May 31, 2010, 10:43 am

Big Car Equals Big Money?

by: The Financial Blogger    Category: Personal Finance
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I recently went out for beers with Mr. Genius and Mr. Conspiracy from my MBA program. Funny enough, I had started a MBA for 3 main reasons, one of them being to increase the scope of my network. Of all the 35 people in my class, I have since kept in close contact with just 2 of them…and I don’t really regret my choices ;-). So I guess we can say that I didn’t really enlarge my business network considering those 2 arduous years ;-). But the 2 friends I found there are worth infinitely more than a bunch of business cards littering my desk drawer!

While we were having a beer, Genius said something funny: “hey guys, we now have living proof that the MBA changed our financial status”. We looked at him knowing he was half serious and half joking.

“When we started, I had a mini van, Mr. Conspiracy had a beat-up jetta and the “Y” (me!) had a scrappy Mazda. Now I have a spaceship (a huge SUV to fit his 4 kids and wife), Mr. Conspiracy has an Audi and the “Y” has an RX-8 and a brand new Tribute”. We all started to laugh.

It was obvious that the MBA had nothing to do with our new cars but it was quite funny to see that the 3 of us have significantly upgraded our rides. But this fact definitely leads to an interesting question:

Do big cars equal big money?

Some people will say that people, like us, with big (expensive) cars are daft. That people, like us, are wasting our money big time on something that loses its value faster than the stock market surfing on a souvlaki. That a car should bring you from point A to point B. And finally, that there are rich people driving their old Fords (Fix Or Repair Daily) for years without changing it. You know what? I think they are half right.

I think that when you have an expensive car, it is a sign that you:

1- Really like cars or

2- You like being comfortable in a car or

3- You have money or

4- You pretend to have money or

5- Most of the above 😉

People that want others to think that they are wealthy will definitely lean towards more expensive cars as it is one of the easiest ways to demonstrate your status in public. A rich car is the equivalent of the stone-age hunter bringing back a mammoth bone on his back at the end of the day. It’s a trophy 😉

Driving a BMW doesn’t mean that you have money. But it is a pretty good possibility though! The funniest part is that people severely question the choice yet they don’t really have an issue with couples who blow $3,000 – $4,000 each winter for a week down south every year. They don’t talk about the guy who renovated his kitchen and sunk $25,000 on it, including granite counters. And they certainly won’t argue with the $5,000 home theatre system with a giant screen during the Superbowl!

When someone is successful (or pretends to be), I admit that I tend to look at what kind of car he drives. Why? Because if someone has to tell you that he is making money, he will surely want to prove it. Low profile millionaires driving around in old cars will never bother to tell you how much they made on their last deal. They are driving an old car because they like the anonymity and they don’t want too much attention!

In the end, driving a nice car is a only a matter of priority in your budget. It’s not a stupid or a smart move; it’s only an expense! If you really can afford the car you are driving, I don’t really see why you should be ashamed of it ;-).

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Comments

Sure it is a matter of priorities, as long as you can truly afford the car or the payments! I bet many people who have a BMW finance it rather than pay cash. And are their savings and retirement programs maxed?

To me, cars are an expense, while education, home renos, etc., have the potential for a return. But the big screen – that’s just an expense too!

Another issue with cars is physical accessibility. My mom is handicapped and their car choices for the past 20 years have been dictated by the ease of access and trunk capacity of the vehicle – not status or cost or anything else. Interestingly the easiest car for my Mom to get into was a Smart car – but it failed on the trunk. So bigger isn’t always better.

It all comes down to status or the perception of status. I would much rather be the quiet millionaire (some day) who drives a 15 year old vehicle and a secure retirement than splash $50K on a vehicle that ultimately will be worth almost zero.

Very true TFB. A friend of mine is the new guy on a trading desk. When he got the job, he decided to upgrade his car from a 1997 Toyota Corolla to a Mazda 3. Why? Because it could have a major impact on the perception of his co-workers. I think we all like to think (or many of us do) that a car does not define our status or the way we are perceived but the truth is that it does have an impact.

I’m betting this friend will upgrade his Mazda 3 when he will sense that he is no longer the “newbie” on the desk.

Wrong? I don’t know.. but we do not create our environment, we live in it.

I see what you guys mean but I just don’t live by those standards. To me, a car not be used to “oversell” how successful one can be and it actually makes me hesitate if I see a salesman with a brand new BMW.

Is the guy:

a) Very successful because he’s taking advantage of his clients?
b) Trying to create an image of a “successful” guy even though he isn’t?
c)Or he is really that good and I should be doing business with him.

Not clear in my opinion.

At Intelligent Speculator, that’s a good example. The only problem is that your friend might have repair costs more than the car is worth… I’m quite sure he had saved some $$$ 😉

Really interesting post!! Yes, big cars “technically” equal big money because we live in a car culture and the car you drive is a way to express an image you want to project… Cars are status symbols.

I like cars and car racing (Formula 1) but I would much rather drive my 2000 Honda CRV until it dies and put all the money I save from not buying an expensive car towards the mortgage. Early retirement motivates me more than any sports car ever could.

by: The Financial Blogger | May 31st, 2010 (1:59 pm)

@ Brock,

I hear you! this is why I bought a 2004 instead of a 2010 RX-8… huge difference in the price 😉

I’d be curious to see if people’s mentality over car had changed over the past 2 years considering the recent credit crunch. I think we are becoming a lot more conservative now than 2 years ago. I can’t say it’s a bad thing either!

@ Allan,
you bring an interesting point. I have never though a financial advisor running a great car could be doing it on the back of his client… very interesting theory!

[…] then read an article today at one of my favorite sites “The Financial Blogger” whom wrote and asked “Do Big Cars Equal Big Money?”. The article was great, but one part of […]

Hey TFB,

Great article.. got me to thinking (especially the part about the yearly vacations) so I quoted you in a quick blog post I just did up.. hope you don’t mind.

http://www.lencurrie.com/2010/05/do-you-judge-people-with-nice-cars-shame-on-you/

Cheers!

by: The Financial Blogger | May 31st, 2010 (3:54 pm)

Hey Len,

thx for the mention 😉

How do you define a big car? Nowadays, anyone (with a job and a decent salary) can get a BMW series 3 or an Audi A4 by leasing it. You certainly don’t see many people driving Audi A8 or Porsche 911 (recent model) or an Ashton Martin.

However, all of the reasons you outlined are valid. When I see a young adult with a nice car (new model Audi A4 for example), the first thing I think is that he doesn’t have kids yet. Much of his income pays for the car. He probably has an iPhone too and all the other convenient luxuries … Then you see a older man in his 40s with a new A4, you don’t think much about it because he should have saved money and you expect that he could afford it. (You never know though…) You really never know until you look further … A new BMW 318 is not the same as a new BMW 740 …

In your list of example, a 25K$ kitchen can actually be an investment whereas the trip down south is not or the excessive spending on technology. Frugality requires a lot of commitment!

by: The Financial Blogger | June 1st, 2010 (4:10 am)

@ Passive Income Earner,

defining big car can be a little bit more complex. But let’s just say a car over 40 😉

as for the “investment” in the kitchen, if you look at any books about home renovation, none of them will tell you that you will get your money back right away. If your house worth 250K and you put 25K in your kitchen, it doesn’t mean that you will be able to sell it at 275K 3 months after, right?

by: 2Hirondelles | June 1st, 2010 (5:43 am)

I have always viewed a car as a way of getting from point A to point B. I buy what I need, not in the hopes of impressing people. Now, I love the looks of the Hummers, but even if I had the money, I wouldn’t buy one because I could not justify the incredibly lousy gas mileage and conspicuous consumption. Make one that costs 22K and uses 7 l per 100 km, though, and I’m there!

For many, cars are status symbols, but from my perspective, that attitude tends to work against you: I will be less inclined to do business with you if that is how you think.

by: The Financial Blogger | June 1st, 2010 (7:28 am)

@2Hirondelles,

I like the Hummers too but I won’t buy one because of its huge impact on the environment. I’m with you ;-0

I think there is a thin line between noticing (and maybe making a few assumptions) one’s car and judging the person solely on that fact.

To be honest, I don’t really mind who’s driving what. However, I will take a closer look if someone is bragging about how much he makes. In those situation, I think it is a good indicator of success. As I previously mentioned, someone who wants to maintain a low profile and drive a “normal” car won’t tell people that he is running a successful busines either 😉

@TFB
I agree that investing in renovation is not an immediate return. It also depends of the area where you live in and how the other houses are. The reality is that if the house is 20 years old, chances are a new kitchen will help get the price you want as opposed to reduce it because it’s not attractive anymore. The ROI may not be that you paid 250K and now you get 275K. It may just be that you get to keep up with the value. If you get too expensive for the area you live in, it doesn’t help either. Market value probably won’t give you what you want.

In the city I grew up, everyone builds, selling a house is not something that really happens much. Land is so cheap. In the Greater Vancouver Area though, there is no land, houses tend to be old until you move out to the suburb. Renovating / upgrading is a regular process. You need to make sure you pay the appropriate price before renovation. There is also a big difference in cost if you do a flip renovation versus a live in renovation.

Lots of factors to consider and I agree that a 25K reno won’t see the ROI in 3 months unless you initially paid less in order to do the reno. A well planned reno can be an investment though.

Cheers.