Throw $100 Out Your Window

A friend of mine bought a new car yesterday. I'm sure the salesman and the dealer were happy to have sold a car in this market - any car! He traded in his other car which was only about 2yrs old. He told me that he got an "incredible deal!" He got a $35,000 car for $15,000, he said. Of course, this is net of his trade-in which was probably a $15,000 trade-in. So, I estimate that he still paid nearly $30,000 for the new car. I wonder if he figured this out yet. I also wonder if he realizes that his trade-in cost him around $25,000 two years ago which means he lost about $10,000 since then on it. I also wonder if he knows that his new car will probably be worth about $15,000 in two years. Maybe $18,000 if he takes good care of it. That's a loss of $12,000 to $15,000 in just two years which is $6,000/yr or more in lost value!

Let me put this in perspective - loosing $6,000/yr is like throwing a $100 bill out the window as you drive to work every week. Every week! Just pick a day - say Friday, and throw your $100 bill out the window! Ouch! Every once and awhile, throw out two just to keep up. Dave Ramsey taught me this!

It's called depreciation. It's the single largest cost of owning a new car. You can find proof in the consumer reports magazines or just calculate it yourself. If you've ever sold a car you bought new, you don't need someone else to tell you how painful it was to find out that it was only worth _______ when it came time to sell it. Often times, this problem is made even worse by having a loan on the car that is still more than the car is worth! Ouch - that's called being upside down.

I don't buy new cars - I buy used ones. I think it's a better way. I buy them after someone else has absorbed the depreciation cost. Then, I drive them for a few years and sell them for somewhere near what I paid for them or just a bit less. If I buy a car for $3,500 and drive it for 3 years, and sell it for $2,500, I've only lost $333/yr in depreciation. If I buy a $9,000 car and drive it for 3 years and sell it for $6,000, I only loose $1,000/yr. I've saved nearly $4,000/yr in vehicle costs minus maintenance.

Maintenance you ask? Yes, there might be maintenance costs on a used car. But it should never add up to $4,000/yr! Just don't buy an old Hyundai or KIA (or a few others). Buy a Honda or Toyota. No guarantees, but they have a better record as good used cars. Investigate and learn what the good ones are. You won't regret it.

The authors of the book "The Millionaire Next Door" documented the same thing as they interviewed actual self made millionaires in America. They discovered that most millionaires don't get rich by buying new cars. They buy used cars and are usually quite frugal. So understand - a new car is not your pathway to building personal wealth. It is actually your biggest hindrance.

Buy used - I think it's a better way.