I had a revelation about cars that has caused me to not really care what mine looks like. It’s not that I don’t want a really fast car, it is just that there is something I want a bit more: financial freedom.
Is any car worth your financial freedom?
The thing I have noticed is that so many people give up financial freedom for their whole lives solely because of the decisions they make with their cars. I know it sounds like a bold statement, but I think it is frightening how true it is.
For most people, a car is the second largest purchase they ever make. Second only to their home. The huge difference is that even if they make a bad home purchase, generally speaking it will go up in value over time. Car Depreciation on the other hand, is a beast. Regardless of whether you buy a new or used car, is going to go down in value, but the key is how fast does it go down in value?
So, if you compare a new car vs. a 6 year old car, the new car will lose a couple thousand dollars in resale value each year. The 6 year old car on the other hand will lose several hundred each year. If you think about it from an investors perspective, it is easy to see that if you must have an investment that loses value you will probably pick the one that loses LESS each year.
What if your car choice cost you $1 million?
A friend of mine illustrated this concept perfectly. He bought a 10 year old Ford Taurus for $500 from his grandma. He drove the car for 4-5 years and then sold it for $800. Not a bad investment at all.
It is an especially good investment when during the same period I saw friends buy brand new $25,000 cars and trade them in when they got sick of them a couple years later. My first friend had a monthly payment of $0 for 5 years and sold his car at a profit, while the other friends were paying $400+ a month on a car payment and ended up selling their cars for less than they owed. My first friend had that $400 to invest each month. The amazing thing is that one simple decision very well could have made my first friend $1 million in retirement.
That is why I am okay with driving an older car. The new car smell is nice, but not worth $1 million.
Should I never buy a new car?
Dave Ramsey would say yes. I don’t necessarily feel that strongly about it, but financially speaking it isn’t the best decision. I do realize that there are other “non-financial” factors that could be affecting the decision. But, I will say this – IF you do buy a new car…
- Research it and find a reliable one
- Maintain it
- Take great care of it
- Plan on keeping it for a decade.
These are the best ways to get your moneys worth out of it.
Break the car-payment cycle
The key is to break out of the car payment cycle. Far too many Americans believe that they will always have a car payment. The goal should be to get the cars paid off as fast as possible, then start saving cash to buy the next one with cash. It is a nice feeling to have all your cars paid off and be in a position where you can save $400 a month to buy your next car with cash, rather than using that $400 to pay off a loan.
I in no way have this whole car thing figured out, but you now know my plan of attack. What are your thoughts?
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Financial freedom — exactly why I don’t want to give up my ‘95 Toyota Tercel *yet*.
First, let me say that I have owned a new car once in mylife. I was very young and very stupid… I paid sticker price. They saw me coming. My point? Don’t be stupid if you buy a new car. Know what you want, pay with cash, take someone who knows how to dicker if you don’t know how, and don’t be afraid to walk away.
Now, that being said, I did buy a nice car once and kept it for 13 years. When I sold it ( for a whopping $500 ), it was still in good condition. The only reason I sold it was because my wife and I were having more children and the car didn’t do well with the car seats. Otherwise, I would have kept the car. So my rate of depreciation was considerable, in one sense, but the car far outlasted the car payments.
Which brings me to my second point: If you can afford a new car and can pay for it in cash and you have already hit or exceeded all of your other financial goals…. why not buy it? Sure it will cost you more and your insurance might go up, but why not enjoy a little of your hard work?
Just a thought.
Joshua,
I am completely with you on celebrating milestones and spending cash at the appropriate times (rather than dying with it all in a bank account). They key, of course, is spending at the appropriate times. Most people don’t have problem you mention. Most are on the opposite extreme. But I do agree with your point – thanks for sharing…
During my senior year of college, my parents helped me buy my first car. I have no mechanical skills, so my parents thought it would be best for me to get a new car that still had a warranty, and would be more likely to be reliable.
They made the first year’s worth of payments, and I bought it from them last year.
Looking back, it was kinda dumb. I mean, I could have gotten a 2 or 3-year-old car and be in a similar situation.
I’m taking excellent care of my car. It’s 2.5 years old and has 23,500 miles on it. I’m on top of all oil changes, tire rotations, and other things the manual suggests.
I hope that it will last us 10+ years, but our family might outgrow it first.
As of this month, we owe $8796 and have $277/month payments. We’re making double payments now, and after the new year rolls around, we’re going to throw every extra bit of money at it. We think we can get it paid off by the end of 2009, and at that point we’ll be totally debt-free (we live in an apartment).
At that point, we’ll probably set aside a bit of money each month to use for car maintenance and to eventually replace it with cash.
Long story short, I want this to be the last car payment we ever have!
Lack of a car keeps me in financial bondage.
Kacie,
Let me encourage you to stick with that goal! Keep that determination and pay that thing off. But….( and here’ the caveat)…. try thinking out past that date of final payment. Consider paying off the loan… and then shifting that monthly payment into a savings account marked “new car”.
Think of it this way, if you are paying $277 a month to yourself, in 3 years or so you will have saved up approximately $10,000. So even if you had to get rid of your current car, you would have money to fall back on and not have to take out another loan.
Keep at it !
Im not sure that Dave Ramsey would “never” say own a new car. Once you get to a point in your life where a new car not impact your financial freedom then he would say go for it.
Good post, yesterday I drove by 5 car dealerships with my 1991 Miata with a bad valve sorely wanting to stop in. Thanks for reminding me why I am nursing this car for another year.
@Gholmes
Actually you are right, He does say that if you have a boatload of money and buy it with cash it can be okay. But as you probably know he strongly discourages it for anyone else.
You may have highlighted this before, but here is an excellent illustration of this article from Dave Ramsey, called “Drive Free. Retire Rich”…
http://www.daveramsey.com/etc/lms/drive_free/player.cfm
I agree. This is a good article. Car payments are many times the #1 obstacle that causes the average family not to achieve financial stability.
While I am a car guy because I want to look “nice” while I drive, I knew it was more important for my wife and I to get out of debt first. So when we began our journey I sold my 03 Altima for a 98 Escort and it was a smart move. I hate car payments, I’ll never go back. I would much rather save, pay cash and drive a “nice” car without that nagging payment.
I wish my cousin that has 2 brand new cars but lives with his wife’s parents would read this. They are “car poor” because they had to have brand new. MADNESS!
Redono,
I would be curious to know what prompted you to want to get out of debt?
Joshua,
Thanks for asking. I realized that many family and friends were always struggling financially and I didn’t want to live my life that way. At one point in my life everything I had was via monthly payments and it was squeezing the life out of my paycheck.
When my wife and I got married we stumbled upon Dave Ramsey’s Total Money Makeover book, we read it. Tallied up our debt which was more than our household income but we know through diligence, hard work and faith we could be debt free. We knew if we had no debt, we could retire millionaires. Hope my response wasn’t to long, there were other reasons but I wanted to keep it short as possible. By the way we are on the home stretch!!! Are you debt free or working on it?
Rodonno,
Thanks for the response. I am very glad to hear that you made such a successful life change and are sticking with a plan. It is very easy to fall back into old habits if we stop looking at our goals and setting new ones as we accomplish each one of them.
We are in what I consider to be my favorite (tongue in cheek ) stage of a Ramsey caller: debt free…. exept for the house. That almost strikes me as an oxymoron
My wife and I are in a prime situation. We live reasonably close to most major services (work, food) and my employer finances a bus pas for my commute to work. We have only a single car, it’s reaching its 10 year old anniversary next year and is just starting to come over 100,000 miles. We plan on keeping this car to 200,000 miles, and better yet, try to keep with a one car household. I’d love to still be able to keep the one car arrangement with 2-3 kids in the years to come. I’d love to hear about those families who have only one car!
Francis,
First let me say, that is fabulous! Basically, you are doing about 10k a year in driving on average and that is below the norm by a good amount. ( Make sure you pass that on to your insurance company if you haven’t already, it could benefit your premium a bit )
Second, you have a great attitude about taking public transportation. There are way too many people driving when they could almost as eaily hop on a local transit route and still land at work around the same time.
Keep being an inspiration !