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My FI Journey » Reflections » Should I buy a new car or keep the old one?

Should I buy a new car or keep the old one?

1289287_under_sunsetI’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.

Starting assumptions

(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

  1. $224,776.04 (year 1: $0; years 2-10: $18,000)
  2. $223,443.37 (year 1: $16,000; year 2: $0; years 3-10: $18,000)
  3. $222,209.42
  4. $221,066.87
  5. $220,008.95
  6. $219,029.40
  7. $218,122.41
  8. $217,282.60
  9. $216,505.00
  10. $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.

Caveats:

  • 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.

Conclusions

$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?

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22 Responses to "Should I buy a new car or keep the old one?"

  1. Sfi says:

    I faced this same dilemma recently. Buying used was not a good option because the used car market is very strong.
    I decided to lease a car. Did you know that you can lease a car for $200/month (no money down). This is close to the cost of maintaining the old car. Plus maintenance will likely be included.

    Since you put no money down, your investments will keep earning money ( i can earn 7% so it makes sense ).

    1. MFIJ says:

      I have not considered leasing a car. I’ll have to look into this more to see how the costs work out where I live.

  2. This is a great breakdown. I agree with quite a bit of your assumptions, but I do believe the caveats you mentioned would make the difference even more negligible. I am in a similar position to you and will most likely be purchasing a new car within the next 2-3 years. I really hate driving a car that might break down at any moment, so I’ll probably get a new one when I begin to feel that way about my current car.

    1. MFIJ says:

      I’m sure that I’ll have to buy a new car sooner or later. But I’ll probably try to keep this one running for as long as I can. So long as I’m only prophylacticly repairing it once or twice a year, that’s not too bad. When it starts breaking down randomly on the road, I’ll probably have to finally break down and buy a newer car.

  3. Liquid says:

    I would wait until your old car becomes unreliable and then switch to a slightly used (new to you) car :) I bought my current 2007 model car in 2010 from a previous owner. No problems with it so far. I plan to keep driving it at least until 2017. A big part of the depreciation has already been paid by the first owner :)

    1. MFIJ says:

      That’s basically my plan. So long as the car isn’t regularly breaking down on the road, I’ll keep on fixing it up and keep on driving it. It’s funny how many people I’m starting to get flack from for having my old car.

  4. I would wait until your current car becomes unreliable to the point you’re passing that once/twice a year repair issue. We dealt with this a few years ago and waited some time before we bought our car. We ended up buying the previous years model (Altima) and got quite a deal on it.

    1. MFIJ says:

      This is basically my plan, although I’m starting to get a lot of heat from people about needing to upgrade my car. The fact is that my car still works well, has low insurance (since it’s not worth much), and I’m too lazy to go car shopping.

  5. This one is always tough. If the car is reliable enough to get you around now, then I will run it until it was dead.

    1. MFIJ says:

      Drive it until it dies is my current strategy.

  6. Integrator says:

    That’s a lot in annual repairs and expense that you are paying. I would have suggested hanging on to the old vehicle longer, but given your annual repairs expense, I’d almost be inclined to incur the expense to buy a new vehicle sooner than later

    1. MFIJ says:

      As far as I can tell based on my analysis, buying a new vehicle vs keeping the existing one is basically a financial tie. With that in mind it comes down to convenience. So long as the repairs are manageable, I’ll keep driving the old one.

  7. Justin says:

    I’m not who thinks buying a new car is the worst idea ever. I prefer to buy new and drive them into the ground. However, a new car can still run into issues pretty early on and it’s best to assume that you may possibly run into such an issue. (My “new”car had three such incidents in years 5-7).

    1. MFIJ says:

      Some time ago, my mom bought a new car that had issues around the 5 year mark. Right after the warranty ran out. So just because the car is new isn’t a guarantee that it will be problem free. My general philosophy is to buy a slightly aged car (to dodge the rapid depreciation phase) and then drive it until it dies.

  8. Pauline says:

    It is counter intuitive that the more you put off the purchase the more expensive it becomes. I think you could buy a 2 year used car in those dealerships where they get rid or rental and company cars, they are usually in good shape and have guarantee. With your situation they should be delighted to give you 36 months finance at 0% or less than 3%, while you can invest the remainder or capital at 8%. If you are buying a car for fuel efficiency and less maintenance go for it. For status, well who cares? You make double cookie dough ice cream, that should be enough for anyone to marry you :)

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  12. Pete says:

    The only thing I would add to this, is the trade in value of your current vehicle decreases every year, until it is null or next to null. By buying a new car sooner, you get additional value on your trade in, which is deducted from the price of your car pre-tax, thus lowering your state and federal taxes. This all assumes you would be trading in your old ride.

    1. MFIJ says:

      My understanding is that the trade in value of a car is a lot less than you would get if you sold it privately and paid the tax. Although given how much I bought my car for initially (a bit over $5K) there never was much trade in value to consider.

      Regardless, it would be a good idea to factor in trade in or resale value of your existing car. Of course, you also have to adjust for insurance (which I didn’t do) which goes down as the car gets older.

  13. James says:

    For years I thought the most reliable vehicle was a new vehicle because of warranty etc… But in the last few years I have really been re-thinking my approach. We live in oil country in Edmonton and it seems like the mentality here is new, shinny and expensive, so I bought into it… till now. Now I look for reliable used vehicles in Edmonton that are priced under $5000 because all the depreciation is done and if I get one from the right place that cares, I can have a vehicle that will last for years. Now my belief has changed, no more shinny and new for this guy, even in oil country… Now its just reliable used vehicles in Edmonton. I found a good place in our city for vehicles like this called Good News Auto. Anyways, great topic and I am glad I am no longer throwing my money away.

  14. greg says:

    Here is 2 cents worth from a recent trip to an infinity dealer.
    I drive a 12′ honda accord that stickered at 30,500 I got it for 26,500.
    It has 33,500 miles on it and runs perfect. Would not have a second thought taking it across county at a moments notice. I heard the ad on the radio for the Q50 at 389 with zero down. Great car not so great fuel economy. The trade in for my accord was 17,000 I still owe 14,000. I think I will keep the accord. The lesson here is buy a 3 year old accord and you should be fine. Their history of quirky problems is small and well publicized. I have a new 98′ and drove 156K got 100K on the 06′ and got top buck for them when I was done. I have a friend who has 200K on a TL. so if you want to save money by that 3 year old accord and save 8K and the headache of taking a car to the dealer for repairs.

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