I’m quite certain that I’ve mentioned somewhere or other that I drive a reliable, but old car. Occasionally, I catch flack from people about why I haven’t bought a new car yet. I don’t really feel like buying a new car yet – mostly because I’m cheap and lazy. So who’s right? My cheap lazy self, or my consumerist oriented acquaintances. It’s gonna get all consumerist vs frugality demolition derby style up in here today. And the conclusion surprised even me.
If you are a regular follower of this blog (or new follower who just happened to be bored and read every single previous post), then you know that I take status seriously and routinely make a it point to practice perception management. In that vein, we must first address the question: “Who is giving me flack about driving an old car?” Let’s just say that they are neither my employer, nor bikini models. So we can conclude that, at least for now, my Methuselah of a car isn’t holding back my social or career advancement. If the answer was “bikini models,” (*) I would not be writing this post. I would be buying a new car.
For the rest of this discussion, we’re going to use math. Okay, that’s not entirely true. I’m going to use math and you’re going to sit there and read about me using math. But feel free to do the exercises along with me.
(based on reality, and on the discussions that inspired this post):
- A reasonably priced new car, say a Honda Civic, costs around $18,000 suggested retail price according to the internet. Hagglers and deal hunters can probably do better.
- I will buy said new car at some point in the next 10 years.
- During the years that I am not buying a car, I will be investing my money for an 8% total return. I consider this a fair estimate.
- The new car will not require any major maintenance over the first 10 years.
- For each year over the 10 year period before I buy a new car, I can invest $16,000 at 8% total return. I must spend about $2,000 per year in maintenance and repairs to keep my old car running.
- For the year that I do buy a car, I invest $0 (all the money went to the car).
- For each year after I buy the new car, I can invest $18,000 since I no longer have to pay for maintenance.
- All purchases are done in cash. I don’t take on consumer debt.
- Inflation is ignored.
If I buy a car in Year X, then according to the assumptions above, by the end of 10 years, the amount I will have saved is listed below. (Read each line like this: “If I buy the new car in year 1, then I will have saved $224,776.04 by the end of year 10.”):
Year of car purchase / Money saved in 10 years
- $224,776.04 (year 1: $0; years 2-10: $18,000)
- $223,443.37 (year 1: $16,000; year 2: $0; years 3-10: $18,000)
- $215,785.00 (years 1-9: $16,000; year 10: $0)
Yes, the longer that I put off buying a new car, the less money I will have saved. In fact, it looks like I lose $900 for each year that I choose NOT to buy a new car, for a total loss of $9,000 over the total 10 year period if I wait all the way out until year 10 to buy a new car.
Why? Because for each year that I don’t buy a new car, I’m still stuck paying $2,000 in maintenance and repairs to keep my old car up and running. Meaning that for each year that I keep the old car up and running, only $16,000 is being compounded, not $18,000.
- I am assuming that a new car MUST be bought within the 10 year time frame. It’s possible that I could just keep repairing the old car for another 11, 12, 13, 14…. years until it finally gives up the ghost or rusts into oblivion.
- I am assuming that the new car will not require any expensive maintenance work over the first 10 year period of ownership. For the first 5-7 years, probably not – afterward it’s a craps shoot.
- I have not factored in how much extra per year I will be paying in car insurance. Probably a lot, given where I live. My current car is not worth a lot, so there is very little to insure.
- I have not factored in improved gas mileage for the new car.
- New cars depreciate in value rapidly. I could easily lose $9,000 in car value over a 10 year spread.
- I have not factored in any trade in value for the old car. Probably not much.
- I have forced a dichotomy: I can either invest money or buy a car. Other options like building an emergency fund, taking a vacation, buying food, etc. are all off the table.
$9,000 is not that much money in the face of the nearly quarter million that I’ve saved in this example. By the time all the caveats are factored in, any difference in the money saved between buying a new car and continuing to keep the old one up and running appears to be negligible. Increases in insurance alone could easily make up for most of the $900 per year savings loss.
What about a used (new to me) car
Buying a used car instead of a new car would alter the above model in a couple of ways. On the positive side, I would not have a year with $0 worth of savings, that would boost my returns. On the negative side, it is highly unlikely that I could count on a 10 year period with no major repair costs. Once the maintenance and repair costs kick in, the advantage of saving an extra $2,000 per year are lost, and the added cost will eventually eat away whatever you saved by buying the car used. Used cars do have a couple of other advantages not included in the model, but worth mentioning. First, used cars depreciate much slower than new cars. Second, car insurance will be lower for a used car than a new car.
When to buy a new(er) car
I will consider buying a new or slightly used (new to me) car when my existing one becomes unreliable for finally passes on to that great garage in the sky. Repairs once or twice a year are something that I can handle, both financially and psychologically. If the necessary repairs become more frequent or begin adversely affecting my regular commute to work or my summer road trips, then it will be time to consider looking for a new car.
(*) If the answer was “bikini models,” I’m not sure that my choice of a Honda Civic for this example would really cut it.
Readers: What do you think? Should I buy a new car? Or keep waiting as long as possible?