Here is a great article by Dave Ramsey on purchasing a new car. I deal with this fairly regularly with clients we counsel and lead, and it’s amazing how many people think they NEED a new – as in fresh out of the factory new. Ramsey’s points are great, and I’ll summarize below:
- One third of car buyers sign up for six year loans with an average interest rate of 9.6%. Among these buyers, the average cost of the car is $26,000, which equates to an approximate $475 monthly payment.
- A brand new car, once it’s fresh rubber meets the pavement with your foot on the gas pedal loses approximately 25% of its value.
- After four years – the car has lost 70% of its value.
- So, after six years having your car own you – I mean, owning your car – you’ve paid $33,000 for a $26,000 vehicle that is now worth $6,000.
Ramsey continues to describe his own plan of paying a car payment to yourself, and having the ability to buy a pretty nice car eventually without payments.
I’ve come to realize there are several reasons why we, and I say that inclusively, think we need new(er) cars all the time.
- We think it’s cheaper. This is utterly blown up when people begin looking, pardon the pun, under the hood of this thought. I’ve heard people say it’s cheaper to have car payments for a newer car, because then you don’t have so many maintenance and repair bills. Do we really think that we’ll have $475 of maintenance EVERY month for an older car? I’m no mechanic, but I think that even if you rebuild the transmission every six months you’d come out ahead with the used, and cheaper, car.
- We feel entitled to it. Ah, entitlement. The downfall of personal finance in our country. What, exactly, do we have to do to feel entitled? Will we eventually feel entitled to a Lamborghini? I’m not against new and nice cars – but only when they’re paid for in cash and done so without jeopardizing your savings and long term goals.
- The neighbor/friend/family has a new car. This is more powerful than a lot of people, including myself, care to admit. It is sometimes conscious realization, and other times it’s subconscious. A perfect example of this is when I will un-expectantly grow not content with our own cars, and when I examine this, realize it stemmed from the news someone I know just got a new car.
Like a lot of things in finance, and in life, desiring a new car isn’t necessarily evil – but a lot of times it’s not a smart move. My advice to you, Jack, is similar to my view on debt: Don’t necessarily avoid at all cost in all circumstances, but realize what it is that you’re doing. If you finance a new car, or even an expensive used car, you’re paying interest for a depreciating asset. That doesn’t make a whole lot of sense. And, in my view, is bad stewardship. Instead, buy a car you can afford with cash, begin saving up as much as you can, and upgrade when you can afford to do so. Till next time, Jack.