Sunday, June 28, 2015

Why You're Poor! Top 7

Why you're poor. Top 7

  1. You drive a car.
  2. You live in an unnecessarily large or expensive home.  
  3. You travel
  4. You buy whatever you want to eat.
  5. You have a pet
  6. You drink Starbucks
  7. You have cable

While these are not listed in any specific monetary order, these are my top reasons why you’re poor.  Now this doesn’t mean you live in a slum, barely afford basic groceries, and lounge around in clothes with bigger holes than Swiss cheese. For the average middle class household with income of $30-75k these items are likely to represent their largest expenditures throughout the year.  We’ll tackle item #1 in this post.  

To fully understand the magnitude of the car problem in our country lets start with some population figures from the US Census Bureau.  For 2010 there were 281 million people in this country with 74 million under the age of 18. Now even though the driving age is 16, not everyone immediately gets a license, or has their own car so for our example we are going to exclude them from the analysis.That equates to 207 million people driving around. Well according to the NADA  in 2010 there were 249 million vehicles in use.  That’s 1.20 cars per person! Last year this country sold 16.4 million new vehicles, of which 1.72 million were pickup trucks.  More impressive is pickup trucks from Ford, GM, & Dodge took the top 3 spots of overall vehicle sales. Now from what I notice is that all these people driving pickup trucks use them for heavy duty work applications.  Because otherwise no human obviously has any (insert expletive of choice) need for one otherwise.  

Yes we know you’re an idiot. There was no need to make
your stupidity more visible.
There’s actually a whole continent that gets by without the USA’s best selling vehicle. Europe.  You actually have to specially order it just to have it delivered there.  We could go on about the differences between the two places; but if a whole continent of tradesmen and construction workers have determined they can get the job done without a pickup we just might not be as smart as we thought we were. Maybe Americans have been getting fed a bunch of BS as to why we need them so badly. Whatever the reason they are a waste of money.  Now I’m not saying only pickup trucks are a waste of money, most of the vehicles we buy are a waste of money. According to the NADA in 2014 we had more SUV’s & pickups on the road than passenger cars. Wow there must be a lot of heavy duty material hauling because there is no need for a human to have that much horsepower and space to transport themselves down the block for their frappucino.  Maybe there’s a correlation between our love of bigger vehicles and the empty pockets of so many Americans. The bigger the vehicle the higher its costs to purchase and maintain.  Check out this analysis showing how different vehicle types stack up. The analysis doesn’t include pickups, but if I know anything from complaints I heard over the years from owners is that they are EXPENSIVE to operate. The article also notes the costs of driving are up 60% since 2003. Have you increased your income 60% since then? I highly doubt most Americans received 60% raises while they drive to their crappy unfulfilling jobs the last 12 years. Maybe that’s a key to why you're broke as you sit in 2 hours worth of traffic everyday, then at a computer for 8 hours, and complain about how running the rate race absolutely sucks.  Now maybe you never bought a new car, but with nearly 32 million new vehicles sold the last two years, plenty of Americans are clearly making bad choices.

Now lets look at the cold hard cash impact.

The IRS sets the cost of operating a vehicle at .575 cents per mile for 2015. Lets take a look at a few scenarios.  For example let's imagine you live 10 miles from your job. Each day you are incurring and accruing costs of $11.50 just to drive to work. If we project this for a year that equates to $2,990 & 5,200 total miles. This doesn’t include another 5-6k miles driven for personal reasons. Now imagine you decide to live 30 miles from work.  I know quite a few people who do this. I even did it myself for a few years and I could only think of the day I could shorten my commute to stop wasting so much money. Anyway if you live 30 miles from work you are incurring and accruing $34.50 in costs each day! For a year that's $8,970 just for the privilege of driving to work, plus 15,600 miles on your vehicle.  Now lets add some miles for personal driving. This would include driving a couple miles to the grocery store, a few more to the mall(spending money on fancier clothes and electronics than you need), grabbing your fancy frappuccino, and countless other wasteful trips .Let’s take a look at the long term implications of the last scenario.  If you live 30 miles from work and still put on an additional 5k miles per year for 20,600 total; well congratulations since you just shafted yourself out of $11,845.  If you drive a pickup truck or SUV just pat yourself on the back for a job well done at screwing yourself since your mileage costs are actually much higher. Maybe you think $ 11,845 isn’t so bad, but lets compound it to see what you could have had in your pocket. If you put this money into a passive stock index fund we can expect a historical return of 8% each year. If we compound that 1 year cost($11,845) 10 years into the future that’s $25,572 you could have had in your pocket if you did no driving at all.  Let's add in your yearly driving cost($11,845) for each year and consider it a contribution. You could have saved up a nest egg of $197,165 over 10 years!!! I bet that’s enough money to have helped you pay off the mortgage, beef up your retirement savings,fund your business idea, allowed you to quit your job, or even help start a college fund for the children. This is serious money going out the tailpipe each year.  If your household has two cars the numbers are even worse. You should be making a very conscious effort to reduce the amount of driving you do each day, or at the very least be driving a compact car if you have no need to be hauling large items for work.

But everyone has new cars you think to yourself, and I’d agree it does appear that way. If you’ve ever been to LA there are luxury import cars all over the place.  Visitors must think everyone is a rich movie star! They couldn’t be further from the truth. Some of the people may be earning above average incomes, but are probably loaded up the wazoo with debt. These people drive around their new(usually leased) Lexus or BMW and look the part, but in reality they have low chances of ever being millionaires or becoming financially independent.  What if I told you that the majority of real millionaires(not high income earners) don’t buy luxury import vehicles, 37% buy used, and the majority spent less than $44,500* on their vehicle. Stunning isn’t it? These people can actually afford to buy a car with cash outright yet still choose used vehicles. The authors of The Millionaire Next Door also reported only 23.5% of millionaires drive the current year model. If we do some basic backtracking that 63% of millionaires buy new cars, and 23.5% drive the current year model;  we can estimate how many of them(based on household) actually bought a new car in 2014. We have 10.1 million millionaire households in America for 2014. If the average household size is 2.6 people we now have 3.8 million people who likely are head of household and buying a new vehicle. If 23.5% of these people are driving the current year model, then 3.8 million X 23.5% = 893,000 millionaires bought a new car in 2014. Remember we sold 16.4 million new vehicles last year.  This means millionaires only bought 5.4% of the new vehicles sold while representing 8.2% of all households**. Clearly the majority of rich people are not buying new cars.  They are smart money for a reason.  Not because they know how to invest it better than everyone else, but because they don’t spend it as stupidly as the rest of Americans.  

Now that was a ton of data I gave in this post, and I’ll elaborate more in future articles.  The basic premise here is that if you’re anything short of upper class you should not be buying a new vehicle, or ever drive a pickup truck unless you have a damn good reason. Additionally always think of ways to lessen the amount of driving you do.  The best options are public transportation, and biking. When used in conjunction with each other you can get spectacular results.

I’ll end this post with a quote from the Millionaire Next Door which I highly recommend to anyone who wants to become financially independent, which MAD Consulting can help you with.

“It is unfortunate that some people judge others by their choice in foods, beverages, suits, watches, motor vehicles, and such. To them, superior people have excellent tastes in consumer goods. But it is easier to purchase products that denote superiority than to be actually superior in economic achievement. Allocating time and money in the pursuit of looking superior often has a predictable outcome: inferior economic achievement.”

1: The Millionaire Next Door by Thomas Stanley & William Danko
*Inflation adjusted number. The authors reported $30,000
**Based off 123 million total households

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