I’ve been catching up on some episodes of a podcast targeted towards financial independence enthusiasts called ChooseFI. The hosts make up for a fairly rudimentary understanding of money with a ton of enthusiasm, which makes it fairly enjoyable depending on the episode. In a recent episode they started talking about car ownership, and something clicked with me about how people both inside and outside the FIRE community understand, or misunderstand, car ownership.
Why do people own houses?
I’ve written before about the appeal of real estate investing to early “retirees,” but that’s a small part of a bigger question: why do people own houses at all? The most straightforward answer is that since people need somewhere to sleep at night and keep their stuff, they have a need for a finished product we normally call “housing.”
Of course there are multiple ways to purchase that finished product, the two most common being renting and owning a home. There’s an important difference between the two, however: when a renter pays rent to the provider of their housing, the provider has to treat the payment as taxable income. When a homeowner provides herself with the finished product, the exchange is tax-free.
Homeownership is, in this way, an extremely lucrative tax shelter: by requisitioning needed housing from assets held by the household, the conversion of the asset into income is completely shielded from taxes. In the economics literature this is referred to as “imputed rent:” the rent a homeowner doesn’t charge herself, doesn’t receive from herself, and doesn’t pay taxes on, to live in her own home.
Why do people own yachts?
Yachting, I’m given to understand, is a wonderful hobby. Wealthy people who enjoy spending time on the water with friends and family purchase or rent yachts in order to fish, swim, or play basketball.
What yachts are not, however, is a way to generate the finished product of shelter (admittedly, if I personally owned a yacht I’d probably live on it). Yachts are a depreciating asset that is used for recreation, like tennis rackets or golf clubs.
A car is an asset that converts energy into transportation
Financial independence enthusiasts typically frame the question of car ownership something like this: “is it better to pay more in rent to live within walking or biking distance of work, or pay less in rent but be forced to own a car in order to get to work?”
In other words, you can tally up your total expenses for housing and car ownership under both circumstances, and the one with a lower total cost is your best bet for achieving financial independence, leaving as it does more residual income to invest.
The problem with this framing is that it treats your costs as variables but your income as fixed. And indeed, this is how most people go through life: given a job, what is the most cost-effective way to build your life around that job?
A different way of looking at car ownership is that on-demand, independent, self-contained automotive transportation is an extremely valuable intermediate good in its own right. Transportation to your workplace is an important input into your ability to work and receive income. Transportation can be converted directly into cash using apps like Uber or Lyft by offering rides to strangers. And transportation is an intermediate good in many other kinds of money-making schemes, like sourcing products cheaply to resell at a profit.
Being someone else’s employee lends itself to the first, cramped view of car ownership: “I need a car to get to work, so a car is an expense I have to incur to get paid.” Being self-employed, the true value of car ownership is much more obvious.
For example, when I lived in Wisconsin, I had a credit card that allowed me to earn thousands of dollar a month on certain purchases. The merchants involved were spread so far apart that I needed to use a car to efficiently travel between them each day. The gas and depreciation of the car weren’t a cost center for me, they were a profit center: the car was an asset that allowed me to convert gasoline into transportation, which I used to visit merchants and earn money.
Note that I wasn’t forced to own a car. I chose to have and use a car because the car gave me access to income in excess of the expenses of driving and maintaining the car.
Is your car more like a house or a yacht?
Homeownership is a tax-advantaged way of securing housing.
Yacht ownership is an expensive way to relax.
For most people, car ownership plays both roles. Commuting to work in a car you own is tax-advantaged in the same way homeownership is: if you took a cab the fare would be taxable income to the driver, if you took a public bus the driver, mechanics, civil engineers, and others would all pay taxes on the income your fare contributes to, while you don’t have to pay any income tax on the imputed fare you provide yourself with.
Car ownership can also be an expensive way to relax: the closer a substitute a bus or train would be for car ownership, for example a car owner who lives directly above a subway station, the more car ownership will seem like an expensive extravagance, like yacht ownership.
The question, then, is not whether you can arrange your life such that car ownership becomes unnecessary. Of course you can. The question is whether the acquisition of an asset that gives you access to on-demand, independent automative transportation is worthwhile given the opportunities you have available to convert transportation into income.