14 Apr Your car determines your savings level
You think that as a high income earner, you have the luxury of splurge purchases. You do, but these expenses do cut into your savings rate, much more than you’d think.
Suppose you decide to buy a luxury weekend car that is fitting for a hotshot doctor: The Mercedes E63 AMG. 550 horsepower in a V8 engine. You can probably get a little over 20mpg on the highway. If you buy it from the dealer and get a deal, you might be able to get for around $100,000 out the door. If you are a deal finder and troll eBay for a used model, you might be able to get a 3 year old model for around $60,000. A deal, right?
With an excellent credit score, you could even score a great interest rate. A $60,000 vehicle could be financed for 5 years at around $1,000 a month.
Maybe add in a few thousand dollars a year for insurance and maintenance costs, the fancy weekend car is still worth it! Premium gas at $3.60/gal and a lousy fuel economy will also add few thousand dollars a year to the upkeep.
As a doctor with an income of over $10,000 a month, you can surely afford a splurge. Maintaining a luxury car might only cost you $1,500 a month for 5 years, and then drops off precipitously after you pay off the car. That’s an annual cost of only $18,000!
Back to reality though: your $18,000 comes at a cost of post-tax dollars. Remember our previous article, you have to earn quite a bit more than that in order to pay for the car. If equivalent pre-tax dollars are used, you can fund an entire 401k/403b for an entire year.
The decision is yours whether you think that you can afford the luxury. Take a look at AMA’s Physician Survey data, and then you start wondering how high income physicians still have a relatively low net worth.