His investment remains untouched.
Year 10: Selling the Second Car
After another 5 years, both owners sell their second cars.
- Depreciation:
- Mike’s Second Car: Depreciates 60% again, now worth $24,000.
- Harvey’s Second Car: Depreciates 40% again, now worth $10,800.
- Maintenance Costs:
- Mike: Another $2,000 over 5 years.
- Harvey: Another $5,000 over 5 years.
- Investment Growth:
- Harvey: The investment continues to grow at 9% compounded annually. After 10 years, it is worth approximately $99,429.
Final Financial Standing
- Mike:
- Total spent on cars: $60,000 (initial) + $60,000 (second car) = $120,000
- Total maintenance costs: $2,000 + $2,000 = $4,000
- Total value of cars sold: $24,000 (first car) + $24,000 (second car) = $48,000
- Net expenditure: $120,000 + $4,000 – $48,000 = $76,000
- Investment value: $0
- Harvey:
- Total spent on cars: $18,000 (initial) + $18,000 (second car) = $36,000
- Total maintenance costs: $5,000 + $5,000 = $10,000
- Total value of cars sold: $10,800 (first car) + $10,800 (second car) = $21,600
- Net expenditure: $36,000 + $10,000 – $21,600 = $24,400
- Investment value: $99,429
Case 2 Summary
- Mike: paid $76,000 in 10 years to drive his cars, and has $0 invested.
- Harvey: paid $24,400 in 10 years to drive his cars, and has $99,429 still invested.
Case 3: The 20-Year Comparison – Swap Car Every 5 Years
Financial Standing After 20 Years
Mike after 20 Years:
- Total spent on cars: $60,000 * 4 = $240,000
- Total maintenance costs: $2,000 * 4 = $8,000
- Total value of cars sold: $24,000 * 4 = $96,000
- Net expenditure: $240,000 + $8,000 – $96,000 = $152,000
- Investment value: $0
Harvey after 20 Years:
- Total spent on cars: $18,000 * 4 = $72,000
- Total maintenance costs: $5,000 * 4 = $20,000
- Total value of cars sold: $10,800 * 4 = $43,200
- Net expenditure: $72,000 + $20,000 – $43,200 = $48,800
- Investment value: Harvey’s initial $42,000 investment grows at 9% compounded annually for 20 years. After 20 years, the investment is worth approximately $235,385.
Case 3 Summary
- Mike: Paid $152,000 over 20 years to drive his cars and has $0 invested.
- Harvey: Paid $48,800 over 20 years to drive his cars and has $235,385 still invested.
Case 4: The 30-Year Comparison – Swap Car Every 5 Years
Financial Standing After 30 Years
Mike after 30 Years:
- Total spent on cars: $60,000 * 6 = $360,000
- Total maintenance costs: $2,000 * 6 = $12,000
- Total value of cars sold: $24,000 * 6 = $144,000
- Net expenditure: $360,000 + $12,000 – $144,000 = $228,000
- Investment value: $0
Harvey after 30 Years:
- Total spent on cars: $18,000 * 6 = $108,000
- Total maintenance costs: $5,000 * 6 = $30,000
- Total value of cars sold: $10,800 * 6 = $64,800
- Net expenditure: $108,000 + $30,000 – $64,800 = $73,200
- Investment value: Harvey’s initial $42,000 investment grows at 9% compounded annually for 30 years. After 30 years, the investment is worth approximately $557,242.
Case 4 Summary
- Mike: Paid $228,000 over 30 years to drive his cars and has $0 invested.
- Harvey: Paid $73,200 over 30 years to drive his cars and has $557,242 still invested.
Case 5: The 40-Year Comparison
Financial Standing After 40 Years
Mike after 30 Years:
- Total spent on cars: $60,000 * 8 = $480,000
- Total maintenance costs: $2,000 * 8 = $16,000
- Total value of cars sold: $24,000 * 8 = $192,000
- Net expenditure: $480,000 + $16,000 – $192,000 = $304,000
- Investment value: $0
Harvey after 30 Years:
- Total spent on cars: $18,000 * 8 = $144,000
- Total maintenance costs: $5,000 * 8 = $40,000
- Total value of cars sold: $10,800 * 8 = $86,400
- Net expenditure: $144,000 + $40,000 – $86,400 = $97,600
- Investment value: Harvey’s initial $42,000 investment grows at 9% compounded annually for 40 years. After 40 years, the investment is worth approximately $1,319,195
Case 5 Summary
- Mike: Paid $304,000 over 40 years to drive his cars and has $0 invested.
- Harvey: Paid $97,600 over 40 years to drive his cars and has $1,319,195 still invested.
Key Takeaways
The Power of Compound Interest
Harvey’s financial success is largely due to the power of compound interest. By investing the $42,000 difference at a 9% annual growth rate, his investment grows significantly over time. Compound interest allows the investment to grow on both the initial principal and the accumulated interest, making it a powerful tool for long-term wealth building.
The Impact of Depreciation
New cars lose a significant portion of their value in the first few years, while used cars depreciate more slowly. By buying a 7-year-old car, Harvey avoids the steepest depreciation, preserving more of the car’s value. This means Harvey retains a higher percentage of the initial purchase price compared to Mike.
Maintenance Costs
Although older cars generally require more maintenance, the savings from buying a used car and investing the difference more than offset these costs. Harvey’s higher maintenance expenses are still lower than the combined costs of depreciation and maintenance for Mike’s new cars. Regular maintenance also helps extend the life of a used car.
Lifestyle and Financial Discipline
Harvey’s approach reflects financial discipline and long-term planning. By choosing to drive a used car and invest the savings, Harvey demonstrates a commitment to financial independence and early retirement. This disciplined approach can be applied to other areas of personal finance, such as budgeting, saving, and investing, to achieve financial goals more quickly.
