I Just Sold My Used Car for $150,000+ FI Dollars

Cars are expensive. Even if you’re buying used, the ongoing cost of car ownership is enough to make you seriously consider some combination of walking, Lyft and hitchhiking. Since we moved to Salt Lake City last November, one thing we’ve been seriously eying is the idea of getting rid of one of our two cars. Last month we finally pulled the trigger and now we’re a one-car household! The haul from the sale?  Over $150,000 financial independence dollars. Let me explain.

What is a Financial Independence Dollar?

An FI dollar is how much you’ll need to save to continue paying this expense for the rest of your life. The idea is that your Total FI number needed will include this expense alongside all other spending (housing, living expenses, travel, etc). This Total FI Number is going to be large – usually well over $1 million.

There is a simple way to calculate it which is used in my Financial Independence Calculator. It comes down to two variables – your yearly spending and your withdrawal rate. Withdrawal rate is the percent of your total savings you want to spend each year.

Without getting too deep in the topic, a 4% withdraw rate is somewhat safe but could require lifestyle tweaks if you’re extremely unlucky. A 3.5% withdrawal rate or lower is considered extremely safe.

Wait, why does a lower withdrawal rate mean less spending money?

This is a question I’ve gotten a lot (and sometimes I’ve even been confused about it when responding to emails). Let’s revisit the formula real quick.

YearlyExpenses x (100/WithdrawalRate) = Total FI Money Needed

If your household spending is $60,000 and you’re using a 4% withdrawal rate, here’s what this would come out to:

$60,000 x (100/4) = $1,500,000 total savings needed

You can double check this number to see how much you would spend every year by doing the math in reverse:

$1,500,000 x 0.04 = $60,000 spending per year

$1.5 million is nothing to sneeze at.  That’ll take a while to save up, but at that point, you could call yourself “financially independent” (woo!!!).

If you change this withdrawal rate from 4% down to 3%, you’ll need to save up even more:

$60,000 x (100/3) = $2,000,000 total savings needed

Whew, an extra $500,000?! “But I thought you said I was FI?” The $1.5m number is how much you’ll need if you’re flexible, while $2m is how much you’d need if you want to be nearly certain you would have enough to not need to change your lifestyle at any time going forward.

If, on the other hand, you had $1,500,000 and decided to use a 3% withdrawal rate that would give you less money to spend each year:

$1,500,000 x 0.03 = $45,000 spending per year

For that $1.5m to last, you’d need to spend less than $60,000 a year, but you’d be completely safe (historically speaking) spending at least $45,000 of it. If you’re flexible with your spending and spend in the $45k-$60k range each year (spending less during years with a down market) you’d be in a great position.

How Flexible?

If you saved up $1,500,000 (the 4% WR number in the above scenario), you’d be FI, but there’s a chance that you’d need to make a few lifestyle changes if the market fell. This could mean lowering your spending by as much as 25% (down to a 3% withdrawal rate on your same income) on years with a major market drop.

If lowering your spending from $60,000 to $45,000 is completely unrealistic, that might be a good indicator to save up more. If you have some fat in your budget you could cut in an emergency, this would be the time to do it.

As an example, if you had decided to retire in 2006, you would have immediately been hit by the great recession. In 2008 alone, the S&P went down by 37%! Since then it’s been up every year for 10 straight years (which is kind of nuts if you think about it). By lowering your spending from $60,000 to $45,000, it’s similar to putting an addition to $15,000 back into your savings that year.

$1 invested in 2006 through today would be worth $2.76. The $15,000 you didn’t spend in that first year would be worth $41,400 today in 2018!

By being a little flexible in one down-market year, the effect of that money in a decade would have been almost enough to pay for an entire extra year of spending later. This is why it pays to be flexible.

Ok, back to car ownership.

The True Cost of Car Ownership

What’s really exciting about the above formula is that cutting even a small expense can have a massive change on the end result needed. You’re multiplying yearly spending by 25 which can climb fast. Car ownership has a few expenses. Here’s a look at what my expenses on a completely paid off car looked like over the last year.

$290 a month or $3,480.00 a year makes car ownership one of the largest line items on our budget. That number would be doubled if we had car payments too!

Up until recently, it was also completely unrealistic for us to get rid of one car. In Orlando, we both drove to our jobs – and in opposite directions. Sharing a car would have meant getting up an hour earlier and braving I-4 traffic. If you’re not familiar with I-4, this graphic is completely accurate.

Any time we spent on I-4 was painful, scary time, where were feared for our lives. OK, it’s not that bad, but it’s still enough to avoid whenever possible.

We can use the same formula as above to determine the true cost of ownership and determine how much we would need to save up to continue having two cars.

$3,480.00 * (100/4) = $87,000

Of if we used 3% rate instead, this would be even higher.

$3,480.00 * (100/3) = $116,000

$116,000 is my personal cost of car ownership at 3%! Even that assumes that my current car is paid off and will last forever. If I decided to get a new (used car) priced at $15,000 every 15 years, that’d add another $33,333 to this ($1,000 * (100/3)) for a total of $149,333 (or $112k @ 4% WR).

If you have two cars, your car spending could be double this – closer to $300,000. If you’re spending $40k every 15 years on two cars instead of the minimum, that quickly grows to over $400k household stash needed for supporting two cars.

In other words, cars are expensive.

Will You Need Two Cars Without Work?

If you’re working and you’re actively using two cars, or can’t imagine getting rid of your car – that’s OK! The only thing that made getting rid of one car possible for us was moving to a place that had acceptable public transportation.

One of Mr. Money Mustaches most common recommendations is to bike. It should be reminded that he also has a Nissan Leaf. It’s OK to have a car. I’ve been trying to hike more, and I can without a doubt say that getting to those places on a bike would be a complete pain in the ass. Needing a car can be part of your FI plan. I’d even encourage it! Having a car will allow us to explore a ton of things on my goals list that would not be possible with public/bike/rideshare services only.

Even if you’re not planning to change locations, if you didn’t have your current job, then would you really need a car? Or one for each person in your household? If, as part of your FI plan, you determine you could get rid of a car then that’s potentially $150,000 less you’ll need to save! For couples, this is especially beneficial area when combining expenses (one of the few that was beneficial for us).

What’s your plan? Are you planning on having fewer cars once you’re not working? Have you already made this change? Would you go back to having another car?