POT

POT, not the controlled substance, but Plain Old Transportation, but it did get your attention.  Another post containing unsolicited advice for my son.  What is the best car to own?  That is the question, and the answer is easy.  One that is paid for.

Automobile manufacturers and automobile dealerships are not going to like what I write after this point (for that matter neither are the banks, credit unions, or finance companies), for they are in the business of producing and selling automobiles that return them the highest unit profit for their unit cost (For that matter the Bank, Credit Union or Finance Company wants you to purchase a high end vehicle, you borrow more money, the collateral with worth more, if you default they have a better shot of getting rid of it for more than you owe).  High end/up scale automobiles are the vehicles that fit this criterion.  The low end/down scale vehicles are usually the vehicles that have the lowest profit for their unit cost (it has been reported that a few manufacturers sell some vehicles for less than it cost to build them). 

For the massed produced automobiles, the production costs for a low-end vehicle compared to a high-end vehicle are not that significant, say on the order of maybe 10 to 20 percent higher.  Yet the price differential between a low-end mass-produced vehicles to a high-end mass produced vehicle typically are on the order of 200 to 400 percent, some can be as high as 800 percent higher (Mercedes A Class to S Class).

That is quite a difference for something that has an engine, a body, some seats, doors, windows, headlight, tail lights, and four wheels in contact with the ground, whose real requirement is to move you and yours, and possibly some limited amount of materials from point A to point B in a safe, reliable manner, with a modicum of comfort (not too hot, not too cool, and dry).  About as a utilitarian mission as one can define.

It is important to remember that an automobile is a tool.  The purpose of this tool is stated in the preceding paragraph.  An automobile is not a fashion statement; it is not a net worth statement (whether real or imaginary).

The automobile dealer wants and needs you to fall in love with beast.  He wants and needs you to be emotionally and irrationally tied to that vehicle.  That vehicle being the one that he has in his show room, not the one back at the factory.  Yes it has just a few items on it that you do not want, and he will sacrifice just a little profit so that you will not have to wait for the one that the factory has not yet built that will have only the features that you require.  You can move off your requirements just a little and he will move off the price just a little, it is a win/win situation (at worse it is a lose/WIN situation, more times than not it is (win/WIN situation), and you can drive it home today (With Approved Credit).

An automobile should be looked at with no emotions, you do not look longingly on an open-end wrench, or a blade tip screwdriver, or a belt sander, or a nail gun (if you do then serious professional help is indicated and rather quickly I might add), why should you do the same for this tool.

The most salient fact for you to remember about an automobile is as follows: At the end of the day it is sum of all of the money that you have spent on the bloody thing (total cost) to drive all of the miles that you have driven that is important.  For many of us, those not so fortunate to be in the upper 3 percent of income or net worth, how much it cost to operate a vehicle is fundamentally important.  For many it will be the second largest purchase that we will make in our life, our house being are largest, so it is a big deal.

Like many things in life the basic equation is simple how much have you spent to date on the car divided by the total number of miles driven on the car.  But we all know that the devil is in the details.

The picture gets even scarier if you do not limit the calculation to just one vehicle at time but accumulate all of the costs and miles driven over each vehicle that you have owned.  Every time you replace an existing vehicle you add another significant step increase to the cumulative cost term of the equation.

Obliviously one wants to keep the numerator (Did not know it was going to be a test, remember that term from math class? Ok it is the top number) as small as practical.  One wants to keep the denominator (it’s the bottom number as large as possible).  If you can do this for a long time you get the lowest cost per mile driven.  It sounds so simple, yes?

Things that go into the numerator are Purchase price, Interest, insurance, maintenance and repairs, cost of fuel, and disposal cost.

Things that go into the denominator, well that is pretty simple miles driven.

From this basic equation four facts should jump out at you.  First you must control the initial purchase price.  Second is that one must keep the car you have for a long time.  Third is that the vehicle needs to extremely reliable or really cheap to fix.  Finally fourth is that the vehicle should be as fuel efficient as possible.  The order that they were stated is important.

One of the first things that I do when I (Your Mother) start to think that I need a new car is I build a little spreadsheet, yes I know I am so predictable, but it is a world of cold cruel hard numbers, and sometimes it is easier to let you mother argue with the spreadsheet.

I pick a likely candidate, perform some research on various items, list price, interest rates, bank terms (although you and I know from your mother that I have not finance a car in for quite a while, most of the time we just paid cash (the cars were that cheap, and the interests rates were high). This is typically the least cost effective path, although sometime it has not been the case (I miss those zero finance days), stated fuel economy, what grade of fuel does the vehicle require, what are the current cost per unit volume of the fuel, insurance costs, cost of replacement tires, cost of scheduled maintenance, and that is just the first pass.

I also pick at least 3 other likely candidates, remember I am not in love with the car it is just a tool.  I gather the same data for these vehicles.  I put all of this into a spreadsheet and let the numbers fall where they fall.

There is a short cut, and that is if the reported (EPA) mileage numbers are close, within 5 percent, and the fuel grade is identical, and the tire sizes are the same, insurance cost are within 5 percent, and cost of schedule maintenance are with 5 percent, then the only real driver for the study is the initial purchase price, since all of the other variables are not really variables between the candidate vehicles.

If they are not close then a little more work will be required, but not that much more.

I typically base this on the assumptions that I will own the vehicle for at least 60 months (5 years, people will actually allow terms on an automobile for that long), and that I will drive 20,000 miles per year, or 100,000 miles total.  That I will have at least two complete tire replacements, that I will have replaced the battery once, that I will have the scheduled maintenance perform at the recommend interval, for at least as long as the vehicle is cover under the manufacturers warranty.

One of the candidate vehicles will win.  If it is a tie, then I will let Doctor Nickel decide. The win may not be by much, but it is like Golf, the vehicle with the lowest cost per mile driven is selected, as I said earlier it is a world driven by cold cruel hard numbers, and that is why I do not drive a Mercedes-Benz SL500, although you mom would look great in one.

And now you know why I drive a car that is 11 years old, that is very reliable, with a better than average gas mileage (The Honda Civic HX), and when it does need something replaced I go ahead and have the work done.  Your mom also looks great in the civic also.

Every now and then you will hear a discussion between your mother an I about getting a new car, especially when mine needs to have a repair performed, and in the end I just end up spending a few hundred dollars to repair the car versus ten thousand plus dollars to purchase a new one, and the ride down the cost per mile curve, why add any most costs to the system then you absolutely need to, besides your mother has lost the argument with the spreadsheet.

Here is the part that makes it all better, for every dollar in cost that you do not incur is a dollar that you can invest into something that will return your capital to you, granted at first it is a little, but you are starting to harness the most powerful force in the Universe, and before you know it the ripple is brook, the brook a stream, the stream a creek, the creek a river.  It just takes times and patients.  By the way at the end of 30 year and 300,000 miles the difference between owning just one car and owning 3 cars is on the order $100,000.00 Dollars with out any compounding interest.

So build your river, not some other guy’s.