In an attempt to stay non-controversial, I will do my best to go through this topic with a loving and caring tone. New cars are great. They are usually safe, reliable, and they smell awesome. But is your new car killing you?
Let’s define terms, by new, I don’t mean “new to you”, I mean brand new. Generally speaking, a new car isn’t always worth the cost because automobiles, at least 99% of them, will always depreciate and new cars depreciate the fastest. According to Trusted Choice, a new car will lose almost 20% of its value in the first year of ownership.
So if you just bought a new 2016 Fiat 500 for the “low, low price” of $25,000 you’ll quickly notice in 2017 that your Fiat is now worth about $20,000. In other words, you lost $5,000 in the first year, all for that new car smell. What’s worse, you ask? You lost 11% of that value when you drove it home. 11%!!!!
It would be much wiser to purchase a car that is one or two years old and you are still getting (1) low mileage, (2) a solid warranty, and (3) a reliable vehicle. All of that while cutting into the depreciation slope and saving yourself some money.
I have four rules for buying a vehicle, these apply to everyone and are pretty much non-negotiable:
1. Pay cash
If you’re thinking “I can afford the payment” you are thinking backwards. Payments take away from your net take home pay which you could be using to pay off debt, invest, save for your kids’ college, or pay off your home early. The more payments you have the more risk you have and the less likely you are to meet your financial goals. More on this rule in a later post, because I know some of you are saying “But Rob, it’s 0% interest”. Pay cash and then look for that article in the next few months.
2. Buy Smart
Shop around. The whole car salesman pitch of “It won’t last long” isn’t always true and if it is, you can find another one. You may be able to save a couple thousand dollars just by making calls to different dealerships and getting competitive bids, you’re the consumer and they are the seller. Do your research and don’t let them talk you into something that is different than your goal or price point.
3. Never Lease
I will write an entire treatise on why leasing a car really sucks but for now I will just say that leasing gives you no ownership, limits your travel, and only benefits the dealer. You pay $200 for 36 months on a $20,000 vehicle which covers their depreciation on the vehicle and then they sell it for $15,000 making a grand total of $22,200; tell me again how that benefits you?
4. Sleep On It
I get car fever; you get car fever. It’s something new and exciting and far too often we make a poor decision on a car due to emotion rather than math. It seems that we spend more time choosing curtains than we do picking out a vehicle. Take your time, shop around and make a wise decision.
If you do all four of these steps, you will be decreasing your risk significantly and giving yourself more cash flow month-to-month. Do you have car payments? Add them up and multiply the total by 12; what could you do with that money? Is your car payment stopping your goals and further, what is your plan to pay off that loan before the end of the payment plan? Those are important questions you need to answer.