Americans love the open road and the freedom that cars provide. Cars are an emotional possession that reflect what we value and how we see ourselves. But having a car is a necessary evil when you look at the financials. You must get to work somehow to make the money so that you can retire. But there’s a lot of ways that new cars can be financial blunder.
First let's define the term "new" car. There are two types: never been owned before and used, but new to you. In this entry, I'd like to discuss how to obtain and enjoy both types.
New Car: Never-Been-Owned-Before
Before I continue, there are several reasons to never buy a new car. Buying a new car is typically a bad financial move. You've no doubt heard that you can lose up to 20% of the cars value just by signing some documents and driving off the lot. That's because new cars depreciate precipitously in the first few days and years. That means if you buy a brand-new car for $40,000, that new car smell cost you approximately $8000. Instead, consider a new car smell air freshener for around $7.00.
Another reason to never buy a brand new car is that newer cars are more expensive to fix. First, technological advancements mean you can't buy a wrench and do it yourself. You need special computers to diagnose and talk to the computer that runs your car. Furthermore, things like adaptive cruise control and lane departure warnings are not essential, but still expensive to fix. So your car can work in every way, but have $4000 worth of repair work just to turn off warning lights on your dash. Finally, warranties can cover major issues for a limited time and when that time runs out you have a financial time bomb just waiting to go off. After 15 years, it's no longer economically viable to put $4000 into a car worth $5000.
So how do you get that new car smell, avoid massive depreciation and out-of-warranty repairs? Lease a new car.
Still with me? Are you shocked that I'm recommending leasing when so many say it’s a bad idea? Stay with me because there are several reasons why leasing can be appropriate:
- Your warranty covers major repairs for the length of the lease. When a car is out of warranty, there’s always the ticking time bomb of a major repair. If you want to know your monthly expense and budget for it, you can lease.
- You will pay less up front and monthly on a comparably financed new car. If you were thinking of paying cash for a new car, stop it. New cars are just depreciating commodities and not a great place invest your money. In reality, you will pay your car note or set aside a similar number for repairs in perpetuity anyway. Accept the fact that you always put some of your budget into your car every month.
- If you’re a business owner, a percentage of a business lease can be a business expense. I won’t go into the details here, but your CPA can explain it to you like mine did for me.
Before you use this blog as license to run down and lease a new car, do some soul searching. Do you really need a new car? Or is it really a strong want? Are you trying to impress people who don’t care with an automotive status symbol? Are you being swayed by Madison Avenue or mid-life crisis? I ask because we are not always rationale about money and I’ve been guilty myself of emotional purchases. If you can live without that new car smell then the best step is to buy a used car that is new-to-you.
New Car: New-To-You
There are two steps to purchasing a used car. First, do extensive research on the fair price on a three-year-old car that works for you. Second, purchase that car from an individual.
When researching a used car consider the following:
- Make sure the car you select will work for your lifestyle for a long time. For instance, don’t buy the two-seat sports car that works now but won’t work when kids arrive.
- Choose low miles and long years if possible. If you can choose between a 5 year old car with 34,000 miles or a 2 year old car with 40,000 miles consider lower miles first. That’s where you get a good balance of depreciation that hasn’t impaired reliability.
- Use several websites to find a fair market price. Carmax, Edmunds and Kelly Blue Book are great places to start.
Working with individuals instead of car dealers can increase your savings, and your workload. When finding or negotiating a deal, individuals may have urgent motivations that help. However, individuals can also be frustrating and deceitful. Buyer beware. Meet in public places and make sure the individual seller can provide a service history.
When you come to major purchase like a new car, the key is to take your time. Whether you lease or buy used, don’t feel rushed. Talk it over with your spouse and your financial planner. Sometimes just hearing yourself process the information can help you clarify your next steps. If you’d like to start that conversation, click here.