People are capable of coming up with all kinds of excuses to go ahead and do whatever they wanted to do in the first place. This is especially true in situations where there are a large and financially motivated contingent of folks trying to help you justify nonsense to yourself. Car dealerships come up with all kinds of chicanery to convince you that you’ve gotten the deal of the century. The reality is, that on a per mile basis you will pay less driving a used car than a new car. Despite the preponderance of $1,000 used cars floating around folks twist themselves in knots trying to explain why taking a 50% depreciation hit on day one with a $20,000 car is financially sensible (spoiler alert: It’s not).
How big a deal is $19,000?
Digging yourself out of that depreciation hole takes a long time. You may be inclined to make the argument that better mileage, or less maintenance makes up for it. That very well could be the case, but the fact of the matter is that I expect to earn an annual 8 to 10% return on that $19,000 I don’t spend. That means that I can spend $1,520 extra on gas and maintenance before we even talk about you catching up. Can you grasp how huge the difference is? I can buy a new $1,000 car every single year, and still save more money than someone buying that $20,000 new car. A brand new Honda accord gets 27 mpg in the city, a 1996 Honda Accord gets 26 mpg in the city. You aren’t going to beat me to the tune of $520 per year on gas with that amount of difference. If some serious maintenance is required you just sell it for scrap and buy another.
Ultimately a car, what is the cost of comprehensive insurance on our $1,000 used car? The correct answer to that, is $0. If the car gets dinged up, you probably shouldn’t care, it’s a 20 year old car, get over it. If you crash the car, don’t worry about it. You just go buy another one, out of the thousands and thousands of dollars you’ve saved. Cost of comprehensive car insurance on a new car? It’s somewhat difficult to find. The best estimate I could find was at minimum $30 per month, or an additional $360 per year. If anyone with a new car pays less, I’d be very interested to know more about it. This kicks our annual differential up to $1,880 per year. For gas, we can get an order of magnitude by figuring an extra 20% spend on gas (far more than our Honda example above), I spend about $75 per month on gas. Therefore, you’re looking at about an extra $15 per month, and that makes our differential an even $1,700.
Not a need
My pet peeve here is that people claim that their car is a need. You need transportation (debatable), you don’t need to spend $20,000 on it. Maybe you aren’t going to spend $20,000 on your new car, after all the average amount a person in the US spends on a new vehicle is…
I just looked up the average amount that American’s spend on a new car. Holy crap! You people have gone insane. Apparently, the actual price folk actually pay is $33,500. It’s easy to see that this could really drive wealth inequality. If I drive a cheap car for two decades and you drive a $33,000 car for two decades, our savings is simply going to diverge. So the purely financial conclusion is buy used. Now to be fair, I’m certainly guilty of this too. The car I drive is worth $4,000, which is far more than what I really need. Yes, you’re car will be ugly. Maybe it’s important to you that you drive a nice or comfortable car. Like every other luxury, you pay for that.Don’t go around telling yourself you need a new car, that’s a load. The financial difference is massive. If you’re a Thousandaire please, don’t keep 50% of your net worth in depreciating asset, you’ll make Franklin cry.