Riddle me this…
Name me something that you use less than 4% of the day, all the while it loses value?
Of course it’s your CAR!
According to AAA Americans spend on average 17600 minutes driving per year which equals about 48 minutes each day. So unless you are sitting in your car enjoying that new car smell in the garage… this equates to about 4% of the entire day that you are actually using your car.
So what happens the other 96% of the day… well the value goes down, down, and well down.
Bobby from MMM recently just posted an article called “I Still Drive a $6,000 Car When I Don’t Need To”. If you don’t know who he is READ HIS BLOG! He is absolutely killing it!!! In January he launched not one but TWO courses!!! He hit over $150,000 in January alone and yet still drives his 2004 Yukon…
Bobby is not normal… but normal is broke!
Michelle and I are both driving 14 year old vehicles. Hers is 2004 Toyota Rav 4 and my beast is a 2004 Dodge Ram. We paid cash and bought used and have been lucky only to have to do basic maintenance. Our goal is ride them out to about 200,000 miles…
Again we are not normal…
What is normal?
Car companies spend BILLIONS on advertising to explain what normal is.
Check out this INSANE graph of advertising spending in 2016!
GM spends 3,769 Million or…wait for it….
3.769 BILLION dollars on ads…
The job of those ads are to trigger emotions and explain what “normal” is.
For men… we need a truck… because that’s what men need. Check out this ad.
Ummmm yeah if you are a man and DONT own a truck after that…
For moms is about safety, family, and of course storage… Check out this ad.
“You just fall in love with the car”…
Remember these things sit 96% of the time doing NOTHING!
More reasons that new cars are a terrible idea
Here are 3 BIG ONES!
Loans/Interest:
If you are like 1 of the 107 million Americans out there, you got a car loan. You may remember walking onto the car lot and one of the first questions the salesman asking you is:
“What type of monthly payment are you looking for?”
But here’s the thing that they don’t tell you…
That 400 dollar a month payment you said could wanted COULD be applied over 4 years, 5 years, 6 year or even more!!! There is a HUGE difference between 4 year loan of 400 per month and a 6 year loan of 400 per month.
Just how much????
Not including interest… nearly $10,000!!!
In 2017 the AVEREAGE monthly payment was 479 dollars and had a loan of 68 months or 5 and half years.
Ouch!
Wait it gets worse…
For example, when paid over the course of 48 months, a $25,000 loan at 4.5% interest will result in monthly payments of $466.08 and a total cost of $27,965.
When paid over the course of 84 months your monthly payments are lower at $347.50 but the total loan would cost you $29,190 — more than $1,200 versus 48 months. For higher interest rates, the difference between short and long term loans will be even greater.
Maintenance:
Yup… whether you buy new or old you are going to have maintenance costs. This is just comes with the territory. AAA estimates that it costs on average $2,686 annually to operate a car.
This includes gas and repairs but not insurance…or the final reason…
Depreciation:
Unless you bought an antique car the value of your car is going to go down. Depreciation is a simple concept. Over time your car will be less and less valuable. But just how much value does a new car lose?
Once it leaves the lot it drops on average 10%…
Let’s pretend it’s a $25,000 car. Within seconds you just lost $2,500.
Holy CR@P!
But Eric I am going to keep it LONG TERM.
Awesome! After 5 years it loses 63% of its value…
How to avoid the new car trap
- Buy used… I know you know this. But seriously… By a 5 year old vehicle or older and let the “normal” people lose 63%. Think of it as you saving 63% on a car…
- Pay in cash… As Dave Ramsey says “Cash is KING!”. Michelle and I were able to save up and pay cash for both of your vehicles. There is buying power with cash. For one there is ZERO hidden fees or changes to the price of the car when you get into the back room. But even more important, you are in control of the negotiation. You DON’T need their money or their payment plans.
- Have Patience… Michelle and I waited 6 months for the “RIGHT” deal before we bought. We researched what vehicles we wanted and then set our buying criteria. For example, Michelle wanted an SUV with low miles and I wanted to make sure it wasnt going to break down every month.
I set up an alert for any SUVs that had less than 40,000 miles on it for less than $10,000 in the brands we wanted. After 6 months and a couple of hits we landed the 2004 Rav 4. Walked in, told the guy our price and walked out 30 minutes later with our new car.
Why is this important?
As a dad my main goal is provide for my family. I know this is the goal for a LOT of dads out there. But too many times we get wrapped up into thinking that a new car or new shiny object is what that means. We are caught up in the idea that advertisers sell us.
But a LOT of time these payments just add stress to our lives and create more burden than it’s worth.
Let’s take a look at “Normal” VS “Not-Normal”
Normal
Let’s say you buy a brand new car for $25,000 and put down $5,000 leaving you to finance the other $20,000.
You have great credit and they give you a BELOW market interest rate of 4% for 5 years. Your payments come out to be $368 a month.
Now let’s look at this a bit differently.
Not Normal
Let’s say you buy a 5 or 6 year old car instead. On average it loses 63% after 5 years but let’s say it only lost 60% of its value. The car would cost $10,000. Again you use you put down $5,000 and finance the other $5,000.
They give you the same 4% interest for 5 years. Your payments are now 92 dollars a month!
That’s a difference of 276 dollars. EACH MONTH!
If you place the money you saved each month into your savings account with 0% interest rate, you will have $16,560! That is enough to buy a NEW used car in CASH!!!!
Soooooo is that New car smell really worth it?
Lets be “Not-Normal”
Great article and I totally agree. In all my life (age 59) I have only purchased 2 new cars. I got a big corporate employee discount but made the blunder of financing 75%. I hated car payments and swore off borrowing for autos over 20 years ago. Paying cash for slightly used cars is the only way to go. I have the same patience as you when it comes to buying a car. For months I will research the year/car I am interested in and follow the sales prices before buying. Then I only jump when the best deal presents itself. I hate buying a car so I find the one I like and I will take good care of it and drive them for at least 10 years. I’ve been driving my Mini-PU for just over 25 years and I still love it. It was already 12 years old when I bought it for $1,300. You are absolutely right, a lot of money is wasted on a depreciating asset that mostly sits idle, so putting some thought beyond the sales pitch before buying a car is necessary for anyone looking to get financially ahead.
I actually LOVE buying cars… Strike that… I LOVE FINDING deals… haha. I actually have friends ask me about my truck and ask how much I owe and I respond. “Nothing”. They almost always follow up with “So are you trading it in for a new one?” That is the mindset that has been built over years by commercials. Finance, pay off, trade in, repeat. Its a DUMB cycle.
Absolutely agree with all of this! Buying a car brand new off the lot is foolish! My car is about 14 years old and has about 310 000km on it and still going strong! serves the ultimate purpose of getting me from point A to point B. Great read!
Absolutely Wally. We are sold this idea that a vehicle is somehow going to make life better or more fun… but they all do the exact same thing. Get you from point A to B.
Your concept and math are spot on. One can still buy the car that one wants one or two years older than the current model year and still save thousands….as long as one pays cash for the car. If you have to take a loan to buy a car, you are out of your financial league. If you do, you’ve just sprung the consumer trap that will require you use your own capital and many additional hours of working to pay it off. Live life without a car payment and do some else more productive with the additional cash flow. Your future-self will thank you.
I absolutely agree. We have bought into the idea that car loans are “normal” debt. People still look at me funny when I say nope, no car loan and not looking for a new car…
We are looking to buy used in cash next time we have to get a car. We paid off our car loans and I NEVER want to have one again. However, I’ve never bought a used car before and I do have a question about what you wrote here.
What do you mean when you say you set up an alert to be notified when they have a vehicle meeting your criteria? Where did you set up an alert? With a dealership or with one of these car websites that you always see advertised on TV?
Hey Michelle. The site I used was Car Gurus. I really liked it because I could set up EVERY thing I was looking for in a car. Miles, price, etc. On that site create an account and then set up your search parameters. Once you do that all the cars will be listed. But additionally an orange box will be above the cars that says “Subscribe”. It will send you an email if there are new cars that meet the exact search criteria or if there is a price drop. It allowed us to be notified quickly and we were able to snap up the car we were looking for.
Awesome. Thank you!
You are wrong. I buy new. I love cars. Cars make me happy. I love to keep them clean and polished. I have taken my kids (2 boys, 2 girls) to car shows and they love cars as well. I made 6 figures a year before I retired.I have 7 figures in my retirement account. I am 76 now and have 2 polished rather new cars in the garage of my retirement home.
You paint with too broad a brush. There are many “car guys/gals” out there who love this hobby. Why should I wait to enjoy my money until I retire. I don’t golf, drink heavily, gamble, do drugs, do women etcetcetc. I love cars. Cars make me happy.
Hey Jack I completely agree that the post was painted with a broad brush. Based on your description you seem to be an outlier. You have a well funded retirement. There is nothing wrong with cars or new cars. However the problem is when people over extend themselves with loans on things they dont need. This could be cars, houses, or hobbies. Unfortunately too many people live this way.
I applaud you for having a 7 figure retirement account. That is amazing.
Easy. I/we have always spent far less than our income. We haven’t touched our savings yet because we can live very well on our SS incomes, my wife’s teachers retirement and my very small pension from years far long gone where I worked for 5 years after college. Our net income is $5000/mo after taxes, Medicare, health insurance is taken out. Our gross bills after that are less than $2000/mo. Who needs our retirement account? 3 of our children/and or husbands make seven figures a year. Our second son,#4 child doesn’t march to a different drum,
he marches to a different kazoo. He is 32. We do help him minimally, but that is it. No wife, no drugs, no alcohol, no addictions. He is happy. His brother and sisters love him and told us to leave him alone. We do. He calls mom and dad daily. We love him, we just don’t know what planet he is on.
Bought a 2012 Corolla from my Grandma for cash. Paid her Book Value (she is my grandma after all) The car has 22K miles on it and my commute is 3.9 miles round trip each day. I could conceivably drive this car for decades and it would rust out before the engine is shot. Focusing on dumping as much as possible into index funds for the next decade before retirement. Cars are just a conveyance for me and not tied to my masculinity in any form. Also just bought a 2002 Altima for my son at college. Previous owner did a bunch of work to it before buying his SUV (for winter) and I got it for just over the cost of the repairs. Cash deal, son is thrilled and the car should last him for years.
My wife and I are trying to see how long we can keep our Rav 4. We bought it used and have put about 100,000 miles on it so far. Outside of basic maintenance, the thing has worked like a champ. We putting aside money each month for a replacement vehicle just in case the time comes.
Once we paid off the Jetta, we promised ourselves no more car loans. I have to say we LOVE it.
Less stress and the money we would’ve been spending are going towards goals like retirement, travel, and next car fund.
We have a 2007 Accord and 2003 Maxima and thankfully they have been easy to maintain. Our goal is to reach 200k on the cars and maybe (probably not – lol) look at replacing them then.
Elle that is our goal too!!! I really am not sure what is going to happen if we ever do hit the goal… Maybe try 250,000 haha.