Extend Your Car Warranty for Free

Posted On January 3, 2019 By Scott Stratton, CFP(R), CFA In Financial Planning /

When it comes to saving money, there are two expenses which will make or break your budget: your home and your cars. If you keep those expenses below your means, you will have a surplus to save and invest. That’s how you generate wealth.

Unexpected car repairs are the worst. You can spend thousands and it feels like you are just flushing your money away. That’s why we love car warranties: they help extinguish our fear of repair bills. For a lot of people, when their car warranty runs out, they want to get a new car because they can’t stand the thought of a catastrophic repair bill.

But buying a new car every three or four years exposes you to the steepest part of the depreciation curve. Most cars will lose 50 to 60 percent of their value within five years. Owning new cars is trading the mere possibility of car repair bills, which might not happen, for the certainty of significant depreciation, which is inevitable.

Of course, car dealers would love to sell you an extended warranty. It’s one of their most profitable areas. That alone makes me think they are not worth it. You are spending $2,000 to buy a $1,000 warranty. And the insurer probably only pays out 50 to 80 cents in claims for every dollar in premiums it receives. It seems like you would be betting against yourself.

I don’t usually endorse products or services here in my newsletter, but I came across a benefit which I think many of my readers might enjoy. It’s a way to provide protection against unexpected car repairs. This might allow you to keep your vehicles for longer and then direct more savings into your investment portfolios. (Selfishly, I will make more if my clients have larger investment portfolios, but hopefully that’s a goal we can both agree on!)

There is a company called BG Products which makes fluids for cars and trucks. They make motor oil (including synthetic), transmission fluid, brake fluid, anti-freeze/coolant, steering fluid, etc. BG offers a Lifetime Protection Plan that when you use their product regularly, if that component breaks down, they will reimburse you for the cost of the repair, up to a specific limit.

Best of all, they will cover your car, even if you don’t start using their fluids until 50,000 or 100,000 miles. That means that if you have a car with 80,000 miles, past the manufacturer’s warranty, you can actually add protection to your vehicle today. They offer double the protection if you start before 50,000 miles, so you might want to start sooner if you can.

There is no limit on miles. As long as you continue to change the fluids within the specified number of miles, your car will be covered. You could keep your car for 300,000 miles and it would still be protected.

Here are the service intervals required for the Lifetime Protection Plan. If your manufacturer suggests more frequent changes, I would follow those instructions. To stay under this protection plan, you need to replace fluids before reaching these limits.

Engine Oil: 10,000 miles

Coolant: 30,000 miles

Transmission Fluid: 30,000 miles

Power Steering: 30,000 miles

Brake Fluid: 30,000 miles

The BG plan will reimburse repairs if these components break, but not for normal wear and tear. You would have to get the repairs done and then submit your receipts for reimbursement, which are subject to the following limits:

Plan 1, started before 50,000 miles: $4,000 coverage

Plan 2: started between 50,001 and 100,000 miles: $2,000 coverage

Full details of covered components HERE.

BG Products are not available in stores, you have to find a shop which uses them. Here in Dallas, I have used M2 Auto Repair, near Love Field. I’ve had a great experience there and can recommend them. If you talk to Eddie, the owner, please tell him I sent you.

If you’re not in the Dallas area, you can find a BG Dealer here. I have not filed a claim with BG, so I cannot vouch for that process, but obviously it is going to be very important to be able to document that you did have the services performed within the mileage limits and that the repairs required were on the specific parts covered by the protection plan.

It doesn’t cover electronics, which is an increasingly large component in modern cars, but can give you some peace of mind over mechanical failures. If you’ve used BG and had a claim, please send me an email and tell me about your experience.

I am aware that other fluid makers offer warranties, including Mobil 1, Castrol, and Valvoline. In reviewing their warranty pages, they may offer similar benefits, but I think it may be more difficult to document proof of eligibility, and they don’t cover all of the systems that BG Products covers.

I’d also love to hear from you if you have ever filed a claim with another oil company and what result you received. Regular maintenance is an important part of keeping your car healthy, and it’s great to see a company stand behind its products. I’m no expert on cars, but I have spent a lot of time looking at spending behavior. Any techniques which can help us spend less over the life of our vehicles will help you achieve your other financial goals. So, even if you don’t end up using the Lifetime Protection Plan, just knowing you were covered may provide you with the extra confidence to keep you car for 150,000 or 200,000 miles.

Car Subscriptions

Posted On February 23, 2018 By Scott Stratton, CFP(R), CFA In Financial Planning /

The question used to be “Should I buy or lease a car?”, but there’s a new alternative, a Car Subscription. It’s intriguing and I am curious to see where this goes five years from now. Maybe you are hearing about it here for the first time.

A car subscription is all-inclusive: for one monthly price, you get the vehicle, maintenance, registration, roadside assistance, AND insurance. You should have no other cost than gasoline. These car subscriptions are brand new and being tested by major manufacturers including Ford, Volvo, Cadillac, and Porsche. Right now, subscriptions seem to be targeted at opposite ends of the market: luxury vehicles for the very wealthy and more entry level vehicles for younger adults.

At the high end, Cadillac offers Book, which will deliver a new Cadillac of your choice to your door. Get bored with an Escalade? Log in to the Book app and swap it for a CTS-V or one of five Cadillac vehicles. You can change vehicles 18 times a year. The program’s monthly cost is $1,800 and it includes 2,000 miles a month. Presently, Book available only in NYC, Los Angeles, and right here in Dallas.

Porsche’s subscription service, Passport, offers your choice of different vehicles for $2,000/month or $3,000/month, currently limited to the Atlanta area. Porsche’s service has unlimited miles and unlimited switches between models. Weather’s going to be nice, order a convertible. Taking a road trip? Swap for an SUV.

The Porsche and Cadillac deals might appeal to people who are very wealthy and aren’t price conscious. I’m sure some companies will offer this as an executive bonus. Other subscribers may have a temporary need for a few months and may find a subscription appealing for its flexibility with being able to switch from a sports car to a sedan or SUV. But for most drivers, it isn’t a very economical alternative to owning a vehicle.

There are two other programs which might be more suited to the average driver, especially if you are paying a lot for car insurance. Here in Dallas, it seems like everyone pays several hundred dollars a month in car insurance, and possibly more, if you have a younger driver in your household, or have some tickets or claims in your recent driving history. In a subscription, the insurance is already included and doesn’t change based on your individual background.

Care by Volvo is the first nationwide subscription program, and will be available for their new XC40 crossover this spring. Both the car and the subscription are targeted at Millennials, but I think will have appeal to many others. The subscription is $600 a month, but if that saves you $200 a month in insurance, that would be similar to a $400 lease, except there’s no down payment. Is the insurance any good? Yes. It’s Liberty Mutual, with $500,000 in liability coverage, and a $500 deductible for collision and comprehensive.

Volvo’s subscription is a 24 month commitment, with 15,000 miles a year included. You can get a new car after 12 months, by restarting the 24 month clock. This program is more like a traditional lease, with the inclusion of insurance and all maintenance and repairs.

Ford subsidiary Canvas offers used vehicles in their subscription program, presently available only in Los Angeles and San Francisco. These are 2-3 year old lease returns, and are offered for $375-$575 a month for a Fiesta, Fusion, Escape, Explorer, Mustang, or F-150. The monthly base price includes 500 miles, or you can upgrade to 850 miles for $30, 1250 miles for $60, or unlimited monthly miles for $90. This is a month to month subscription, with no long-term commitment. You can change cars every month if you want, but if you keep one vehicle, they lower your base price each month.

A subscription might be an opportunity for someone who has very high insurance costs to lower their total costs. The unlimited miles subscriptions, could be an alternative to leasing or buying for the road warriors out there who rack up a lot of miles. For a family that needs a second or third car for just a month or two, a short term subscription might be an alternative to keeping an extra car all year around. While some car subscriptions are targeted towards the very wealthy, other plans will appeal to people with a low credit score who might otherwise have difficulty getting credit to buy a car.

Would I recommend this? The reality is that all vehicles depreciate very quickly when new, so your most cost-effective choice will always be to keep your existing car and drive it for 200,000 miles. But many of us don’t want to keep one car for 10+ years and carry the risk of having to pay for unexpected and expensive repairs, even though these costs are likely to be low when considered over the life of the vehicle. Some drivers will prefer to have a fixed monthly cost for their transportation, rather than tying up $40,000 or more in one car. And that’s why I think Subscriptions are going to be popular, they’re a good match for our innate preferences for flexibility and predictable costs.

Are you considering a car subscription? I’d love to hear about your experience if you proceed or decide against it. For many people, their cars are their second largest expense after housing (or third largest, if we consider taxes). Cars depreciate quickly, so saving money on transportation can leave more of our cash available for investments which do appreciate. Here’s how I hope people will evaluate subscriptions: is the cost of the subscription less than if you pay for the vehicle, insurance, and other costs separately?

My Used Car Adventure, Part II

Posted On May 6, 2017 By Scott Stratton, CFP(R), CFA In Behavioral Finance /

Some people in Dallas pour more money into new cars than they do their investments and financial future. They get a new luxury car every three years, but tell me they cannot afford to put $5,000 into an IRA. I think their priorities are backwards! To sink our hard-earned cash into a depreciating asset will keep us poor and stressed, rather than allowing us to enjoy the peace of mind of financial independence.

Last night, a friend was asking me whether he should fix up his 10-year old Toyota (facing a $400 expense) or buy a new car. Previously, I have written in this blog about my real costs of buying a high-mile used car. Three years ago, I purchased a 2002 Toyota 4Runner with 179,000 miles for $4,500. Seems like an invitation to disaster and disappointment, right? Well, here’s how things turned out…

I sold the 4Runner last fall, after two years of ownership, with 197,000 miles on the odometer. During my ownership, it never broke down and always started on the first try. It was completely dependable and there were no unexpected repairs, only routine and preventative maintenance. I sold it for $4,150, my full asking price on a (free) Craigslist ad, to the first person who looked at it.

That means that over the two years, my total depreciation was $350. I cleaned the car meticulously before selling, and you truly can polish money into a car. If it looks great and you can show detailed maintenance history, you will do well.

While my depreciation was very low, I had maintenance expenses over the two years. The biggest expense was a set of four new tires, $744.84. (Those are some big tires, 265’s!) The rest of the work I performed myself and included: four oil changes, replacing the rusty radiator, hoses, and thermostat, changing the differential oil, steering fluid, and brake fluid, wipers, air filter, PCV valve, two indicator bulbs, and one headlamp. Sounds like a lot, but most of those are 5-minute jobs. My total spend on maintenance over two years was $574.33.

The average car on the road is over 11 years old, but many of us still hate older cars. It is definitely a headache when a car breaks down and leaves you stranded, but that can happen even in a new car. From a behavioral perspective, the inconsistency in our thinking is that we have such a strong aversion to paying for unexpected repairs but are so willing to accept the known and inevitable loss of depreciation.

Why is spending $1,000 on a repair so much more painful than losing $4,000 in depreciation over a year? Depreciation is the bigger expense. Almost every new car will lose 50% of its value in 5 years. By 10 years, you will have an 80 to 90 percent loss.

The reality is that today’s cars are more dependable than ever. When you trade in your 8 year old car with 100,000 miles, chances are that someone else is going to drive that vehicle for another 8 years and another 100,000 miles. But you will have paid 80% of the depreciation!

Now, I realize that a sample of one (my experience with one 4Runner) does not prove a statistical case that all used car purchases are going to be effortless and inexpensive. It is entirely possible that I was just lucky. The car could have blown up the day after I bought it and I’d have lost my $4,500 investment. Fortunately, it did not, but that is a gamble I can afford to take.

My advice remains that the least costly course of action is to keep your current vehicle for as long as possible so that you can spend years on the flat end of the depreciation curve. Maintenance costs should not be unexpected, even though the timing and amounts are always unknown. The key is to remember that your repair costs are still likely to be a fraction of the depreciation costs of a new car. When you have to get a new vehicle, consider a used car and let someone else pay the steep depreciation of the first 3, 5, or even 10 years of the car’s life.

I know rationally that keeping cars for 10+ years is the best option, but truthfully, I get bored with cars. If you are fine with the same vehicle for a decade, that is fantastic. You are undoubtedly being very smart to keep one vehicle for 10 years. But I’d rather get a different vehicle every couple of years, a habit which could get very, very expensive. Luckily for me, I don’t really care if a car is new or used, just that it is new to me.

When I sold the 4Runner, everything still worked and I could have kept on driving it. But I just wanted something different. I purchased a 2006 Mercedes E350 sedan with 123,000 miles for $5,300. Now I am not only flouting the conventional wisdom of avoiding older, high mileage cars, I am doubling down by going from a dependable Toyota with cheap parts, to a luxury car with very expensive German parts.

I’ve had the Merc for a few months and have already put on 5,000 miles, with zero issues. The engine seems quite strong and everything on the car feels very well made. Fingers crossed that it holds up! We’ve had a number of BMWs in the past and I always wanted a Mercedes. I’ve gotten a number of compliments on it, but I think people would be very surprised if they knew how little I paid for it! I expect that, unlike the Toyota, I will not do all the work myself and that my maintenance costs will be higher. I will continue to keep a spreadsheet and report back to you, my readers, and let you know how it turns out – good, bad, or ugly!

Is Your Car Eligible for a $7,500 Tax Credit?

Posted On July 18, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning /

If you are in the market for a new vehicle, you may want to know about a tax credit available for the purchase an electric or plug-in hybrid vehicle. Worth up to $7,500, the credit is not a tax deduction from your income, but a dollar for dollar reduction in your federal income tax liability. In other words, if your tax bill was $19,000 and you have a $7,500 credit, you will pay only $11,500 and get the rest back.

This credit has been available since 2010, but in the last two years a significant number of new car models have become eligible for the tax credit. If you drive a lot of miles, these cars may be worth a look.

The credit includes 100% electric vehicles like the Tesla Model S or the Nissan Leaf, and it applies to the newer plug-in hybrid models, including the BMW i3, Chevrolet Volt, Ford C-Max Energi, Hyundai Sonata Plug-In Hybrid, and others. The credit does not apply to all hybrid vehicles, only those with plug-in technology. While the plug-in cars may be more expensive than regular hybrids, they are often less expensive once you factor in the tax credit.

The amount of the credit varies depending on the battery in the car, and may be less than $7,500. The credit is phased out for each manufacturer after they hit 200,000 eligible vehicles sold, with the credit falling to 50% and then to 25%. So, for those 400,000 people who put down a deposit on the Tesla Model 3, most will not be getting the full $7,500 tax credit. Only purchases of new vehicles – not used – are eligible for the credit.

The program is under Internal Revenue Code 30D; you can find full information on the IRS website here. An easier-to-read primer on the program is available at www.fueleconomy.gov.

Some states also offer tax credits or vouchers for the purchase of a plug-in hybrid or electric vehicle. Unfortunately, Texas is not one of those states! You can search for your state’s programs on the US Department of Energy website, the Alternative Fuels Data Center.

Do you have a plug-in hybrid or electric vehicle? Send me a note and tell me how you like it.

Should You Get a New Car to Save Gas?

Posted On June 13, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning /

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I applaud frugality and will be the first to tell you that it doesn’t matter how much you make, but how much you spend. Wealth is created by the surplus between those two numbers. So, it would definitely make sense to get a more fuel efficient car, and save money at the gas pump, right? Let’s find out.

Cars are much more fuel efficient today. Electric cars and hybrids are at the forefront of this improvement, but so are diesel engines and small turbo engines. Many car makers now offer a 2.0 liter turbocharged four cylinder engine as their base engine. And this isn’t just for economy cars – the base engine for the BMW 5 series, Mercedes E Class, Jaguar XF, and other midsize luxury cars are all 2.0L turbos.

Coincidence? Not a chance! The world’s largest auto market – six years running – is China, at 23 million vehicles a year. To try to slow the growth of greenhouse gases, China imposes an excise tax on the sale of all cars, based on the size of the engine. At 2.0L, the tax is 5%, but if the car had a 2.1L engine, the tax would be 9%. For an engine over 4 liters, like many V-8s, the tax is 40%. This is a significant incentive for car makers to create small engines that offer more power and improve fuel efficiency.

Given the nice gains in fuel economy for today’s cars, does it make sense to trade in your current vehicle for a less thirsty model? Let’s run the numbers for a couple of different scenarios.

1) According to the US Department of Transportation, the average American driver logs 13,476 miles per year. Let’s consider a significant improvement in fuel economy, from 20 to 30 mpg.

At $2.25 a gallon for gas, the 20 mpg vehicle would consume $1,516.05 in gas per year. The 30 mpg vehicle would require $1,010.70 in fuel, a savings of $505.35. That sounds pretty good! Who wouldn’t like to save over $500 a year?

The problem is how much did it cost to save that $505? If you spent $25,000, it would take you 50 years to make back your “investment” in the new car. The gas savings is a 2% return on your money. In terms of opportunity cost, it seems like a very poor return to spend that money rather than keeping it invested. If you could make just 6% on your $25,000, you’d receive $1,500 in annual gains. With compounding at 6%, your $25,000 would become $50,000 in 12 years, $100,000 in 24 years, and $200,000 in 36 years.

So while it is alluring to “save” $500 a year on gas, you are likely to be better off by keeping your current vehicle and keeping your cash invested. Most people don’t think this way, because they don’t pay cash for their cars. If you start to pay cash for your cars, as I do, it will definitely change your perspective. However, don’t think that just because you take a loan or lease a vehicle that this math doesn’t apply to you. Instead of having an opportunity cost on your cash, you are paying interest on a loan or a lease. Either way, there is a decrease in the future value of your wealth, and whether we look at opportunity cost or interest expense, the decrease in wealth is going to be larger than just the $25,000 price tag on the car.

People are not logical about their car purchases. Cars may be a necessity for most of us, but they are a poor use of money. Most vehicles lose 50% of their value in the first five years. People decide they want a new car and then create a rationalization as to why they “need” it. It’s okay to buy nice stuff you want, especially if you have met your savings and investing goals. But let’s not fool ourselves into thinking that spending $25,000 on a new car is a way to “save money”.

Let’s consider a more extreme example of high mpg, using actual car models:
2) What if you drive a lot of miles, say 20,000 highway miles per year. And let’s say you are thinking about trading in your 2011 Toyota Camry for a hybrid, a 2016 Toyota Prius.

The Prius is estimated to get 50 mpg on the highway, versus 33 for the 2011 Camry. At $2.25 for gas, the cost savings is only $463.64 a year. Surprised it isn’t more? Our intuition fools us here – even though the difference in fuel economy is 17 mpg and we are driving more miles than in example #1, the actual cost saving is less. The difference in fuel consumption in this example is 206 gallons: 606 gallons for the Camry versus 400 gallons for the new Prius.

For a base 2011 Camry in clean condition and 100,000 miles (20,000 per year for 5 years), your trade in value would be only $5,744 according to Edmunds.com. For the 2016 base Prius, the MSRP is $25,095. Is it worth spending $19,351 (plus tax) to save $463 a year? No, it is not!

My recommendation: if you are genuinely interested in maximizing the utility of your hard earned dollars, drive your current car into the ground. If you have a 2011 Toyota with 100,000 miles, you’ve already experienced most of the car’s depreciation. Try to keep it for another 100,000 miles. Keeping one car for 200,000 miles will save you a ton of money versus having two cars for 100,000 miles, or worse, four cars for their first 50,000 miles.

The fuel economy question is a distraction. Looking at the total cost of a new vehicle, depreciation is your largest expense. Don’t get a new car to try to save money at the pump. Get a new car – or better yet a used car – when your current car is all used up. When it is time to get your next vehicle, by all means, consider fuel economy along with the other costs of ownership. Until you have to get another vehicle, it is likely going to be more cost effective to stick with your current car, even if it means spending more money at the pump.

The Benefits of an Older Car

Posted On November 30, 2015 By Admin In Behavioral Finance /

The average car on the road today is 11.5 years old today, according to USA Today. Today’s cars are more dependable and long-lasting than ever and yet for many consumers, transportation remains their second largest expense after their home.

Last November, I purchased a used car, and not the typical 2-3 year old gently used vehicle, but a 2002 Toyota 4Runner with 179,097 miles. I wanted a larger vehicle to transport my three big dogs and wanted something I wouldn’t worry about getting muddy or scratched.

Admittedly, I have been leery of older cars. What if they break down? The last thing anyone wants is to have unexpected large expenses trying to keep a dying vehicle on the road. And I especially do not want to have an unreliable or unsafe vehicle when it is 102 degrees in July or 20 degrees in January.

Well, I’ve lived with my old car for a year now and will give you a full report, including a breakdown of all my costs. I drove the car almost every day and put just over 11,000 miles on this year (the photo is my current odometer reading: 190,182 miles). During that time, it has been 100% reliable (knock on wood…). The car has always started and worked perfectly. I have had zero breakdowns and no unplanned maintenance.

As a student of behavioral finance, I think people’s car buying choices are interesting to study. Most of us buy what we want, but then create a rationalization that sounds good for why we “need” a new car. Oftentimes, it’s really about projecting an image of success or trying to fit in with others in the office, neighborhood, or group of friends.

Many people prefer a new car, under warranty, to avoid the unpleasantness of having to pay for car repairs. This is known as “loss aversion”, which means that the pain of a $500 loss is much more intense and memorable than the satisfaction of a $500 gain.

Getting a new car every three years may cost $400 or $500 a month regardless of whether you lease, finance, or pay cash. With an older car, your depreciation can be very small, and instead your main expense is typically maintenance. You may end up spending $800 twice a year in repairs and upkeep. That sounds terrible, but which costs more: $400 a month, or $800 twice a year?

Having a used car may leave you on the hook for unplanned repairs, but the chances are good that those repairs will be a small fraction of the ongoing cost of getting a new car every three years. It’s loss aversion that makes $1,600 a year in unplanned repairs feel much worse than the fact that you might save $400 a month ($4,800 a year) by not having a car payment.

I paid $4,500 for my Toyota, and had to pay $316.75 in sales tax and registration fees. My biggest expense for the year was for a set of four new tires, $744.84. I did all the work on the car myself, including three oil changes, replacing the rusty radiator, hoses, and thermostat. I changed the fluids, including brake, transmission, power steering, and differential oil. I installed a new air filter, PCV Valve, and wipers, and cleaned the intake twice. In total, I spent $521.23 on maintenance, which was quite low since I did the work myself.

According to Kelly Blue Book, the current value of my vehicle is $4,044, so my estimated depreciation for the year was $456. Including depreciation, my cost for the year was $2038, which works out to 18.4 cents per mile (not including fuel). My insurance cost was much lower with this car; I kept the same high level of liability coverage as my other vehicles, but dropped collision. The annual insurance premium was $510.40, less than half the cost of our other vehicles.

What are the takeaways from this experience? A couple of thoughts:

A well-maintained vehicle can certainly last 150,000 miles or more. Your best choice is always to keep your current vehicle for as long as possible and remember that even if you spend a couple of thousand on repairs per year, that is a small amount compared to the costs of depreciation associated with the first 5 years of a new cars’ life.
Buying a used car is always going to be a bit of a gamble. Do your homework and choose a vehicle known for its dependability and ease of repair. Keep up with routine maintenance, using the manufacturer’s recommended schedule. Get to know a trustworthy independent mechanic.
I know that keeping a car for 10 years is a great idea, but for me, I just get bored with a vehicle after a couple of years and want something different. Knowing this preference, I can buy a used car every couple of years and not have the staggering depreciation costs of new vehicles.
It’s okay to spend money on cars, but if you think that retirement, paying down debt, saving for college, or growing your net worth are more important, than you need to make sure to prioritize those goals ahead of new cars. Every financial planner has met lots of people who have a new Mercedes but who “can’t afford” to contribute $5,000 a year into an IRA. Make sure your spending reflects your values and goals, and is not based on what you want others to think.