If you walk out into the average parking lot of a Fortune 500 company, it’s like getting front row seats to last year’s Detroit auto show. Everyone has a new car. Brand spanking new, gorgeous vehicles without any weirds stains, faded paint, or dented passenger doors. Looking at them makes you feel great, driving them makes you feel even better. The typical excuse people give is “man I gotta get a reliable vehicle” to make it seem legitimate to go spend $25,000 on a Chevy sedan that will be worth half that in three years. I’m just gonna throw out numbers to make it easier to follow why buying a new car is literally one of the dumbest financial moves you can ever do.
Say you make a solid middle class salary of $50,000 a year. Your take home pay is probably more like $35,000 after the tax man takes his bite and you paid up on all your random things like property taxes, employment tax, state and local mandatory taxes and fees, etc. So that equates to around 3000 a month. Most people have mortgages so throw in 1500 for all your expenses associated with living. So you literally have 1500 lying around each month that you can spend. A new car with so so credit in the 20-30k range is probably going to set you back 400-600 per month including interest, fees, insurance, etc. For that new car to be a better deal than a decent used one, you literally have to have over $5000 a year of stuff go wrong with your clunker to make it a toss up, and that’s a lot of blown transmissions. You should be able to pick up a decent used car that you can get cross country with if you had to for 3000-5000 bucks. You won’t be riding in style, you won’t have leather seats with a sun roof, but if you buy a foreign made vehicle you’ll probably have reasonable expenses every year maintaining it.
So if the difference between a new and used car is about 5000 a year, you would need to have $125,000 in an investment portfolio throwing off cash for the privilege of the new car smell. How long would it take you to save that in your personal investment account? If you were able to take down a really aggressive 20% savings rate (on top of whatever you put into 401ks and stuff like that) it would take you about 10 years.
So the next time you see a fast talking, sexy car salesman on TV telling you that you need a new car, don’t act like a mindless zombie in a mosh pit. Realize that in exchange for all the envious looks you’ll get (which will last about a year til something newer comes out) you get to work at your cubicle for another 10 years. For me, I’d rather have the time to work out, learn code, start a random business, and write poetry or any combination of stuff I could do with more free time to make myself more attractive than shiny paint could. Resist the new car urge and drive your 93 toyota with pride.
Great question. This is a common habit of people that are conscious about overspending but it still doesn’t make sense from a financial standpoint. If you buy a brand new toyota camry new it’ll probably cost $25,000 after tax tag and dealer fees. That car costs a lot to insure and will not depreciate as much as a Chevy or Mercedes but will still go down in value over time by a fair amount. Compare this option to buying a Scion from 2005 or Honda Fit from 2009 for under $10,000 and if your goal is to get from point A to point B you will save thousands of dollars if you buy one of these instead and drive it into the ground. The only people new cars are great for is the dealers.
If you’re car shopping in California, remember to tack on an extra 9% for sales tax (even on used cars!) and an additional markup of ~$2000 over the rest of the country.