The reason you’re still poor: Your car
The other day I was listening to the radio to congratulate a girl because she had just got a job after a long time on the dole. What blew my mind was that the first thing she had done since she got the good news was buy a new car to go to work “because it was a little far away”.
I understand that, in most cases, someone who has been unemployed for a long time will not have much savings to speak of, so buying a car (and a new one at that) because you have just been hired seems to me to be the worst decision you can make at that moment.
The justification may be that the job was a bit far away and that’s why I needed a car blah, blah, blah, but whatever, you can’t afford it!
Another anecdote that happened to me just a couple of weeks ago: I met for lunch with a friend that I hadn’t seen for a long time and at one point in the conversation he told me that he was thinking of buying a Chalet in the area of Las Matas (in the outskirts, about 40 minutes from Madrid on a road full of traffic during rush hour).
The funny thing is that he currently lives 5 minutes away from his job, but he wanted to move because the house he could buy in Las Matas was much bigger than the one he currently has (a chalet!).
Although it seemed that he was still thinking about it and evaluating the pros and cons, I had the impression that he had practically decided: much cheaper houses, a big house, good schools, near the countryside and the mountains of Madrid, fresh air, etc.
It doesn’t seem such a bad idea, does it? After all, a 40 minute drive to work isn’t bad at all, is it? It is the most common if you live in the province of Madrid.
Yes, it’s really very bad. And this kind of wrong ideas about what is a reasonable use of the car and what is not, is what causes a lot of families in Spain to remain poor.
Driving to work is too expensive
Suppose we take the typical day of my friend once he’s moved to the Matas. If we multiply 60 km per day to and from work at the average cost per km in Spain of 0.31 km, we will have 18.6 euros per day of direct expense for driving to work.
Of course, it is possible to drive for less. But it is also possible to spend much more if the car is new and you have bought it in installments. If you want to calculate the cost per kilometer of your car and the financial effort involved, here is a good calculator (I assure you that you will be surprised).
Following my friend’s example, we will have to add to that cost of 18.6 ? per day the time spent in going to work. By moving away, you will have voluntarily added 80 minutes a day of penance behind the wheel, or what is the same, almost one extra day of work a week. So, in reality, it’s like you’re working 6 days a week instead of 5.
After 10 years, multiplied by 2 cars (since his wife also works) the decision to move will have cost them around 100,000 euros of wealth (or 150,000 euros if they invested that 38 euros a day in more profitable things) and the equivalent of 1.3 years of work time EACH! risking their lives behind the wheel.
And all of this every 10 years, and with a commute to work that many of us in Madrid would consider “NORMAL”.
You may have noticed that there are not many 30 or 35 year old couples who have 100,000 Euros in assets, but instead it is not so rare to see them making long trips to work with new and credit-buying cars. These two realities are directly related!
The alternative I would recommend to my friend, if he ever wants to hear my humble opinion, is to continue living 5 or 10 minutes away from his job by bike and immediately sell his two cars and trade them in for a single second-hand family car that costs less than 1/10 of his annual gross income.
My friend has a management position and a good salary so he will have no trouble finding a car for that price.
Booking an extra £10,000 to keep the car in good condition will still allow you to enjoy an extra £90,000 in cash after 10 years (it goes by faster than you think).
If you also combine this trick with the recommendations I’m giving in this blog, you will be able to be financially independent in a few more years and move where you want to live from the income (instead of going to work by car every morning and supporting your boss in exchange for a salary).
If you need a car, yes or yes, better second hand
As I said before, it is possible to drive cheaper and reduce the cost per kilometre somewhat.
That’s why in my family we still have a 14+ year old car for occasional trips and some weekends (well actually I use it a little more than I should so let’s see if I make a little more effort to follow my own advice).
If you are able to buy a used car for less than £5,000 you may well be able to do even more than £100,000 km without having to spend a lot on repairs. In this case the depreciation of the car is only 5 cents per kilometre.
The most efficient and cheapest car you can think of will cost you about 15 or 20 cents per kilometre. Most people can’t drive that cheap. And this is not counting the cost of insurance or parking because I assume that even if you don’t drive to work, you will still have a car at least.
For many it will be impossible to do without a car altogether, but if you are one of them, congratulations! Of my close friends I only remember one who lives without a car in the family (and of all of them he is probably the one who can afford one the most).
Do your best to live close to your work
To live closer to work you have two options. Live in a house close to your work or look for a job close to your home. If you have the possibility, change your job! But despite these options, the concept of living close to work seems completely secondary to many people.
Although it should be much more important than salary or even the type of work you do, most of us put distance to work below the price of housing, the supposed quality of schools or personal preferences for one area or another.
After housing prices, schools are often one of the most common reasons we move away from work. But unless you’ve met with each and every school principal you have nearby and they’re a disaster, you may be doing your children a disservice.
Which is better, going to a school with “better grades” and richer classmates or going to one with a more diverse, real-world environment with 2 hours of extra time every day to read books with Mom and Dad?
And how about having an extra 300,000 euros, before you start college, that hasn’t been wasted and burned on cars and gasoline during the years of school life?
Driving to work is even worse than you think
Let’s do some simple numbers to see how ridiculous it is to drive to work.
Let’s suppose that the average cost per kilometre of a normal car is 30 cents and that the average salary of the Madrid worker who goes to work by car is 15 euros per hour.
Each kilometre you drive twice on your way to and from work becomes approximately 500 km every year, or in other words, an annual fee of 150 ?.
For each of these kilometers you also waste about 4 minutes between the trip and the return, which added together makes a total of 15 hours a year (225 ? of your time).
Therefore, every kilometer you live away from work steals about 375 Euro a year in expenses.
375 a year pays the interest on 12,500 euros of housing with a mortgage at 3%. In other words, a rational person should be perfectly willing to pay 12,500 euros more for a house that is 1 kilometer closer to their work and 375,000 euros more for a house that is 30 kilometers closer.
If we talk about a couple in which both of them drive to work these figures are 25,000 and 750,000 euros respectively.