You’ll Never Get Rich Buying New Cars
By Aaron Crowe
There’s nothing like the new car smell when you get into a new car. It can be refreshing and lets passengers know you’ve bought a car that hasn’t been touched before.
Whether you get that smell by paying the average new car price of $30,500 in 2012, or add a “new car smell” from a $10 spray bottle to a used car with an average price of $15,793, it’s a choice that can have a major impact on your financial life during the life of the car.
If a car’s purpose is to drive from Point A to Point B, why spend twice as much money on a new car if a used car works just as well?
“People just want to own new. It feels good,” says Todd Tresidder, a financial coach and founder of FinancialMentor.com, who always buys used cars.
Having the latest technology and safety innovations, new brakes and other parts that haven’t been used and should be reliable, and a warranty are some reasons to buy a new car.
But over a lifetime of driving — around 60 years — doubling the cost of buying a new car instead of a used one adds up to a lot of money.
Financial advisor Mike Sena figures that if a driver saved $10,000 each time they bought a used car every five years, they’d save $120,000 if they bought 12 cars in their lifetime if they didn’t invest the savings. If at age 20 they invested that first $10,000 in a stock market fund earning 8% over the next 60 years, they’d have more than $1 million.
To break that into a monthly savings, if the monthly payment on a new car is $550 and a used car is $365, then the almost $200 in monthly saving for five years could be put into a mutual fund or bond fund averaging 2.5% over the five years, Sena says, adding up to close to $12,800. Saving $200 a month over a lifetime of driving with a little more investment risk could lead to $3.5 million in savings, he says.
Some new car buyers are deceived by low monthly payments versus the total cost of the car, and want the prestige of owning a new car, says Tresidder, the financial coach. That’s not a way to build wealth, he says, no matter how good the deal for the new car feels.
Tresidder buys cars four to five years old that have service records and are cars that are reliable and durable. He also has a knack for finding sellers who put few miles on their vehicles and take good care of them, such as a motorhome with camping equipment included for 30 cents on the dollar.
Like the cliche of finding the car from the little old lady who only drove it to church on Sundays, Tresidder bought a 1995 Toyota Previa from an elderly couple for $8,000 and he put more than 100,000 miles on it. He’s done it again and again, driving for pennies on the dollar with lower insurance, registration taxes and maintenance costs.
“If you do this with just a couple of vehicles, you end up driving free for the rest of your life,” he says.
Let someone else pay the depreciation and find a used car that has a good maintenance history and hasn’t had major problems, he says. People are keeping their cars longer — a record high of 11.4 years — which may make finding a good used car more difficult, but it can be done.
For a car enthusiast, buying a new car doesn’t cut it, no matter how much the savings. Kristofer Kirchen, president of Advanced Insurance Managers in Tampa, Fla., has bought five new cars since 1999, partly because he enjoys having the latest model.
“I have always been very passionate about cars, even as a little kid,” Kirchen wrote in an email response. “A new car gives me the ‘fix’ I need for my car jones. How I see it is that it is my treat to myself for hard work.”
He says he also likes their reliability, although that’s not as big of an issue as it was with cars from the 1960s or 1970s. New cars often have maintenance plans that go beyond the warranty, allowing him to more accurately budget monthly transportation expenses of gas, car payment and insurance.
That may be true, but he’s unlikely to ever get camping gear thrown in as part of the deal when buying a new car.
Aaron Crowe is a journalist who covers the auto industry for CheapCarInsurance.net.