Cost of a new car

Buying a car is a difficult process and one that most people do not take lightly. There are so many variables and tradeoffs to consider…foreign vs. domestic, flashy vs. practical, new vs. used, cup holders vs. a car that parks itself (or something like that). Let’s explore the most important part (or at least it should be) of the decision making process…cost.

A car is the single most coveted pleasure that defines one’s status in life…at least that’s what one would believe if they spent any time watching TV, reading magazines, listening to the radio, or glancing at the occasional billboard. Billions of dollars are spent every year to enforce this message and burn it into our collective psyche. To sweeten the deal, car manufacturers even make this piece of the “American dream” available for no money down and an easy monthly payment. How nice of them.

But after the new car high has worn off, what is left? The answer is a huge old liability. Notice that I said “liability” and not “asset.” It’s not an asset because…well…you don’t really own it yet. But even if a car is owned outright, I would still argue that it is a liability and not an asset because A) it doesn’t produce a cash flow (unless you are running a fly-by-night taxi service in your new whip) and B) it can’t be sold for more than what it was purchased for (unless you are buying a rare classic or something of the shorts).

Depreciation is no one’s friend when it comes to being an automobile owner. Take a quick look at this website (granted it’s a British website, but I’m sure the Queen won’t mind us dropping in for a visit) to get an idea of how quickly the value of that “new” (for a working definition of “new” vs. “used” please refer back to my previous post) car evaporates. In the case of my car (or the new equivalent of my car), over 30% of the car’s value is lost after the first year. The cost of owning a new car is not just the monthly payment, but also the value lost by the newly acquired liability as it is used. A bit of a double whammy if you ask me, but wait…it’s gets worse. :)

At the fear of being called a Debbie Downer, I’ll throw a third whammy out there for consideration. That “easy” payment that you are making every month is incurring an opportunity cost. The money that is going to pay down the debt on the car could be used for other purposes. At the very least, it could be sitting in an online savings account making 3%-5% interest. The income and appreciation that is not being earned on an investment opportunity to make room for that shinny, four wheeled liability is the opportunity cost. Not to pour salt in the wound, but it gets even worse for those who forgo paying down their high interest rate credit cards in order to make the monthly car payment. In that case, the opportunity cost is the interest paid on the credit card debt, which we all know is extremely high.

There are definite advantages to owning a new car, the largest of which is the warranty. I’d love to never have to pay the mechanic every time my car broke down, but how much is this peace of mind worth and how much does it really cost (i.e. the triple whammy). The real question to ask onself when considering a new car purchase is "how much am I willing to pay for the perks (warranty) and the new car high (giving into the man's propaganda)?". Too often people spend beyond their means to purchase (or worse yet finance) a car. This needs to stop! There are plenty of reliable, nice (enough) cars to be purchased for a fraction of their new sticker price.
I use the next post to discuss some these options and a list of do’s and don’ts for the used car buyer.

Until next time…ariva derche.

Franco