ExtremePerspective

Common sense perspectives and finding a way to retire

Buying a car – new or old?

Posted by Paul on December 31, 2006

I’m not sure why there is ever a discussion on this topic. I’ve run through the calculations many times and there is never any way that a new car can be financially justified. One of the more important ways people get into financial trouble is buying depreciating assets. A car is the largest depreciating asset that most people buy. The worst financial decision is to buy a depreciating asset with credit.

Now some very smart people will try to convince you otherwise. A young man named Ramit who writes a blog called Iwillteachyoutoberich does just that. He tries to justify his decision with various reasons but in the end gives himself away when he talks about the “new car smell”. This means in the end he made an emotional decision, not a financial decision. (The ironic thing is that “new car smell” is a mix of VOC’s including benzene which can be harmful.) New cars depreciate quite rapidly – often 30% right off the lot. Add to that the interest nearly every purchaser pays and the cost of owning that car can double.

Now some people claim that they need a new car for business credibility. I don’t buy that logic either. Confidence comes from within – not from external things. Now when I was young I too feel prey to the idea that I needed a shiny red RX-7 to impress the women. Fortunately, I’ve grown out of that phase although many middle aged men think they suddenly have to buy a new Vette for the same reason. My car strategy at the moment is to buy cars with good repair records that are 5-7 years old which I can pay all cash for. Typically my cars have close to 100,000 miles on them (cars today when maintained will easily go over 200,000 miles – everyone of my 12 cars has.) I keep them well maintained so they don’t break down unexpectedly. My typical maintenance costs are less than $1500 a year including routine maintenance.

Let’s assume you buy a new car for $25,000 with $3000 down and I buy a $3000 car cash. Now I don’t carry collision or theft and carry a $1000 deductible – you’ll have to carry collision and theft insurance. Here’s a simple spreadsheet:

After 3 years the typical new car buyer is upside down in their car loan so there is no re-sale value per se. The new car buyer is out an extra $14K Vs my strategy.

I have grown tired of buying cars from dealerships. Even with the advent of kbb and other services, the dealers want to play a game of giving me far less than my car is worth and asking over kbb average retail values. Instead, the last 3 cars I have bought have all been on E-bay. I research the cars and history and only bid when I can get close to the wholesale value. So far this strategy has worked extremely well and I have no plans to change it. Even a sudden windfall would not tempt me.

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2 Responses to “Buying a car – new or old?”

  1. Hmmm interesting about your net worth. Did your ex wife take 3/4’s of what you both owned together?

  2. bmw m3 convertible

    ha-rd-po-rn-fu-ck 1078071 Research about bmw m3 convertible.

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