Note: read my previous post on the Money Multiple or this will make no sense.
Sporty. Quick. Sleek and low-slung. I could imagine myself carving up the canyons near Malibu and Topanga in this small, beautiful, and exciting machine.
This car is the Mazda Miata MX-5 RF sports car. It’s not the car in the featured image, but it costs just as much. I’ll explain how shortly.
Relative to one of my previous cars (BMW M5, albeit used), buying this car is responsible, right? I work so hard and for so many hours, I deserve a little fun don’t I? NO. Ideservititis i.e. creampuffery is a lethal enemy to financial independence. The Money Multiple is its vaccine. Indulge my state of mind for just one second, though.
This car, fully loaded and with a manual transmission (of course) costs a total of around $36,000. According to my personal Money Multiple (“MM”), this costs me $36,000 x 7.8 = $280,800 if I buy it outright. Wheew, that’s a lot. However, what if I’m the typical consumer and can’t afford to buy it outright? I want to finance it over 60 months / 5 years! How do you use the Money Multiple to figure this out?
The original Money Multiple table is designed to calculate for a one time expense. It is also easy to use it for one year’s worth of expenses. But what do you do if you’re financing something like a car for 5 years? First, let’s look at the cost of financing this for 60 months at a 1.9% APR. Mazda’s website all-too-easily tells me that, hey, this is doable, only $595 per month! One year of these payments is $7,140.
Next, figure out your Money Multiple ladder. Since this car is going to take 5 years of payments, I need my Money Multiple 5 times. However, one year from now I am one year older and one year closer to retirement, so the math changes and my Money Multiple isn’t the same. This difference increases with each additional year. So, to adjust for this, I take the Money Multiple table and sum 7.8x as well as the preceding 4 years’ Money Multiples like this:
I go vertically in the table to represent the passing of each additional year. The sum of these Money Multiples is 36.1x. This is my multiple for a 5 year structured debt like a car payment. Now, I multiply the total of a year’s worth of payments ($7,140) by this and find that this car, when financed, still costs me a total of $257,574!!!
While this is less than the cost outright if I buy it cash, this is only because the interest rate charged is low at 1.9%. If the interest rates exceeds your real rate of return, it means trouble.
Using the Money Multiple, I was able to see this as a quarter-million-dollar car that it is instead of the relatively inexpensive $36,000 car Mazda wants me to think it is.
BTW, in case you’re curious, this is the car we ended up getting after the Money Multiple sobered me up to reality:
This rolling aphrodisiac cost me a total of $1,800. I don’t need to refer to the MM again to know I came out ahead!
Now that you see how the Money Multiple can calculate multiple years of expenses, how much could you save by quitting your smoking habit, making your food at home, or buying a jalopy (or dare I say, biking)?
Recommended reading about cars and FIRE: