Why Buying a New Car is a Mistake
New cars are great. You can get the latest technology, the latest safety features, and you hopefully won’t have to worry about maintenance for a while.
The problem is that new cars are expensive. Like really expensive.
One reason for this is depreciation. When you buy a new car and drive it off the lot it loses 11% of its value on average.
Within five years your new car is only worth 37% of what you paid for it!
Depreciation does level off after 4 or 5 years. So you don’t need to look for a used car that’s 20 or even 10 years old to avoid the rapid depreciation of a new vehicle.
Beyond the actual cost of depreciation, there is the opportunity cost involved. You are not only costing yourself money by the car losing value, you are leaving money on the table by tying up extra money in a depreciating asset.
Think about it, if instead of buying a new car for $30,000 you buy a 6-year-old version of the same car for $15,000 you are free to invest the other $15,000. Assuming a return of 6% per year you would have over $21,000 after 6 years. In other words, you would be giving up the ability to let your money earn you over $6,000 passively.
So six years later the new car you bought would be worth $15,000. The used car would be worth around $7,000. But the money you saved and invested is now worth $21,000 bringing the value of your assets up to $28,0000.
So in this example, if you buy a car that is around six years old and invest the rest of the money from the purchase price of the new car you can expect to come away with almost the whole value of the new car at the end of 6 years. By contrast, if you buy a new car and drive it for six years you can expect the car to be worth about half the original purchase price.
Now some people will ask, what about the maintenance cost of a used car vs that of a new car?
Yes, a new car will probably require less work than a used car. But do you think it will need $13,000 or 43% of the purchase price less?
If you’re thinking you wouldn’t invest the extra money you’d still be way better off buying the used car. You would still have the $15,000 plus the $7,000 value of your used car.
If you love cars you should feel free to buy a new car if you want to. I don’t think anyone should feel guilty about spending extra money on things they really enjoy.
If you view a car as transportation and just want something safe, fun and reliable there is no reason you should ever buy a new car.
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