Your next car may be a life annuity. It will look like a car. It will drive like a car. It will function like a car. But, if you do it right, it may also provide more effective income than any conventional savings vehicle.
This notion occurred to me as I was reconciling the Burns family checking account. I saw that the interest rate on our balance was a pathetic 0.06 percent a year. Committing to certificates of deposit is nearly as painful. Basically, our friends at the Federal Reserve have made conventional saving a deeply fruitless activity. According to the Bankrate website, for instance, the average 12-month certificate of deposit now yields 0.24 percent. With inflation running at 1.5 percent, anyone who uses conventional savings is being guaranteed a loss of purchasing power.
One solution may be in our garages. If we can’t get a decent cash return on our savings, maybe we can get a decent non-cash “return” with a more efficient automobile.
Here’s how. Please note that I am not using extreme assumptions, like an all-electric Leaf or Tesla, or even a 50-mpg hybrid. If you trade your 20-mpg conventional car for a 40-mpg diesel or hybrid car, you’ll cut your fuel consumption in half. If you normally drive 12,000 miles a year, your fuel consumption will drop by 300 gallons. At the current national average price of gasoline, $3.67 a gallon, you’ll save about $1,100 a year.
To get that amount of interest from the average bank CD, you’d need to deposit $458,750. You’d also have to divide it between two banks to be sure of FDIC coverage. That’s more work than visiting a car dealership.
Those figures, however, aren’t an apples-to-apples comparison. Interest we earn on CDs is subject to taxation. But money we don’t spend is tax-free. As a consequence, a saver in the 15 percent tax bracket is saving the pre-tax equivalent of $1,295 a year. A retired saver in the 15 percent tax bracket who also avoids the taxation of some Social Security benefits by needing less income is saving the pre-tax equivalent of $1,421 a year.
For a retiree to get that kind of income from a one-year CD, you’d need to deposit $592,083. You’d also have to divide it between three banks to be sure of FDIC coverage. Most people don’t have $592,083 to put to work that way.
But lots of people have a car in their garage, as well as some cash in their checking accounts. If we insisted on a 4 percent yield on our non-spending — the equivalent of the Good Old Days of saving — we could afford to spend about $32,375 ($1,295 in pre-tax savings divided by 4 percent) on a new and fuel-efficient car.
That’s a lot easier to do than putting the required cash in a bank CD. And with all that new car smell and nifty newness, it will be a lot more fun.
But this analysis has overlooked something: Cars wear out. Drive them long enough or far enough, and they won’t go any further. That doesn’t mean, however, that they won’t last as long as an older human.
Today, the average age of cars on the road is a record 11.3 years. Since that’s the average age, we can assume that many are still older. In fact, some Canadian figures tell us that about 93.5 percent of cars are still on the road after 10 years. The percentage declines to 23.2 percent of cars after 20 years. The same research tells us that some brands stay on the road a lot longer. For example, in Canada, 40.3 percent of Hondas are still on the road for 16 to 20 years, while luxury brands like Acura (45.7 percent), Cadillac (45.1 percent), Lexus (72 percent) and Mercedes (76.6 percent) remain on the road even longer.
So a comparison with older human beings is in order. If you happen to be 65 to 70, your prospects for “staying on the road” are quite similar. While a higher percentage of cars than 65- to 70-year-olds are on still on the road out to 15 years, humans pull ahead after that -- unless, of course, you’re comparing the humans to a luxury brand.
Is this a crazy idea? You bet. But crazy ideas may be a good response to crazy government policies.
SCOTT BURNS is a principal of the Plano-based investment firm AssetBuilder Inc., a registered investment adviser. His email address is firstname.lastname@example.org.
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