Last month, my 2000 Honda Civic LX turned twenty-one. Most of its 156,498 miles were earned during the first seven years of its life when it was our only vehicle.
When I bought it in 2000, I drove it off the lot, brand new, for $15,631.
What I didn’t know at the time is how I could have gotten it for only $4,000, a fraction of what I actually paid!
The answer is pretty simple: take $4k today, invest it at a reasonable 8% per year, and twenty-one years later you’ll have $21,343, just slightly more than the $21,250 MSRP for a brand new 2021 Honda Civic LX.
That’s the difference between “you working for money” and “money working for you”.
And yeah, I’ve completely ignored taxes, including sales tax, vehicle taxes, capital gain taxes, etc. While those aren’t insignificant expenses, compounding can reduce their impact as well. Maybe you need to start with $5k, or a higher rate of return, or maybe add a couple more years of compounding
Dear Past Self
If I could send a simple message to my past self, it probably would have nothing to do with delaying my purchase for twenty-years. I’m sure I’d have more meaningful messages for my past self. But if it was about the Civic, I would have given my past self the following advice:
- Don’t buy new; don’t buy at the dealer. Instead buy it used, with maybe two to three years on it.
- Take the money saved and max out my contributions to a Roth IRA (contribution limit was $2,000 in 2000), and place the remainder in a taxable account; invest both in a total market index fund
- Delay buying another vehicle as long as possible
My past self didn’t get the memo on the first two items. I literally did no research into what I could expect to pay before walking into the dealer with my younger brother. Not knowing anything about how these things play out, I’m pretty sure the salesman immediately recognized me as an easy mark.
I hadn’t even heard of Roth IRA’s at the time, still being a poor student with little income. It would be another 5 years before I opened my first Roth IRA account after landing my first real job at Megacorp, post graduate school.
Back To The Real World
I can’t send a message to my past self. What I can do is teach my children about the power of compounding and Roth IRAs. My oldest finished her first year of school without a car, getting rides from roommates and others. When she returns in the fall, she’ll do the same. I do wonder how long she’ll remain car-less.
One option that we’re kicking around is gifting the Civic to her and her younger sister in a year or two when they’re both at the same (highly likely) university. It would cost around $1,300 to ship it, more than its Kelly Blue Book value of $1,200. Seems crazy expensive and probably a bad idea. Having just driven six hours straight in it a couple weeks ago, I would not recommend a 30+hour, 2,000 mile trip in it. I suspect such a long drive might even do it in.
As I’ve been driving my aging Civic the last couple years, I’ve been dreaming about what my next vehicle will be. Will it be another sedan (albeit larger), a crossover SUV, or something larger? What are the conveniences that it will come with that weren’t even available when I bought the Civic in 2000, such as Bluetooth and a backup camera?
The other dream is living in a foreign city where I would need no car, instead walking or taking public transportation everywhere that I needed to go, maybe occasionally renting a car when needed. That’s a much longer dream, years or even decades in the future.
As I continue to dream and delay my gratification, I put compounding to work for me, giving me an even larger, future “discount” on whatever vehicle I end up replacing my Civic with. I suspect, as with so many purchases, it’s a hedonic treadmill and that “new car” smell wears off sooner than later.