Many people I know are car fanatics who love the idea of owning a trendy new car. I've seen family and friends beam with pride when they show off a new car purchase, eager to have me join them in that celebratory spin around the block.
But whenever I find myself inhaling that new car smell as I sit in the passenger's seat, I often remind myself (secretly, of course) of what it costs to buy a new car. It is during occasions like this that I weigh the costs of a car purchase with the benefits of keeping and maintaining a vehicle over time. After all, it's always a good idea to work out ways to keep those costs low, as a vehicle usually turns out to be one of the largest expenses you'll make in your lifetime.
So how does one go about shopping for a car?
Financial savvy folks will recommend that you first budget for it (this YNAB review describes a great budgeting system you can try). Then shop for and find a used (1-2 year old) car that you could either pay cash for completely, or for at least a portion of the purchase price. Since new vehicles depreciate approximately 15 to 20 percent per year, that’s a huge chunk of change that you can clip off the selling price right off the bat. That saves you an average of $3,000-4,000 that you would otherwise finance or pay for upfront for a spanking new 2010 vehicle. Is it worth it? Here are a few things to consider to keep the costs of car ownership low.
1. Keep your car as long as you can.
According to polls, most Americans plan to keep their new vehicles for approximately 5.5 years after purchasing it. This means that essentially, a new $20,000 car will cost you an amortized $3,636 per year over a span of 5.5 years if you pay for it in full upon purchase (the cost excludes maintenance and gas costs). Now if you finance the vehicle for 100% of the purchase price on a 4 year note, say at a 6% interest rate, you would pay $22,543.63 for a $20,000 vehicle. That means that it would cost you $4,099.20 per year if you finance the vehicle. That’s actually not a huge difference when comparing a cash purchase to financing your vehicle. What actually makes the biggest financial difference? It's the price of the car you purchase and the length of time that you end up keeping it.
Let’s use some more math to illustrate this point, albeit with a simplistic example. Suppose you decide to apply a strict budget as you bargain shop for a slightly used vehicle. You could very well acquire a new set of wheels for around $15,000, down from the $20,000 on a new car. And if you decide to hold on to it for around 8 years (an additional 2.5 years above the average length of time that households keep their vehicles) then you would be paying just $1,875 per year to own that car (again, minus the maintenance and gas costs). Not bad!
Note that the annual cost of owning a vehicle goes down based on a car's initial purchase price and the length of time you decide to keep the car. That is, it becomes cheaper to own a car the longer you own it. It seems obvious but anyone can save money when car shopping by simply going for the more affordable option (forget upgrades). And you'll save even more by simply holding on to your car for longer.
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2. Pay off your car loan faster.
Everyone knows that the greatest savings are made by avoiding any form of financing on a purchase, especially a large one. But if you can't afford a car unless you finance or get a personal loan, then keep in mind that you'll save the most by paying off your loan sooner.
I touched on this matter earlier, but it's worth repeating: by skipping on financing, you'll save on having to pay off the interest on your loan. As an example, a $20,000 car with a 4 year loan at a 6% interest rate will require a $469.70 a month payment over a span of 4 years. The interest you'll pay here is $2,545.63 which you wouldn't need to pay if you just set aside enough in your high yield savings account to afford the vehicle in full.
3. Consider the maintenance costs of your vehicle.
Some car sites have numbers that will give you an idea about the financial cost of owning popular vehicles. For instance, there is a huge difference in the 5-year ownership cost between a Hyundai Elantra and a Toyota Sequoia. A $29,784 difference to be exact. That’s a lot of money that could be invested in an online broker account or used elsewhere. How much is your vehicle worth to you? This may be an opportune time to rethink that question.
4. Maintain your vehicle well.
How do we keep our cars running well and ready for the long haul? The life of your car depends on its maintenance record and general upkeep. But if you want to extend that life, it may be as simple as just treating your vehicle as though you plan to use it for 8 to 10 years. Keeping the interior and exterior clean keeps it free from rust and deterioration. Keeping the oil/oil filter, transmission fluid, tires, brake fluid, air filter, and other essentials changed in accordance with the maintenance manual ensures that the engine and key parts are in good working order. When in doubt, do these things more often than required, rather than later than required. The more you baby your vehicle, the better off you will be.
Think about what you could buy with the financial savings you get from just keeping your vehicle an extra 3 years. Could it all add up to be the equivalent of your child’s college education? Or a more padded 401k? How about all those vacations that you’ve always dreamed of? Or a nice home addition?
By being a savvy car shopper and owner, you can very well free up your money to do a lot more for you!
