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Erik doesn’t need a new car

Ramit Sethi · March 14th, 2006

I still hear people saying “I can’t compete against professional investors…they’re pros and I’m just a little guy.” Wrong. I am going to hammer this in 1 billion times: It’s not about being the smartest person or knowing insider investment information. Take Erik, for example, who’s doing it with just a little discipline and common sense.

He writes:

My fiance and I got engaged in May 2005. We decided to get married on Sept. 17 2006 and made the decision to pay for it ourselves, and not go into debt doing so. This was not an easy task – we bought our first home a few months prior to getting engaged and at the time I was working full-time while and my fiance was only working seasonal jobs.

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We looked at our expenses for two months and saw where money was going. Then my fiance started what she called the “cash diet”. At the beginning of every month, we’d withdraw an amount of money enough to cover groceries, gasoline, eating out, and miscellanious expenses that came up. The money was placed into seperate envelopes and stayed at a central location in our house, so we could not spend the cash on whim while we were out. In order to spend money on something, we’d have to plan ahead so we had it with us. Our bills would just be paid online as we recieved them, and nothing would go on credit cards. Through this cash diet, we estimated we could save at least $700 a month.

Amazingly this change of perspective worked. Our first month we saved over $1000, despite having some expenses that we did not expect. More importantly we felt like we were actually SAVING, and not living paycheck to paycheck. We don’t feel like we are giving up any luxuries and the peace of mind is great.

The cash diet worked so great in fact, that by the end of the month we’ll have enough in the bank to pay for the wedding. We’ve decided to keep on the diet. Hopefully this will save us enough to go on a honeymoon and after that – who knows?

Secondly, far too many people think they need to have a new car every 2 years. I drive an 11 year old Geo Metro that I got FOR FREE – someone just gave it to me. Since I do my own repair work, it’s really cheap to maintain and drive. It’s really reliable and have never done anything more than routine maintainance on it.

A friend of mine was poking fun at me, trying to get me to ditch the car and get a brand new one. He was particulary amused by one of my mirrors, which I had broken off accidently when I was carrying a ladder. It had only been a few days since that happened and I did not have a replacement yet, all I did was strap it down with some twine to hold it in place temporarily.

I asked him how much he paid, per month, for his car. $350. I told him that for what he pays in one month on his new car, I could buy a new mirror, new floor mats, new seat covers, oil change, and still have money left over to go to a few nice dinners. This car’s function is to get me from point A to point B and as soon as it can no longer do that safely and reliably, I’ll get rid of it. (But I’ll replace it with another used car).

I get a lot of laughs out my old car, but the one who laughs loudest is me… all the way to the bank.

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27 Comments

 
  1. Jonathan Radande

    I too was at one point going to get a new car when i finished paying my old one. Then I started thinking about how much I could save if I didn’t have to make the monthly car payment.

    Instead of getting a new car, I will put that money toward a retirement account or build up my emergency fund.

  2. I did the same thing as Jonathan. Paid off my car and started putting money in my Roth and 401K. No regrets!

  3. Dan Esparza

    It is so inspiring to hear other young couples ‘get it’.

    Sometimes I feel like it’s me and my wife against the world of ‘free spending maniacs’. It’s really nice to hear a breath of sanity … a breath of ‘maybe we don’t need a new car’.

    Thanks for the inspiring article.

  4. Jennifer

    Guys who drive beaters are HOT! The ultimate unspoiled, un-image conscious, anti-whiny non-mamma’s boy who know how to rotate their own tires!

    Of course a ’95 Metro can’t even begin to compete with a ’90 Prizm. 🙂

  5. I used to work with a girl that had a 2004 Jetta, brand new, and then in early 2005, she traded it in, and bought a 2005 Jetta. And here’s the best part, she did it because the 2005 version had this new color she really liked. She also rolled about $4,000 to $6,000 (can’t remember the exact number) in negative equity into the new car loan. Ridiculous.

  6. But excessive spending of americans keeps the global economy running…

  7. Anonymous

    Investing = saving?

  8. Why do you earn money? To have comfortable life today and tomorrow. There has to be balance between spending for today and saving for tomorrow. Just don’t be obsessive about one aspect only and ignore the other.

    You are being cheapskate if you want to keep driving the old beat-up car especially if you can afford it and still meet your saving goals.

    If buying new car makes someone happy and they can afford it, go for it. I do and don’t regret it.

  9. Anonymous

    The economy isn’t an end itself. GDP is a measure of consumption and investment and government spending and trade balances. If people started saving, GDP would go down because of the money multiplier. However, this wouldn’t signifiy a decrease in spending power, just a decrease in the use of that power.

  10. Phil Crissman

    @anon: “Saving” is not “investing”, no… but try investing when you spend your entire paycheck each month. 😉

    Great post. I have friends who do the “envelope” budget and it works very well for them.

  11. AG, if you know you’ll have a comfortable life today and tomorrow for yourself and your family, then good for you. If you’re in your twenties, then I figure your net worth must be at least in mid six figures.

    Too many people spend money unconsciously. They don’t realize that the $6,000 they spent today on a new-color car means a less comfortable marriage, parenthood, and/or retirement. Erik is not being a cheapskate, just spending consciously, even though it’s not “cool” in some ways.

    As far as the economy is concerned, yh’s sarcasm is closer to the truth than people realize. Check out the recent book review on my blog.

  12. AG – I sort of agree with you. There has to be balance. But I’d rather appear flat broke, driving my banger car now and save as much as I can so that later, when I’m closer to retirement age and my kids are out of the house and I can enjoy material things more. I think delayed gratification is nearly a lost art.

  13. I sort of agree of AG and Matt as well.

    There has to be a balance. If you are managing your money properly, and can afford a nice car, then do it. The disclaimer is to make sure one has their finances in order and be responsible. There is no point to life or earning a paycheck if you are not going to have fun. When you are young and don’t have the responsibilities of marriage, family, kids, I’d say splurge within reason. Lastly, everyone has different passions. We all know cars are a horrible investment. However, if your passion is cars, then there is nothing wrong with driving a nice car (again, as long as you can afford it). One’s passion might be another’s waste of time. It depends on the individual.

    Work hard, Play hard, Save, invest, spend, and be happy!

  14. HRP, couldn’t have said it any better. While the idea of a cash diet is interesting, Erik’s behavior is classical frugalness. Nothing wrong with that, per se, and I’m glad he’s better off financially than most Americans, but when I was reading his story, esp. near the end when he felt the need to defend his keeping his car, I felt that his values clashed with my own. Being a big fan of Kiyosaki (Rich Dad, Poor Dad series), as well as Steve Pavlina and other personal improvement/personal finance and investing people, I feel that each individual has the capability to plan and chooses their life and how they live it. As a result, Erik seems to be planning a life of frugality, which he will undoubtedly live. In Kiyosaki’s terms, this would be a life of security, maybe comfort. But not financial freedom or richness. This is not how I want to live. Instead, were I in Erik’s position, I would be working on generating more (passive) income through investments in addition to his cash diet. That way instead of just living within his means, which he is undoubtedly doing, he would also be increasing his means.

    In this respect, I agree with AG. Life is about enjoying the present, and if you’re doing well, why should you have to wait until you’re too old to enjoy it?

  15. Hi everyone –

    I am the “Erik” in this story, and I just wanted to respond to a few comments.

    I think the point of my story was missed by a few people – I’m not just driving a “beater” to save a few bucks on a car payment. The point of my story was that we live in a throwaway society where perfectly good things are often discarded for newer, better things. Financially, it’s a smarter decision to continue driving this car on which I make no payments on and is in working order instead of paying for a new car just because I’m not in love with this one.

    Secondly my fiance has a much newer car and I also have a project car, as well as a motorcycle, so it’s not like I don’t have a backup in case something happens to the Geo.

    Finally, driving a new car just isn’t all that important to me. For some people it is, and that’s fine. I’d rather have a nice wedding and a beater car than a nice car and eloping.

    Everyone earns only a finite amount of money, and it’s up to each person to decide how to use it. My trade-off is cheap car, more money for something else. I’m not saying that is right for everyone, but it works well for us.

  16. Michael G. Richard

    My girlfriend and I are in a similar situation. We are both saving for a house when we move together in two years, and in the meantime we are both living with our parents to save as much as possible.

    Most people we know would simply get an appartment and spend most of what they make, but we decided to sacrifice some freedom for now to have much greater freedom (from debt!) later on.

    Since I telecommute, we also plan to share one car for the foreseeable future. Two are just not needed.

  17. Good for you, Erik! I am a Finance Director in the automotive industry, and I love to see people buy new cars. After all, that is how I support myself. However, you are very wise in your decision to keep your vehicle. I see people daily, trading, or, more accurately, ATTEMPTING to trade their nice vehicle in on something that is newer for reasons I often don’t understand. As for me, when I get my personal vehicle paid for, I’ll be pocketing that money as well.

  18. “This car’s function is to get me from point A to point B and as soon as it can no longer do that safely and reliably, I’ll get rid of it.”

    Let’s hope you don’t have a serious accident in the old car: an accident that could be avoided by having a dynamically superior new car.

    Or an accident that could be fatal in an older car but not life-threatening in a new car with better safety features.

    What’s more important: your money, or your life? Last time I looked, they don’t put your bank balance on gravestones.

    I think a little perspective is needed here. I’d say it’s fine to cut costs on household matters, but not matters of life and death.

  19. Very insightful thoughts, Chris. Safety features are often overlooked as well.

  20. This discussion has some really good points. I think that withdrawing money from the bank every month and putting it into seperate envelopes is a bit superfluous. Cash doesn’t earn you any interest, not to mention that having a bunch of cash lying around is a liability — it could get stolen, for example. Instead of real envelopes, how about envelopes ‘in your mind’. A little bit of creative financial planning would save you from having a bunch of cash lying around, and would earn you some extra interest in the long run. Erik, you said the whole idea of keeping cash at home is to control your spending. I think some self-control is in order. Keeping cash in envelopes at home reminds me a bit of my grandmother keeping cash in a sock under her bed. She does this because her generation has learned not to trust banks. In our modern times, however, banks are very trustworthy. I think keeping a limit on your spending doesn’t have to entail physically limiting yourself from spending.

    Using credit cards is definitely a good thing, for two reasons. First, it builds credit, and you’ll thank yourself later for this if you need a loan, or you want to rent some property. Second, you can earn rewards for spending money on goods and services which you consume anyway. I use my credit card for everything, but I always make sure to pay the entire balance when the bill comes so that I don’t incur any costs on interest. I’m building my credit, and at the same time, I’m earning miles which I’d buy anyway, since I love to travel. I think your enthusiasm for saving is excellent, but consider my comments. Best of luck to you!

    Mateja

  21. So I just finished reading the post and I have to say there were some solid points made. It actually reminded me of the other day when I was researching various US cities and reading people’s opinions. For nearly every major city people complained that the cost of living was too extravagant and even warned not to move there because “you won’t be able to afford it”. I am moving to San Diego this summer and the thought of not being able to afford it scared me for a moment, but then I thought “all I really need to do is have a little discipline”. Sure it isn’t easy to buy property and the gas is pricey, but what does this really mean? For the gas it means I may have to decide to get a more fuel conscious car or just be practical about planning out my day so I don’t guzzle gas. As the car example pointed out, what people can afford will shock most if they make even a simple effort.

    The barriers and doubts people create that ultimately prevent them from their dreams are ridiculous. I believe what it really comes down to is that people are too lazy and unwilling to change their habits.

  22. I agree with Mateja. Envelopes are cute, but an ING acct will earn interest and you have the same protection against knee-jerk purchases.

  23. Anastasia

    Mateja – I see your point re cash sitting at home not earning interest. However, sometimes it is hard to have self-control 100% of the time, and I think Erik’s plan is good because it reduces the chances of blowouts, which are going to cost a lot more than you would gain by having one month’s worth of expenses in a high-interest account.

  24. Daniel Schildt

    I find it rather weird that some think that people should always have “the newest and greatest”, when most can keep living reasonable life without too much spending. I know that it is good to have car that works but hey, most of older cars are still OK for many years. While new car has it’s advantages, I wouldn’t buy new because of too high costs. Another thing to consider is amount of repairs etc. needed and estimated cost of them. Anyway, I’m not sure about costs of buying new car in USA, but at least here in Finland goverment taxes make it much more expensive than in countries like USA or Germany (that manufacture huge amount of cars every year).

  25. debt-free

    Mateja, Mateja. You totally missed it.

    Money in envelopes has nothing to do with earing interest. That money is for their monthly spending. Its going out the door, they’ve just given it a name and choose to spend it in cash (which btw is a great way to curb overspending like you do with your credit card). They’ve spent their money on purpose, its not just this theory in their mind.

    “I think keeping a limit on your spending doesn’t have to entail physically limiting yourself from spending.” Now that just doesn’t make any sense. Try this: NO. Here it is again: NNNNNNO. Sometimes, the answer to “Ohhh, I want that!” is “NO”.

    You sound like a credit card commercial. Building your credit is a myth. Go deeply in debt so that later you can go… deeper into debt. And your CC rewards don’t outweigh your overspending + the additional risk you’ve taken on. Erik is living the good life in ways you may never understand. Stop playing games with these slimeball CC companies.

    Kudos, Erik. I’m glad to see that someother people here understand that no payments = more money in your pocket to save, to spend, to invest, to give…. And look at it this way – at least Erik didn’t need to write a 2,000 word essay, justifying his overspending on something like buying a new car like his buddies did.

  26. It’s a myth you need to buy a new car to have a safe car.

    Yo can buy a 1989 Acura Legend Coupe for about 3K, or a Volvo 740 or Saab 9000, all safe cars and all a few K.

    Also, unlike a SUV, they won’t roll over and kill you.

    Old and cheap doesn’t mean a tinny little death trap.

  27. Justin

    Erik, you are doing great! Keep up the Envelopes system. Read “Total Money Makeover” by Dave Ramsey.
    You might also check out the website “Mvelopes.com”. This will allow you to continue to use the Envelope systems but also have the luxury of using your debt card and cutting checks. I have been using Dave Ramseys Plan to get debt free for 2 years not and have also been using the Mvelope website for that long. My success story is that I have gone from $80,000 in debt to having no debt (except for my Mortgage) in those 2 years! I have been married for 6 years and am only 27 years old. I am not about to start changing my life style just because I am debt free. Here is my view on life: Life like no one else….So later you can live like no one else!
    Take it as a complement when some one calls you cheap or frugal! Then when you get debt free invite them to your debt free party.
    My next step is to pay off my mortgage. This is only going to take me 3 years based on the fact I have a great snow ball of funds after paying off the other debts. The key is that as I have increased my income and reduced my debt I have not increase the amount I spend “like most people do”. You have all heard it…the more you make the more you spend. Well not for me and my family!
    I plan on being completely debt free at the age of 30.
    And I dont plan on stopping there…