How to Buy a Car
- Never borrow money for a vehicle.
- Paying cash sets a hard budget – you get a car you can afford.
- Buy used.
- Used cars don’t depreciate as fast as new cars.
- Answer these questions:
- How many miles will you put on it?
- How long will you own it?
- Look at models that age with that many miles on KBB and NADA to get an idea of what your car will be worth when you sell it.
- Subtract your expected selling price from the total cash it will cost you. This is your true cost of ownership. Is it a number you can live with? If not, KEEP LOOKING.
- (Cash out of pocket) – (What you sell it for) = True Cost of Ownership
New Cars are
AWESOME A MONEY PIT!
I hate new cars.
Yeah, I know, they smell awesome. But the smell just can’t overcome the true cost of a new car.
I wasn’t always this way. My current way of thinking has taken training in the school of hard knocks.
I hope you can learn from my mistakes, and prevent other young people from making the same ones.
In 2011 I proposed to my future wife right after she completed a post-graduate degree. When we were engaged and she got a “real job” between the two of us we were making really good money.
At the time she was driving a beat up old junkhouse Ford Focus that had left her stranded on the interstate north of a half dozen times.
She had sworn a blood oath of hatred against that particular vehicle, it’s family, and any potential children.
Further, she had been telling herself for four years that a nice car would be the first thing she bought when she got the “real job”.
So we went car shopping. At that time the used car market was suffering from the aftereffects of the “Cash for Clunkers” program, jacking up the used market abnormally high. We figured we could buy new for just a bit more than used.
So we did. We got a good deal on a new Honda Pilot with leather, moonroof, dvd, etc, etc. And it was a good deal…about 2k below what a competing lot priced it at.
All up we spent 38,192.21, putting 6 down and financing the rest…but it was at ONLY 0.9%!!!
Not bad right?
True Cost of a New Car
- Purchase price – $38,192.21
- Interest over 3.5 years at 0.9% – $544.84 (no biggie)
- Total Cost $38,737.05
So the car’s total cost was pushing 39K. Interest is inconsequential in this. But the real kicker is depreciation.
Honestly this is something I knew about, but didn’t have any feelings about. It hadn’t hit home, or marinated in my brain like a festering splinter you can’t get out.
The Money Pit
Two years and 60,000 miles had cost us around $16,000 in depreciation. Sixteen THOUSAND. I don’t have room for enough exclamation points after that figure. The car was in immaculate condition and we’d lost 16 grand.
Based on today’s KBB value we have lost a total of $19,505.21 in value.
This has caused me to grow some feelings about depreciation.
- Purchase price – 38,192.21
- Interest over 3.5 years at 0.9% – 544.84
- Total Cost $38,737.05
- Book value today – $18,687
- $38737.05 – 18687 = $20,050.05
And this is how we learn to determine the TRUE cost of vehicles.
It’s not sales price. Or gas. Or maintenance. It’s not interest (usually).
The TRUE COST of ownership in a vehicle is what you pay for it in total cash, minus your expected selling price. This accurately accounts for depreciation.
(Buying Price + Interest) – (Selling Price) = True Cost of Ownership
Most people don’t think about depreciation at all. Technically it isn’t a cash cost, but rather something accounted for when you sell it.
I like to state the true cost in a per year calculation, like it’s a regular bill.
- Per Year Cost – $4010.01
Our beautiful smelling new car has cost us $4010.01 per year for the last five years. And the best part? That doesn’t even count gas or maintenance!
We bought too much car, plain and simple. If you had told me the day we bought it that we would lose half our money in just a few years I would’ve walked away.
Looking at a major purchase this way forces you to remove the emotion from it. You stop wanting the nice car as much, and you certainly won’t buy a status symbol.
What we learned during this process:
- Buy a used car.
- Our car that depreciated 16 grand in a couple years lost only 3K in the following year and a half. The depreciation slows waaaaaayyyy down on used cars with 50-100k miles.
- Pay cash.
- Waiting a little longer and paying cash would’ve put us into a car in the 10-20k range within just a few months. Patience would’ve paid off bigtime here, and we wouldn’t have overbought.
- It’s an ASSET, not a member of the family.
- Price out similar models at the age and mileage you expect to sell at on KBB or NADA to get an idea of your expected selling price.
- Subtracting the selling price from the cash outlay tells you how big a chunk of your financial world this will be.
What about you? Any new vehicle experiences to share? Or maybe a major mistake on a major purchase? I’d love to hear what y’all have to say.