Every year, my wife and I discuss our old cars. We look at our savings, we look at how much a new car costs and the yearly expenses to keep the old car. Every time I look at this data, I always draw the same conclusion. In the long run, I am better off keeping the old car. Whether you decide to keep an older car or buy a new car, you must understand that a car is going to be a money pit. It will need gas, it will need repairs, it will even need to be washed and there is no way to avoid these extra costs.
Sure, I could run out and buy a brand new car for $40,000 to avoid the repair cost for a couple of years. There is one problem, I just wasted $40,000 on a shiny object that takes me places. I am in no position to be throwing away $40,000. Most of us aren't in the position to be throwing away money. We need that money for mortgage payments, debt payments, retirement savings and monthly bills.
You could let these bright shiny objects and snappy advertisements give you the 'I need a new car bug,' but you just can't let emotions dictate your spending. Children let emotions dictate their spending. Adults make a plan and follow it. A plan requires research, time and the ability to be patient.
My wife and I discuss getting a newer car every year (mainly whenever my car goes to the shop). I have a 12-year old car that I bought in 2009 and my wife drives a 6 year old car that she bought new. Each time we fall back on the idea that in the long run it is always cheaper to keep our car instead of buying a new car.
Reason #1: Repair Costs in Comparison of a New Car Payment
Last January, I discussed this topic in an article titled, You Need a New Car, The Myth. The problem is that a lot of people fear the repair costs. They will instead go buy a brand new car on payments (lease or debt). They feel like they did the 'smart' thing by avoiding the repair costs of keeping their old car.
Each year, I track the expenses associated with repair costs. This year, our repair costs were more expensive than last year, but still less than dealing with a car payment. The data for our car repair cost over the past three years (2014-2016) is compared to the monthly payment of the average car payment over the course three years according to data from Edmunds.com.
Based on my family's car repair data and the average car payment in America, we have saved boatloads of money by keeping our car and avoiding car payments. In three years, we have spent $23,501.20 less on cars than the average two car family has spent in America. That's an average savings of $7,833.73 per year. Do you think you could use an extra $7,000 dollars every year? We definitely use that money to help pay extra on our mortgage and to fully invest in a Roth IRA. With that much extra money, you could even find some money for a trip or two.
For my family, the wasted money of car payments has kept us in our old cars. I love driving around my old 2005 Pontiac Grand Prix. It's kind of like a badge of honor to me, because I know that most people with new cars are throwing away an extra $7,000 a year.
Reason #2: Cars Drop in Value like a Rock
Any car that we own continues to depreciate with every mile that we drive on that car. According to a 2010 article from Edmunds, a new car loses 11% of it's value the moment you drive off the lot and loses an average of 37% of its value in 5 years. The article from edmunds has a very neat infographic detailing the loss of value from the minute the car leaves the lot all the way to five years after ownership. The image below is a screenshot of a portion of the infographic from Edmunds.
In the image above, Edmunds used a car with the starting value of $29,000 and showed the depreciation over 5 years. In this example, the car lost $17,804 over 5 years. That is an average loss of $3,569.80 per year. Not only do people lose money on the fact that they have a car payment, but they lose money because a car continues to lose value every time you drive it.
My car and my wife's car is still losing value, but my car is so close to the bottom that it doesn't lose as much per year anymore. Therefore, by just holding on to our cars every year, we are saving money that other people are losing because their cars continue to lose value. Once again, this is another badge of honor for me, because my old car is saving me the depreciation of a new car every year.
Reason #3: We Refuse to Buy our Next Car on a Loan
My wife and I have officially started to discuss the possibility of getting a newer car, but this won't happen unless we have enough to pay for the car with cash. That's right cash. This article has pointed out the savings of avoiding car payments and keeping depreciation of a car to a minimum. To do this, you must hold onto cars longer and buy cars with cash. Cash is one of the smartest financial decisions that you can make when it comes to car buying.
Ironically, my wife and I have officially begun discussing a car purchase. It might not happen this year, because we don't have enough cash to buy a car and still have a fully funded emergency fund. Thus, we have started a separate savings account that will be used for a car purchase in the future. When our 'new car fund' has enough, I will have no problem upgrading my car, because we have the cash. Until then, we will continue to hold onto our old cars.
It's Time for You to Make a Decision
I have always been a huge fan of cars and grew up going to the dirt track races in my hometown every Friday night. I even dreamed about racing cars and owning my own fancy car. Somewhere from the age of 16 to the age of 28, I grew up and realized that a car is waste of money. It has one good purpose: Transporting us from point A to point B. It does not have to impress anybody. It doesn't have to have all of the upgrades. It just has to work.
It's easy to get lost in the shiny new paint job and fancy new upgrades in cars. It's easy to go out and buy a car for zero down and 6 years of payments. It's easy to think that a little car payment won't hurt your financial future. The data in this article suggests the exact opposite. A car payment and the depreciation of a car will slow down your wealth building. A fancy car today will leave you with less for retirement. It could cost you $7,000 or more a year towards your retirement. It's time for you to make a decision. It's time for to decide on how you will buy your next car. Will you be like everybody else and throw your money away on a car payment or will you start saving today for your car purchase in the future?