Category: Frugality

Never Sell a Used Car

Yet another blog post from the personal finance mainstream that I must grudgingly acknowledge is good and useful. This one is on the advantages of driving a car until it is an inert pile of rust, rather than trading it in for something new. Get Rich Slowly guest blogger Joel Berry describes the financial benefits of driving a 1995 Geo Prizm, which has got to be just about the least impressive set of wheels imaginable.

That you should always buy cars used rather than new is a common and cliched bit of advice. Like many cliches, it is generally true. But I have always been amazed that the relatively obvious corollary, that you should never sell a used car, is rarely mentioned.

The crux of the matter is a bit of insanity that we all take for granted without reflection. New cars lose something like 25% of their value the moment they get an owner and continue to depreciate rapidly over the next year or two. Step back and think about this. The physical attributes of the car do not change when it is driven off the lot and generally do not deteriorate very much at all in the first years. So why does the market price for the car plummet?

There are basically two explanations. The first is that people are crazy. They will pay good money for the new car smell. Or they think that a newer car will attract members of the opposite sex. Much as I am biased in favor of any explanation based on the mental deficiencies of my follow man, I do not think this is all that is going on.

There is an inherent information asymmetry in the used car market. The owner of a car knows its true condition while the buyer does not. So the market price for a particular used car is based on the average value of similar cars for sale, not the specific value of the car in question. An owner considering selling a car will compare what he knows the car really to be worth to what he could get if he sold it. If it is worth more than the going rate, he holds on to it, if it is worth less, he sells. Which means that the used cars for sale tend to be the bad ones, which in turn reduces the average selling price, which means even fewer good cars are for sale, and so on. This is from a truly seminal paper published in 1970 called The Market for Lemons: Quality Uncertainty and the Market Mechanism.

On any rationally objective measure, used cars are cheap as compared to new ones. Moreover, and this is the point that most personal financial advisers miss, the average value of used cars that are for sale is far less than the average value of similar cars that are not for sale. So unless you have a real clunker, that car in your driveway is almost certainly worth more to you than you could get if you sold it.

It would be hard/impossible to get real numbers, but I am of the opinion that you take a bigger hit selling a used car than you do buying a new one, at least on a percentage basis. The optimal car strategy is to buy two- or three-year-old used cars and drive them until they are scrap metal. Which is what the experts recommend. But the real benefit is on the back end, not the bargain you get up front. Given the choice, and here is where I part company with the established wisdom, buying new and driving the thing until it stops running makes more sense than buying youngish used cars and selling them again when they are not so young.

categories Cars, Frugality, PF Blogs | | datetime January 21, 2009 7:01 am | comments Comments (93)

Big Ben Franklin

The blog Get Rich Slowly had a post two days ago celebrating Benjamin Franklin’s 303rd birthday. I’m sorry I missed it. (The date; not so much the post.) Little Ben came into the world right here in Boston, about where the Claire’s store is now.

I’m a big fan of Ben’s, although not for the reasons that attract the Get Rich Slowly crowd. (And wouldn’t calling the blog Get Rich Slow be more parallel with get rich quick? It’s a great name anyway.)

Franklin was a very successful entrepreneur on what was then a wild frontier. In his spare time he was the leading American statesman and diplomat of his generation. And that stuff they told you in school about his discovering electricity is more true than not. Three centuries later, one end of your AA battery is labelled “+” and the other “-” because that’s what Ben decided to call them.

But for the adherents of the frugal faith, Franklin is known for the aphorisms he published in his Poor Richard’s Almanack and rehashed in Father Abraham’s Sermon, a.k.a. The Way to Wealth. These were wildly popular works in 18th Century America. You might say they are the beginning of our personal finance advice genre.

The Way to Wealth is all the more convincing because it is from a notably wealthy man. But just like the personal finance gurus of today, Franklin did not get rich from following his own advice so much as from selling it to others. It is not clear how frugal he was in his own life; he certainly understood that making a good show of being thrifty was good for business.

It is clear that getting rich slowly and quietly was not his thing. At 17, he skipped out of his apprenticeship to his brother in Boston (after learning the printing trade) and settled in Philadelphia. He fathered an illegitimate son that same year. By age 24 he was publishing a newspaper of his own and agitating for political reform in Pennsylvania. He managed to found most of the civic institutions the city needed, including a university, a public library, a volunteer fire department, and the militia. And then on to a bigger stage. In 1757 he got himself appointed the colony’s representative in London. He stayed there more or less continuously until the revolution broke out in 1775. If things hadn’t gotten nasty he probably would have lived in the big city for the rest of his life. His wife was back in Philadelphia the whole time.

Like I said, I love the guy. But those aphorisms of his, many, if not most, borrowed from others, may not relate all that well to his life. He did not, it bears pointing out, ever sign his own name to them. Get Rich Slowly quotes one of them as “Who is rich? He that rejoices in his portion.” That’s not in The Way to Wealth. As far as I know, it is in one of the 25 issues of the Almanack, but it’s originally from the Jewish Mishna, quoting Shimon ben Zoma two thousand years ago. (Pirkei Avot 4:1) Authorship aside, I am pretty sure that in real life my man Ben was not the kind to be satisfied by what he had already.

categories Frugality | | datetime January 19, 2009 1:20 pm | comments Comments (55)

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