Ah, that new car smell… or stink if you have any financial sense.
I buy used cars/trucks. You don’t pay the “drive it off the lot” tax (~11% of the vehicle’s value the second you drive it off the lot.) After one year, that tax is ~25-30%!
Why not buy it after the 2-year mark, avoid the worst part of the depreciation curve, and not flush so much of your wealth down the toilet? (continued below)
Well, unless you have money to burn, there is no reason.
I’ll take my family’s most extreme case first:
My son needed a car to get back and forth to college. He only had about $4000 saved and he wanted to make a down payment on something in the $10k range. That’s a $7,000 loan (after TT&L) that would likely have meant a $200+/month payment at that time (probably much worse now.)
Instead, I counseled him to find something for less than $3k while he’s in school, pay cash and save the rest for emergencies.
He’s had the car for 14 months, had a fender bender and it now needs other repairs.
His insurance, and the accident repairs, didn’t cost much because his car is only worth about $3k (he paid $2,500). His annual car registration isn’t that expensive either due to the car’s lower value.
The non-accident repairs, which were a cracked headlight assembly, worn wheel bearing and a wheel alignment came to about $1000. Sounds tragic. He should have bought that newer car, right?
Wrong!
In just the first 14 months, he would have spent $2,800 in payments and that’s without a warranty. If you add that in, probably another $500-600. That would have cost him $3,400 on the high end.
Instead, he’s spending around $1,000 to bring his car up to date and keeping that other $2400 for himself instead of giving it to the bank.
His car is 10 years old and will need repairs from time to time, but instead of giving the bank that $200 per month, he puts that in his savings account and if anything happens, it is no big deal.
Even though he’s a college student with his parents footing that bill, the example should work for anyone. I know because my wife and I both have cars that we bought when they were 3-5 years old. We’ve been doing this for decades because paying the reduced price for a used car means that when we sell it, the depreciation curve hasn’t eaten so much of our wealth.
“At all costs, avoid the first 2 years of depreciation on a car. If you can save for the maintenance, avoid the first 5.”
Here’s how it works:
Buy a new truck for $50k, drive it for 5 years. It’ll probably be worth $20k (if you’re lucky) which is a $30k loss ($6k/yr to own). Buy it used after 2 years at $35k, drive it for 5 years, and sell it for $20k which is a $15k loss (3k/yr to own). That just left an additional $15k for your retirement fund, investments, home repairs, college fund, whatever – wealth.
At all costs, avoid the first 2 years of depreciation. If you can brave the maintenance, avoid the first 5.
For a more interesting example, buy that same truck at 5 years old for $20k, sell it 5 years later for $14k. Now that truck only cost you $6k to own for 5 years. You do the math.
Buy what you can afford with cash. Then put the amount of a car payment into your own savings account every month. That money will take care of repairs and/or save up for a better car in the future.
If you are good at buying used cars and pay attention to the market, you will eventually have the cash to buy a shiny new car/truck if you want to dump your money into it. They are still bad investments, but at least you aren’t financing that decision.
Do NOT finance a car. It is one of the worst assets to own and the worst to pay interest on other than whatever crap you buy with your 25%+ credit card. Other than collectible/antique cars, vehicles never go up in value and cost a ton to maintain. Save up, pay cash for whatever you can afford, save up, sell the old one, buy a little better, save up… rinse and repeat.
Don’t let your car keep you broke. The federal government already does a good enough job of that.
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Thank you for backing me up on what I always said to my kids – & have practiced myself. I’ve never purchased a new car & have no intention of doing so. As our oldest gets ready for college – or post HS education – we’re looking at lower cost vehicles to get her form Point A to Point B, & save the rest for a rainy day.
It must be the initials ;).
Good on you for giving them the wisdom that, if they choose to accept it, will last them a lifetime.
I was taught by my depression-era grandparents that, other than a house (a typically appreciating asset) if you can’t pay for it with cash, you can’t afford it. It has helped me dodge some terrible economic times in my many decades on the planet without losing anything.
Cars are a necessity, but are a terrible investment. Credit cards are my other pet peeve. The interest rates are horrendous and people buy crap like lamps and kitchen utensils on them and leave a balance. REALLY? You took out a 25% loan to buy a frying pan? What’s wrong with you?
Don’t get me wrong, I have credit cards, I just use them to buy gas then pay them off that month. The cash back helps save a little money on gas and I know how much gas I use every month so I’m not going to get surprised when it’s time to pay it off every few weeks.