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Drive Rich or Be Rich

By Thomas J. Stanley on Jan 31st, 2012 in Studying the Wealthy

Ranger X. Rich was profiled in an earlier blog. I met him “as we hiked out of the large parking lot adjacent to the wilderness area.”  He was in the process of ticketing those who had not paid to park in the lot [under the honor system].   He believes in the “rich first system” when distributing tickets.  He seeks out prestige makes of motor vehicles to ticket first because he thinks that rich people don’t pay taxes, they don’t pay to park. And Ranger Rich believes that rich people drive prestige makes of cars.  But, as I pointed out in the blog and in Stop Acting Rich,


The median price paid by millionaires for their most recent acquisition was only $31,367.  The typical price paid by decamillionaires was $41,997.  . . . many millionaires drive so-called common, nonprestige makes of cars; . . . .


But what if Ranger Rich is like many people who define rich in terms of income instead of net worth? Certainly many drivers feel the need to display their socioeconomic achievements by acquiring prestige makes of motor vehicles.  They may think that those who are successful in generating high incomes drive luxury brands.  And correspondingly drivers of more common makes have dull normal income credentials.  But the hard data suggest that the level of prestige of a car and the income of its driver are not anywhere near being perfect correlates. In fact, many drivers of luxury makes have neither the levels of income nor net worth which would qualify them as high economic achievers. 


Along these lines, Joann Muller, writing for Forbes.com, poses “what the rich people really drive.” She defines rich people in terms of income, not net worth. 


. . . the richest people were the most likely to buy luxury brands [39% for people with household income above $250,000 vs. 8% for those people who earn less than $100,000 a year].


. . .61% of people who earn $250,000 or more aren’t buying luxury brands at all.


Her analysis indicates that those households with high incomes are more likely to drive luxury cars.  But just because someone is driving a luxury brand it does not necessarily mean that the driver has a high income or a high net worth, for that matter. 


I estimate that there are 2.5 million households or nearly 2.2% of the total that have annual realized incomes of $250,000 or more.  Using Ms. Muller’s estimates that 39% of “the rich” buy luxury brands, one can estimate the number who do so, approximately 975,000.  Ah, but this population is much smaller than those households who drive prestige makes but have annual incomes under $100,000.  About 30 million households have annual incomes in the $50,000 to under $100,000 bracket alone.  Translated:  8% of 30 million = 2.4 million who are buying luxury cars but are not in the so-called “rich” category.  This population is nearly 2.5 times the size of the high income/luxury vehicle buyer.


Could it be that it is the pseudo affluent, the aspirationals, who are keeping the manufacturers of prestige makes of motor vehicles in business? 


 

8 responses to “Drive Rich or Be Rich”

  1. Tony Rovere says:

    The reason this is the case is simple. What is the average car/lease payment on one of the ‘affluent’ cars? $400? $500?

    What would happen if you invested that money into a good growth stock mutual fund for 30 years?

    The answer is…you’d be rich.

    And Mr. Stanley’s analysis goes beyond just cars and could be applied to any product. Look at any female ‘fashionista’ between 18-35 years old. What are they doing with their retirement? They are wearing it.

    So the key is to manage your expenses, live within your budget and invest heavily.

  2. chris says:

    A member of our practice owned a BMW. Everytime that car broke down it had to towed to Memphis or Birmingham. I drive Toyotas almost exclusively since they almost never break down and can easily be repaired locally. I owned a ford that had to be repaired 13 times with less than 100,000 miles. I will never own a ford again. It is not just the cost of the vehicle but the cost of upkeep and repairs. BMW mechanics charge twice what our local toyota mechanics charge.

  3. Nick says:

    Here is strange but true story.
    I own real estate. Young couple (in late 20, early 30s) came to rent the place. I asked reason – why they are looking for an apartment?
    Wife indicated that they (Husband and wife) went through foreclosure and now they are living with their in-laws with their young kid.
    I checked their car which was latest model luxury SUV. They were interested in the apartment. So, as a part of process, I reviewed their financial numbers.
    Both were making total more than 120k with less than 2k in assets, living with their in-laws. Both were working in the bank.
    My feeling was that they were driving an expensive car to show/prove that they are financially successful.

  4. Againstthegrain says:

    Just today I walked through a parking structure to my bought new-paid-cash-for 2007 Honda Fit. I had to make a slight detour to walk around a half dozen fashionably dressed young men and women oohing and aaaahing over a shiny and new-looking Mercedes-Benz (no idea which class, model, or year, as luxury cars hold little interest for me). I was paying more attention to the people who were obviously very impressed with this vehicle, practically drooling with envy.

    One of the young men boldly asked the car owner (leasee?) how much his monthly payment was (nosy, huh?). I thought it was interesting that he asked about the monthly payment, not the price paid, but I guess that betrays his financial mindset. The answer he received to his question was “3”. I know very little about the cost of MB cars, but whether the “owner” meant $300 or $3000, I hope the bragging rights and admiration of his peers are worth the substantial cost of driving that car.

  5. BD says:

    When I see a person driving an exotic or a luxury car (less than 4 years old)I assume 90% of those drivers are making up for lost opportunties, trying to impress their friends and/or getting over some setback. Those under 22 years of age..I give them a pass as they are young and hopefully learning what it takes to maintain a car. There is no substitute for experience. The older I get the less I pay attention to the car one drives unless it it is so poorly maintained or its magnet for damage to my auto in the parking lot.

  6. Renard says:

    I am the manager of a small, automated manufacturing plant (14 employees). My boss is the owner of the company, and he has two other plants in other states similar to the one I manage (he is definitely a PAW). I’ve been working for him for 10 years, and although I make a decent wage, it is well under $100K.

    It never ceases to amaze me the number of expectations people have of me, based upon my position. Salespeople usually ask if I drive the new F-150 out front. I tell them no, mine is the ’98 S-10 parked by the side door. Or, because our town is decidedly “working class”, they’ll also ask if I live in any of the more upscale towns 10-30 miles away. I always smile a bit when I hear the “Ohhh…..” when I tell them, “No, I live down the road about 3 miles from here”.

    To me, it is much more important to become financially independent (not there yet, but that day is getting closer), than it is to have a bunch of expensive status symbols.

    I first read “The Millionaire Next Door” about 12 years ago. It was a REAL eye-opener for me, and it helped me focus my efforts. I reread the book at least every other year, because I always seem to find how something in the book helps out some random situation.

  7. Anonymous says:

    There is nothing wrong with having a luxurious car as long as it was a wise purchase. If one ran it as a business expense, if it was not new, but in excellent condition, if one spends hours driving daily, a nice car seems justified. Admittedly, I will buy a house from a successful looking realtor rather than someone who drives a beat up car. Luxury (WITIHIN LIMITS) is what we all strive for and what is a representation/reflection of us. But I do agree with the comments on the overly ostentatious purchases/leases most people make.

  8. BJ says:

    While Dr Stanley makes a good point about the cars millionaires drive, I personally believe it is all about “balance”. Finding a balance between how you spend your income and what you spend it on, balance on what you save and where you save, balance on what you invest in and where. Same can be said to apply to all areas of ones life. I can’t be rich and be so spend thrifty that I can’t buy any car I want because I want to save all the money I can. While it is good to live within your means, budget and invest, it is also good to enjoy the fruit of your labor. I don’t believe in buying vehicles on loan or will never lease a vehicle. I own 2 luxurious automobiles and don’t spend a fortune to maintain them. I actually buy all my vehicles from dealer auctions, hence no loan and always buy at least 3 – 4 year old make. I can’t imagine shedding out $30-$50k on a new car only to drive it off and it losses $10-15k within a year or two. So I will rather wait and let someone carry that loss or better still, let auction reduce that loss. Another key point is to know that luxurious service centers charge a fortune to change your oil and service your car. I recently changed the oil on the Lexus ES350 that we own at a nearby Toyota dealership and it only cost me less than $35. If I were to take that to Lexus, I won’t pay anything less than $120. One time I called them and I was told $120, I asked myself if they put gold leaves inside the engine? Also, I buy any parts that needs to be fixed and only pay for labour. While it is also true that some people drive luxurious vehicles to FILL a VOID or to show economic status or the saying that “not all that glitter is gold”, I personally appreciate the engineering that goes into these vehicles. Maybe because I am an engineer myself, late 20s, own one high income generating commercial and residential property, max my retirement account every year, have 529s for my children. Mortgage on primary residence is not up to my yearly income (62%) and trying to pay it off with 5 years of taking out a loan. Mind you, primary residence was a short sale and commercial property was acquired for 50% of what it appraised for. One of the best investments I have ever made. My goal is to be rich, plan for retirement, enjoy retirement, leave inheritance for my children and children’s children and then drive rich while and when I can. Life is too short.

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