• Home
  • About
  • Recommended Reading
  • Disclaimer
  • Privacy Policy
  • Advertise / Contact

Invest It Wisely

Maximizing your EV in life

  • Home
  • Growing Your Wealth
  • Small Business Solutions
  • Healthy Living
  • Miscellaneous

Why Should I Buy a Used Car?

By Kevin

Beater Car

Source: http://www.northshoretowinginc.com

When I first started driving, I drove a real beater car; one of those 80s American cars. The power steering didn’t work too well, the passenger side floor had a hole in it, and the head gasket blew after only a few months of driving. After repairing that, one of the pistons melted, and after repairing that… I got rear-ended, so that was that.

The second car I got was an old Toyota Corolla with a manual transmission. The engine was a lot more solid (and it was carbureted! Just to show you how old the car was…), and I was able to beat the heck out of it without any problems with the drivetrain. The body, on the other hand, was falling apart, and so were some of the mechanics.

When I bought the car, I had to replace the radiator right away since the one it had was leaky. I had to change the brakes since the ones I had no longer worked. One of the rear wheels was hanging on by only one suspension arm, since the other one had rusted completely through. The tires were literally worn down to the metal; you could see the wires through the rubber. I drove that car until one day the tires exploded; it was to the scrap heap from there.

After that point on, I had a bit more money, I was working, and I decided to stop playing with my life and buy a new car. I also didn’t want people to be scared for me (or themselves!) because I was driving around in a scrap heap. While the new car was a lot more secure and a lot more reliable, it wasn’t the greatest financial decision; my insurance skyrocketed, and I now had car payments to pay!

I compounded the mistake by exchanging it for another car 4 years later. Let’s face it, it is almost too easy to buy a new car these days. Whereas some banks will turn you down for financing a used car, almost nobody will turn you down for financing a leased vehicle.

I’m in a different phase of my life now, and I’m realizing just how expensive car ownership is. Since I’ve already paid most of the depreciation on my current car, I’m considering sticking with it for the long haul. How about you? I’ve prepared an analysis below to compare three different situations with the same type of car:

  • Lease a new car every four years, for twelve years.
  • Buy a new car and keep it for twelve years.
  • Buy a used car every four years, for twelve years.

Before we get into the analysis, let’s look at a couple reasons why people buy new cars: status and reliability.

Reasons not to get a new car

People (especially young people) often give silly justifications to themselves in order to justify spending money on a new car. They can include the following:

“A new car will help me get the girls!” (status)

Not necessarily. A new car might impress a girl into getting into your car, but it doesn’t necessarily mean that she will stay around, or that she’s the right type of girl for you. Also, there are plenty of older cars that will impress a lot more than your standard everyday new car. For example:

  • Chevrolet Camaro Z28

    Source: http://musclecars.howstuffworks.com/classic-muscle-cars/1969-chevy-camaro-z28.htm/printable

  • VW Beetle

    Source: http://naeomi.livejournal.com/

Which car do you think will impress a girl more? Or, to ask it another way, which car do you think will impress your guy friends more?

“A new car will give me less headaches and cost less in maintenance!” (reliability)

Not always true. This is what I thought, but you don’t have to buy $500 beaters like I did, and don’t forget that many new cars have recalls or manufacturing defects that also cause problems. It’s said that new cars can help improve gas mileage, but one must consider the total costs of car ownership and not solely the costs of gas alone.

Many of the older Japanese cars are very reliable and require little out of the ordinary other than regular maintenance, and can also be had for a cool $3000 to $5000. They will also cost significantly less in insurance than a new car. If you live in a region with strict emissions controls, then you do want to verify that passing inspections won’t cost you a fortune in order to get the car certified.

So, still think it’s worth it to buy a new car? The conventional wisdom says no. The conventional consumer says yes. I say… it depends on what you’re looking for. A new car can bring emotional joy that you just don’t get with a used car, not to mention that you can customize it how you like with your own color and packages (on the other hand, you can spend the same amount of money and get a really nice luxury or sporty used car). This emotional satisfaction does come at a price though, and the buzz does wear off after a couple of months.

If you don’t care about any of this emotional stuff, then a used car makes more financial sense. A good chunk of depreciation happens right after the car is driven off the lot, so you can often find a good deal on an “almost new” car.

Certain cars (i.e. Honda Accords, Toyota Corollas) hold their value well over the years, so you can drive the car for many years and still sell it for a decent chunk of change. Why? Well, these cars have a reputation for being reliable, and the reputation is usually deserved, so you will have less headaches over the long run. For someone who really knows their way around cars, a cheap American car might be a better purchase, as the parts are cheaper and the cars are sometimes easier to work on.

The analysis

Here are the assumptions:

  • New car purchase price: $24 000
  • Depreciation: 20%/year, 10%/year after 8 years.
  • Maintenance & repairs: $600/yr for the first 4 years, $850/yr for the next 4 years, and $1100/yr for the last 4 years.
  • Tires cost $800/4 years.
  • Insurance costs 8% of the current value, with a minimum price of $500/yr.
  • Financing costs are ignored.

Here are the scenarios:

  • Lease a new car every four years, for twelve years.
  • Buy a new car and keep it for twelve years.
  • Buy a used car every four years, for twelve years.

And finally, here are the numbers:

Lease a new car every four years, for twelve years
Year Value, end of year Maintenance Insurance
1 $19,200 $1,300 $1,536
2 $15,360 $600 $1,229
3 $12,288 $600 $983
4 $9,830 $600 $786
5 $19,200 $1,300 $1,536
6 $15,360 $600 $1,229
7 $12,288 $600 $983
8 $9,830 $600 $786
9 $19,200 $1,300 $1,536
10 $15,360 $600 $1,229
11 $12,288 $600 $983
12 $9,830 $600 $786
Total cost, car $42,509
Total cost, maintenance $9,300
Total cost, insurance $13,603
Total cost $65,412
Total cost/year $5,451
Buy a new car and keep it for twelve years
Year Value, end of year Maintenance Insurance
1 $19,200 $1,300 $1,536
2 $15,360 $600 $1,229
3 $12,288 $600 $983
4 $9,830 $600 $786
5 $7,864 $1,650 $629
6 $6,291 $850 $503
7 $5,033 $850 $500
8 $4,027 $850 $500
9 $3,624 $1,900 $500
10 $3,261 $1,100 $500
11 $2,935 $1,100 $500
12 $2,642 $1,100 $500
Total cost, car $21,358
Total cost, maintenance $12,500
Total cost, insurance $8,667
Total cost $42,525
Total cost/year $3,544
Buy a used car every four years, for twelve years
Year Value, end of year Maintenance Insurance
1 $4,027 $1,900 $500
2 $3,624 $1,100 $500
3 $3,262 $1,100 $500
4 $2,936 $1,100 $500
5 $4,027 $1,900 $500
6 $3,624 $1,100 $500
7 $3,262 $1,100 $500
8 $2,936 $1,100 $500
9 $4,027 $1,900 $500
10 $3,624 $1,100 $500
11 $3,262 $1,100 $500
12 $2,936 $1,100 $500
Total cost, car (car sold for $2,642) $4,155
Total cost, maintenance $15,600
Total cost, insurance $6,000
Total cost $25,755
Total cost/year $2,146

Summary

As you can see, for the same type of car, it is more economical to keep driving the same car for 12 years rather than to replace it three times. It is even more economical if you buy the same car 8 years used instead of new.

Disclaimer: The numbers here are a general extrapolation from my own experiences, and they can work out differently for different people. Andrew Hallam, for example, has a story to share about selling used cars at a profit instead of eating the depreciation, which makes the case for buying a used car even more compelling. Of course, it’s not always about the numbers. I’d love to hear what you think!

Related Posts Plugin for WordPress, Blogger...

Filed Under: Growing Your Wealth, Opinion, Saving Your Money Tagged With: car ownership, depreciation, used cars

About Kevin

Kevin has left the office, and he is currently fighting the rat race by working on his own business. He enjoys exploring unvisited places around the world and gaining new experiences. He believes that by properly managing our energy and time, we can learn to invest our lives wisely.

Comments

  1. Mike says

    May 11, 2010 at 6:37 pm

    Kevin,

    Very well thought out post. It’s smart that you are considering insurance costs in the analysis. I have never really looked at keeping a car for 12 years, but it might make sense.

    What I do now is buy a car that is 1-2 years old with somewhat high miles. (I know that sounds weird re: high miles) However, I only drive may 10k miles per year. I am able to negotiate a lot lower price with the miles. After about 4-5 years, I sell the car and the mileage is considered normal for a car 5 years old. I pay cash for the car and continue saving (in my car bucket) every month or quarter. This works out and I don’t end up paying interest.

    By the way, nice pic of the Z 28. I love muscle care and would like to get an early 70s style Mach I.

  2. Andrew Hallam says

    May 12, 2010 at 4:47 am

    Mike, that sounds really smart. One of my favorite strategies was buying an American car that was actually Japanese. American cars plunge in value, while Japanese cars tend to maintain theirs. In Canada, the Mitsubishi Eclipse sports car that they sell in the U.S. is actually called (or was called) the Eagle Talon. It was a great car, and because of its American affiliation, it plunged in value. That would be a great car to hold for a while–or a car like it. I recall that the 1994 Ford Escort was 100% Mazda as well. I went on a hunt for them, but I found that there were many others who knew what I did. So I was never able to scoop one.

    Kevin, the work you put into your posts is very appreciated. I love the photos and the attention to detail.

    Andrew

  3. Kevin says

    May 12, 2010 at 4:46 pm

    @Mike
    Yep, it’s a pretty nice car… the comparison wasn’t fair (assuming you are a guy looking to buy a car; my girlfriend might think differently if she was the one shopping ;))

    @Andrew
    That’s a good trick; I was actually looking for an Eagle Talon at one point but all the ones I found had already been beaten up to hell and were on their last legs. Probably was a good thing; the way I used to drive I probably wouldn’t have survived.

    A friend of mine used to drive a ’94 protege that he had bought for a good price off a woman who hadn’t driven it that much; it was in very good shape for the age. I think he bought it for $4,000, abused the car until the engine starting making funny noises, then sold it for $2,000. No profit, but he had a lot of fun with the car…

    Thanks for the feedback guys!

  4. Car Negotiation Coach says

    May 13, 2010 at 7:19 pm

    Kevin, very interesting analysis. You may be surprised because of my blog, but I’m a buy and hold guy myself.

    Your story reminded me of my friend’s car in high school. Everytime he made a left turn the passenger seat got sprayed with anti-freeze…..so he kept a bag of sand on the floor to absorb it….of course he wouldn’t mention it until after you commented on the sand or he took a left turn…. real nice!
    .-= Car Negotiation Coach´s last blog ..14 Extreme ways to lower your car insurance premiums =-.

    • Kevin says

      May 13, 2010 at 9:36 pm

      Hey, welcome to the blog!

      Wow… I wouldn’t have enjoyed riding shotgun in his car. I have to admit that new cars eat up a lot of money, but on the other hand, my days of driving ghetto beaters is over. 😉

  5. Used Car Inspection says

    November 8, 2010 at 1:51 am

    Just with a few clicks away, you can get the service of a used car inspector. The quality of the car will be assessed by an expert and you will know if you will get what you will be paying for.

    • Kevin says

      November 8, 2010 at 2:58 pm

      Most useful spam comment ever? Haha… I’ll let you keep the link.

Trackbacks

  1. Yakezie Carnival: The Wisdom of Scrooge McDuck says:
    May 16, 2010 at 11:02 pm

    […] for duckmobiles, buy a used car (Invest It Wisely) if you can, and try to lower your car insurance costs (Find the Best Car Price). […]

  2. » Reality is better Early Retirement Extreme: — written by Jacob Lund Fisker, Freelancer says:
    May 24, 2010 at 8:48 pm

    […] Yakezie Short Carnival: Saving Money With An iPhone @ Canadian Finance Blog, Why Should I Buy a Used Car? @ Invest It Wisely, Dirty 30’s Dieting – It’s easy to lose weight when your […]

  3. Carnival of Wealth #11 – Nov 7 2010 Edition — Personal Dividends - Money+Lifestyle says:
    November 8, 2010 at 4:54 am

    […] had previously declared bankruptcy or walked away from your foreclosed home.”Kevin presents Why Should I Buy a Used Car? | Invest It Wisely posted at Invest It Wisely, saying, “This post looks at ways you can save money by going for […]

  4. Canadian Finance Carnival #9 - Canadian Finance Blog says:
    November 8, 2010 at 5:02 am

    […] can maximize your money just by being patient. “Invest It Wisely at Invest It Wisely presents Why Should I Buy a Used Car?, saying “This post looks at ways you can save money by going for a used car over a new […]

  5. Car Buying Spreadsheet and Free Ebook | Car Negotiation Coach says:
    December 6, 2010 at 1:21 am

    […] Why Should I Buy a Used Car (Invest it Wisely) […]

  6. Going Carless: Does It Make Sense? | Invest It Wisely says:
    January 12, 2011 at 1:31 pm

    […] so decision time is coming back up again. What’s it going to be: Another new car? Another used car? Or shall I buy the car back? Alternatively, the book Early Retirement Extreme has challenged me to […]

  7. What Would You Do with a Million Dollars? | Invest It Wisely says:
    July 19, 2011 at 10:00 pm

    […] my dreams. My lifestyle would not change that much in many ways; I would not go out and buy a new car, nor a new home, and there aren’t many things that I want that I can buy with a million […]

  8. 5 Ways to Help Your Kids With Their Finances | Invest It Wisely says:
    May 24, 2012 at 5:07 am

    […] or she turns 17, so begin talking about buying a car when your child turns 14. How will your child pay for a car, car insurance, and maintenance for the vehicle? Share your auto insurance bills with your kids, […]

  9. The Financial Impact of Owning a Car | Invest It Wisely says:
    August 7, 2012 at 11:04 am

    […] There’s no getting around it — a car is expensive. Even the cheapest cars will likely still cost a couple hundred a month in gas and depreciation. On the other hand if a car […]

About Invest It Wisely

Invest It Wisely is about evaluating the choices that each of us face everyday. It’s about investing your time, your money, and your energy wisely, in order to achieve your goals. The end goal is maximizing your life expectation, and exploring the ways to get there.

Subscribe!

Subscribe via RSSSubscribe via EmailSubscribe via TwitterSubscribe via Facebook

Most Popular Posts

  • How to Get Fit, Feel Better, and Get Rid of Your Foggy Head: A Few Simple Steps
  • 3 Frugal Ideas for a Romantic Valentine’s Day
  • What Would You Do with a Million Dollars?
  • The Importance of Opportunity Costs, and Why They Should Not Be Ignored
  • What Do You Need to Get out of the Rat Race and Achieve Financial Freedom?

Categories

  • Avoiding Scams
  • Book Reviews
  • Crypto Trading
  • Currency Trading
  • Economics
  • Financial Freedom
  • General Reviews
  • Growing Your Wealth
  • Healthy Living
  • Insurance
  • Interviews
  • Investing
  • Market Analysis
  • Miscellaneous
  • Motivation
  • Opinion
  • Paying Down Debt
  • Philosophy
  • Precious Metals
  • Reader Questions
  • Real Estate
  • Relationships
  • Saving Your Money
  • Small Business Solutions
  • Stories
  • Uncategorized
  • Weekend Reading

Archives

Invest It Wisely Copyright © 2016
Creative Commons License
This work by Invest It Wisely is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License
Permissions beyond the scope of this license may be available at http://www.investitwisely.com/contact