Buy Used to Save Big
In America today, the average price of a new car is $31,252 according to USA Today. If you happen to have $30,000 in the bank that you couldn't use for anything else, then maybe buying a new car would be okay, but chances are you don't have the money. In order to purchase an average new car, you would likely have to take out a loan, with interest, and pay it back slowly over the next several years. And you would do this all so that you could shuttle yourself back and forth between your home and your job, where you spend many hours working to be able to pay for your car. Here's why you shouldn't do this!
1. A Financed New Car Costs Way Too Much
If you were to take that average new car and finance it for 4 years at 3% interest, you would end up paying $691 every month! That is insane. Not to mention that your $31,252 really ends up being $33,203 after adding in the interest payments. I don't know about you, but the idea of adding in almost $700 per month to pay for my transportation does not sound like a fun proposition, nor something that will help you to achieve financial freedom!
Imagine instead that you were to spend $5,000 on a nice reliable used car. Let's assume that the new car and the used car have similar fuel economy. Over the four years of owning either of these vehicles, you would save $28,203 with the used car. If you invested that $28,203 over the four year period that you could have your car loan, and earned a reasonable 5% return on your investment, you would actually wind up with $31,279. So by purchasing a used car at the beginning of the four year period, you would actually save the entire value of the average new car in four years rather than being in debt for the whole period. Then the next time you wanted to buy a car, you could actually pay cash if you wanted to, but I would still advise against purchasing new.
2. Cars Depreciate Exponentially
The second you drive a new car off the lot, it begins to depreciate in value. Typically, car depreciation occurs exponentially; new cars decrease in value much faster than older cars. You might have thought that buying that $31,000 car was an "investment," but in reality that "investment" is likely to lose somewhere around half of it's value in four years.
On average, that new car will lose about $15,000 over four years. After the loan is paid off in four years, you will be left with a car worth about $16,000. This ends up being less than half of the value of your invested savings on the purchase of the used car plus the depreciated value of that used car. Don't rationalize your expensive car habit by calling it an investment!
3. A Car is a Car
This might seem obvious, but it is worth mentioning. I have heard many people argue that a new car is somehow better than an older car. If you feel this way you are wrong. The reason that we own cars is not to show off how much money we make, it is actually to help us move from one place to another. A car is a mode of transport in it's most basic function; it is not an entertainment device, it is not a popularity producing device and it is not any of the other weird mushy feelings that we Americans seem to attach to cars. It is just a car.
And all cars being alike, we know that they are all capable of providing us with transportation. When you think of it like this, you come to realize that there is no reason to spend extra money on something that does the same thing as something else. A fully loaded BMW x5 will transport you just as well as a used 2005 Honda Civic; the only difference is that the first option will cost you 10 times more!
If you value your time, and the freedom that comes with having enough money to be able to make your own decisions in life, then buying a new car is probably not in the cards.