Ahhhhhhh. The shiny new toy everyone thinks of when they want to get a vehicle. One of our readers, Tony, is thinking about getting one. What do you think?
Dear MoneyNing,
I’m 24 years old and have been fortunate enough to land a really good job straight out of college. I now earn $100,000 a year, max out my 401k/Roth IRA, and my retirement portfolio is already valued at $35,000. I also saved $23,000 in a taxable brokerage account that acts as my emergency fund.
I’ve been driving a beater Honda Civic since the college days when I needed a ride to get me to my part-time job, but it’s giving me serious issues so it’s time for me to get a new ride.
I want to get a Tesla 3 and that’s going to cost roughly $50,000. I know cashing out my retirement funds to buy that beauty is a really stupid move, so I plan to finance the car with all the cheap loan options that are out there.
Can I afford one? Talk me out of it if you must!
There’s a lot to like about Tesla cars. I have a friend who bought a Tesla 3 a couple of years back, and I’ve never seen people get excited about their cars like how Tesla owners do about theirs. The company Elon Musk has been able to build from scratch is nothing short of spectacular. He symbolizes the pinnacle of the American Dream. Owning a Tesla isn’t just merely buying and driving a car, but being part of this history. I can see why you would want one, but let’s get right into the finances.
First of all, congratulations are in order for being able to max out your retirement accounts and build a healthy savings cushion at such a young age. I poked around and a likely financing option for you is to borrow $40,000 for 60 months. At a 2% interest rate, the monthly payment would be $701 and at 4%, $737.
For discussion purposes, I’m going to assume that you find a killer deal and the vehicle is going to cost you $700 every month. Add in the extra insurance cost at your age and it’s easily $800 a month.
Have you made this calculation? There are so many Teslas in my neck of the woods that, as crazy as this sounds, the $50,000 car no longer feels like a frivolous purchase. Still, that money is a big jump from what I assume is practically paying nothing to drive the Honda Civic.
You can certainly afford to pay $800 a month for something you truly love. The question is whether the monthly outlay is worth the cost to you. Is paying $800 a month, plus the loss of compound interest on half of your emergency fund, worth getting that shiny new toy you drive for part of your day?
Also, consider this. A new Tesla is a state of the art vehicle with great range and power. In a few years though, your shiny new toy will slowly become just an outdated tool used for commuting because surely there will be newer Teslas with better range, more sophisticated tech, and more comfortable seats. When it comes time to change cars, it’s most certainly guaranteed that you’ll get another Tesla or a vehicle that’s comparable in price because it’s incredibly hard to downgrade your tastes after you’ve upgraded them. By giving in to your impulse and buying into that awesome new piece of technology now, you aren’t just committing to $800 a month for 60 months, but you are likely committing $800 a month for life unless you are willing to make the probably painful step to downgrade what you are used to later.
There’s no mention of a family, so I’m assuming that you are single. But your family situation will likely change in a few years and you may have other financial priorities. Do you want to commit a huge chunk of your disposable income to the car now for the foreseeable future? Here’s another comparison. Paying $800 a month on a 30-year mortgage at today’s low rates of 3% or so equates to borrowing $190,000. Plus, part of that $800 goes towards building equity in your house. You will eventually own that car with the finance route, but a vehicle is a rapidly depreciating asset that may not be worth that much in five years. Would you rather drive a sweet car for a while? Or would you rather use your purchasing power towards a dream home and be wealthier on paper to boot?
There’s no right answer here. I have a friend who drives a Porsche 911 and rents, while another friend of mine drives a 10-year-old Honda Odyssey minivan but live in a multimillion-dollar home.
When we get together, our 911 friend is obviously the one we envy more. He’s also the louder talker who’s always talking about what we could do, where we could go, and how we can spend our money. The reality, though, is that the friend who drives the older minivan is the wealthy one.
Who do you eventually want to be when you go up? You’ve done well and are in a position to be plenty wealthy if that’s the goal you’d like to pursue. But what do you actually want? Get that question figured out and you have your answer.
