One of the most important things you can do to make your monthly take-home pay go further is to recognize that your vehicle is a depreciating asset. That means it goes down in value rather than up which also means that when shopping for a vehicle, you’ll always buy high (and eventually sell low). That’s the exact opposite of how an investor builds wealth.
Since vehicles help you lose money and not make it, it’s much smarter to buy only what you need and at the lowest price possible. From a financial standpoint, brand new cars are a huge waste of money. Here’s an example:
A recent CNBC article reports that the average amount borrowed for a new vehicle loan is currently $32,187.
Thanks to depreciation, we know that new vehicles lose approximately 10% of their value as soon as you drive them off the lot, another 10% over the course of the next 12 months, and as much as 60% over 5 years.
After doing a little rough math, this means that if you purchase your new vehicle on a January morning for $32,187, it’ll only be worth $28,968 by the time you get it home that same day. And by December later that year it will likely be valued at only $25,750.
That’s a $6,437 drop in value and $6,437 you spent without anything to show for it whatsoever. Thought of another way: this new car would cost you $536 a month, every month for a year, in addition to your monthly car payments, your insurance payments, any gas you purchased, etc.
(Investing that same $6,437 at 7% and letting it sit for a year could have netted you $451, by the way.)
But wait – there’s more.
According to a new Experian report, the average monthly payment for a new vehicle is $554 with an average loan term of 69.5 months.
Just think! If you buy a brand new vehicle, after factoring in insurance, gas, a few car washes, and an oil change or two, you could be paying $650, $750, or more, every single month for nearly 6 years! Do you really want to still be making payments on a car that’s six years old? Your newborn will be in the first grade by the time you’re out from under that debt. Your 12 year old will be graduated from high school. Don’t have kids? Well you just might by the time that last payment rolls around…
(And when it does, your vehicle could be worth as little as $12,875.)
Here are 5 good reasons to skip the new car and buy a used one instead:
1. You’ll save money overall
This is a no-brainer. Apples to apples, a brand new car is going to cost more than a used one. That means your monthly payment will be lower, you’ll pay less in interest on a loan, or you may not need to borrow money at all. Paying cash for your car will save you the most money and will probably give you some extra room for negotiation.
Don’t get caught up trying to save money on the car you want. Instead, focus on spending as little as possible for the car you need.
2. You won’t pay for depreciation
The main thing you have to keep in mind is that vehicles are depreciating assets – they’re constantly losing value and therefore acting as a drain on your finances.
Knowing this, it doesn’t make sense to take out a larger than necessary loan and it definitely doesn’t make sense to buy brand new without seriously considering the longterm and ongoing costs – i.e. the true cost – compared to a more affordable option.
Let someone else eat the cost of buying brand new – meanwhile, you can take your savings straight to the bank.
3. It will cost less to insure
For the record, there are numerous factors that go into determining your insurance rate, including your location, credit score, the vehicle’s safety features and your driving record. But another major factor to consider is that you will need to carry full coverage insurance on a brand new vehicle if you have a lien holder – i.e. if you took out a loan. Even if you paid cash for your new ride, insuring a brand new vehicle is often more expensive anyway because newer technologies drive up the cost of replacement parts and repairs.
4. They’re easier to research
I found out the hard way that researching a vehicle’s recall history is a critical part of car buying. Unfortunately, it’s pretty much impossible to research recall and maintenance issues on a brand new vehicle that hasn’t experienced any yet. We tend to think of brand new cars as being the safest cars on the road, but the truth is that they often have a lot of kinks that need to be worked out and sometimes that process takes years.
If you buy a brand new Ford with transmission issues, you won’t know about those issues until they affect you. If, on the other hand, you buy a five year old Ford with a history of transmission issues, there’s a good chance that the previous owners have already been through the recall process with it and had it repaired as necessary. Of course, if you’re shopping for used cars, the smarter choice is to just avoid the transmission-issue-riddled Ford altogether and choose another make or model with better reviews and ratings.
5. You’ll worry less
Someone dinged, dented or scratched your brand new car in a parking lot while you were grabbing bread? Infuriating! Someone dinged, dented or scratched your new-to-you car? Shrug. Trust me, you’ll stress less when driving a used vehicle and you’ll be able to chalk up all of those minor and even not so minor imperfections as part of your car’s character.
From a financial standpoint, it’s important that you be incredibly deliberate about both what you buy and why you’re buying it. If you’re trying to save money or need to save money, choosing an older vehicle model is a better choice 99% of the time.
Still not convinced? Sometimes it helps to step back and ask:
What are you really buying?
There is a giant difference between buying a vehicle and buying a status symbol (which many of us do without even recognizing it).
If what you want is a vehicle, then any vehicle that is safe, mechanically sound, and offers the practical features you need will do the trick. Keep in mind that the features you need may or may not be the same as the features you want. With four kids you might need a third row of seats – but you don’t need heated seats or parking assistance any of the latest technology that might keep those four kids entertained.
If what you really want is something more than what suits your practical needs, then you’re not actually shopping for a car – you’re shopping for a status symbol.
The car you drive says nothing about who you are.
Common sense says you shouldn’t buy a car you can’t actually afford, no matter what you (consciously or subconsciously) think it says about you.
And let’s be honest: if you want to get ahead financially and to stay ahead then you can’t afford to spend $554 a month (plus insurance, plus gas, plus annual registration fees, plus regularly scheduled maintenance) when you could pay half that for a vehicle that gets you from point A to point B just the same.
I know you work hard and your current car is x number of years old and doesn’t have feature y or z, but frankly, who cares?
Like all financial decisions, car buying should be a rational process. It shouldn’t be based on the desire for 360-degree surround-view cameras and multizone climate systems.
Don’t be average by mindlessly falling for the conspicuous consumption status quo. Be smart about your money. Skip the new car. Instead, buy something that’s new to you.
Questions? Advice to share? Let me know in the comments!