A few weeks ago, I met up with an old friend of mine who reads The Simple Dollar. After a bit of catching up, he started criticizing me on my purchase of a Prius. “You’re basically throwing your money away there,” he told me. He then went on to describe how he buys cars – he buys old junkers for around $2,000 each on average and drives them until they fall apart.
I told him that I was intending to drive the Prius until it reached a little over 200,000 miles, so I asked him how many miles he gets out of one of his “junkers.” He thought about it and said, “Oh, about thirty thousand until they’re completely ready for the junk heap.”
A light bulb went off in my head. I started asking him some questions about his junker purchases.
“How much time do you spend looking for replacement junkers each time?” “Probably… twenty or twenty five hours, all told.”
“And you have to pay for the title transfer and new license each time, right?” “Yep.”
“Do you ever have to invest in these cars to get them road worthy?” “I usually wind up throwing $500 or so into each one to get that 30,000 out of them.”
I started scribbling on the back of a napkin.
Our one Prius purchase was $20,000. It took us probably twenty hours of active searching to find the one we wanted. We would pay about $100 for the title transfer and other paperwork. We intend to drive it 210,000 miles.
On the other hand, to get the same 210,000 miles, my friend would buy seven cars at $2,000 each, then put another $500 into them to get them road worthy. He’d also pay $100 each time for the title transfer and other paperwork. Each time, he would spend twenty hours looking for that next car.
So what’s the difference between the two? Seven cars at $2,000 each, plus another $500 for roadworthiness, plus another $100 for paperwork adds up to $18,200. The junkers are $1,900 cheaper (versus the $20,100 total for the Prius).
Now let’s add in fuel efficiency. The Prius averages 46 miles per gallon over 210,000 miles. I’ll be generous and estimate that his junkers get 20 miles per gallon on average. Over those miles, and assuming an average of $2.50 a gallon for gas, the Prius saves $10,000 on gas. Seriously – do the math yourself.
The difference is now $8,100 in favor of the Prius. Even if you start throwing in lots of other factors – insurance and the like – and forget reliability, that’s a shell shocker.
I’ll be generous and adjust the calculations a bit. Let’s say my friend managed to buy all of his junkers for only $500 instead of $1,500 – I’m giving him an extra $1,000 per car here. Let’s also say they get an average of 27 miles per gallon – he happens to stumble upon lots of Honda Civics, let’s say. Even then, it’s only $900 in his favor.
Now, my friend invested one hundred and forty hours in his car searching, while we invested twenty. That’s a difference of 120 hours.
Thus, my friend’s hourly savings for that 120 hours spent beating the pavement looking for a junker is $7.50 – less than minimum wage in many states. That’s after giving him the benefit of the doubt by assuming he gets a tremendous deal on every car he picks and they’re all fuel efficient. With the original assumptions, he loses $67 per hour.
Even if the cars were strictly equivalent in reliability, that wouldn’t be a good investment of my time. If you add in the fact that the first six junkers will be less reliable than the new car (and the seventh should be roughly the same, as they’re both junkers now), it’s clearly not worth it.
In this case, I’m not disputing that there is a cash savings by buying old used cars at all – there clearly is. In the example above, my friend does wind up with more cash in his pocket than I do if you’re looking strictly at the money invested in the cars. In fact, if you play with the assumptions a bit, you can probably increase (and also decrease) his hourly rate. I felt that some of the assumptions were actually favoring the junkers, actually.
However, our world doesn’t consist strictly of car purchases.
My friend’s car purchases took a lot more time than our single purchase. During those 120 hours, I could easily be doing something more productive than saving $7.50 per hour searching for an unreliable junk car. I could be writing a freelance article, air sealing my home, making homemade laundry detergent, preparing a triple batch of a home cooked meal, or going clothes shopping at a thrift store. Any one of those activities would earn me substantially more than the $7.50 an hour I would save doing repeated car searches.
What’s the lesson here? Time has significant value. Whenever you choose to spend time saving money in one way, you’re choosing not to spend it in another way. Thus, if you keep filling your time with things that earn a relatively small return, you might find that you’re excluding things that earn a much bigger return.
On top of that is the big consideration that we all put more value in spending our time in ways that are enjoyable to us. For me, looking for a car is complete misery. I do not enjoy the process at all. I hate talking to people trying to sell cars, whether it’s a dealership salesperson or a guy with a car parked alongside the road. I’d far rather be in my kitchen making three casseroles or brewing up a batch of homemade laundry detergent.
Other people, though, really enjoy the process and the time invested in it has an additional personal premium for them. They may also dislike cooking at the same time. If this is the case, there is a personal premium for them to invest their time beating the pavement looking for a car and then eating out for dinner – they’re still saving money and also doing something they enjoy.
Always remember, though, that time has a real cost in the form of lost opportunities.
Edit: I misplaced a decimal in my original math, so I fixed the math example to make more sense. (I shouldn’t do arithmetic in the evening.)