Should I Buy a New or Used Car? Pt 2
Buying a new car is far more expensive than buying a used car. Review from part one our total cost of operating a new ($40,000 purchase), used ($16,000 purchase), or very used car ($10,000 purchase) over five and twenty-five years (not including gas).
| New Car | Used Car | Very Used Car | |
|---|---|---|---|
| Total Cost (5yrs) | $56,000 | $15,200 | $13,300 |
| Total Cost (25yrs) | $170,000 | $27,000 | $13,300 |
When should or can you buy a new car versus buying a used car? Let’s look at the math and emotion. Let’s examine where you should be financially and where you might want to be with your values before buying a new car.
Financial Position Before Buying a New Car
I know people who make $45,000 per year and make payments on a $60,000 truck. This is absurd in the extreme.
Rule number one, and this is an easy one, is that the purchase price of your vehicle should not exceed your annual income.
That’s an easy rule of thumb that applies to everyone. Let’s take it a step further.
The five-year operating cost of a vehicle should not exceed half of your annual income.
If you make $40,000, you don’t get to buy a $40,000 vehicle, even if the dealer will finance it. The net operating cost is $56,000 over five years. So buying it exceeds your annual income. Indeed, you should be earning twice that cost before buying a new vehicle.
Looking to buy that $60,000 truck? You better be making over $150,000 per year then.
You may also have heard rules of thumb like “You should be a millionnaire before you buy a brand new car. Only then can you take the financial hit.” That’s also good advice.
It truly comes down to this: Do you have enough cash flow to fund everything else you need and want to be doing? Or is too much going to your vehicle?
You should have a fully-funded emergency fund and be saving enough for your desired retirement before buying a new car.
That last part is going to look different for everyone. If you’re young and on top of it, 10% going toward a good retirement investment strategy may be enough. But maybe you’re fifty and behind on saving. You are trying to invest yourself, and you’re in a poor investment strategy because you can’t withstand market volatility. You may need to save 25%–40% of your income to catch up. You need a retirement plan to know if you are saving enough for retirement. And if you aren’t currently saving enough, it’s likely because your vehicle cost is too high for your income and life situation.
Others will say you should be completely debt-free before buying a new vehicle, or that you must be able to pay cash for it. Maybe. But those are tactics to achieve a desired outcome.
“Be debt-free so you can have the cash flow to save enough for retirement.”
What if you already are saving enough? I have plenty of clients that carry vehicle and mortgage debt even though they could pay it off. Their retirements are fully funded, and they are achieving all their other goals. Becoming debt-free is the means to an end: having the cash flow to save. Many, perhaps even most, need to be debt-free to be able to save. Some don’t.
“Only pay cash for vehicles. If you don’t pay in cash, don’t buy it!”
Maybe. But if you are on track for retirement and your other goals, is saving up cash in a bank account for five years so you can buy a car in cash the best use of your money? Should you drain $40,000 out of an investment account earning 10% on average to avoid paying 3% on a vehicle loan? As long as you have plenty of cash flow on top of a car payment, leaving the money invested may be the better option. A better rule would be this:
Only buy a vehicle that you could pay for in cash, even if you choose to finance.
Most people have too much debt, not enough cash flow, and are way behind on saving for retirement. A new vehicle is entirely out of the question for all of those people.
But those who are doing everything they should and need to be doing financially have the financial freedom to buy a new vehicle if it aligns with their values. And that’s the next big “if.”
Does Buying a New Vehicle Align with Your Values?
What do you value? What would you say you value? Those can be different.
“Where your treasure is, there your heart will be also.”
We may say we value certain things, but our spending reveals what we truly value.
We may say that we value our faith, our spouse, our children, our friends, our church, serving in the community, charity, etc. But does our spending align with those? Let’s look at some of these commonly stated values.
Faith, Church, and Charity
Many people of faith, Christian, Muslim, Jewish, or any other, claim that their faith and their community of faith are of great value to them, perhaps their highest value. Yet on inspection, they give none of their money to their “highest value.”
The average American gives about 1% of their income away. That’s not to say that most are giving. Au contraire! The vast majority of Americans give nothing. Some give a nominal amount, perhaps $50-$100 a year. The 1% average comes from the small minority who give much more than that.
Christians are a bit better, averaging 2% of annual income donated to charity (usually their church and other Christian organizations). But this is the same phenomenon. Most Christians give nothing, and a tiny minority are very generous. (I haven’t read concrete studies on people of other faiths, but I hear it is similar. People of faith give a bit more than the general average, but not by much.)
This is born out in my tax preparation experience. For the last two years, you could have received a tax deduction of up to $300 and $600 for donations to charity. The vast majority of the returns claimed $0. They did not give a single dollar away for charity. A few gave between $0-$300, and then a few more gave 8-15% of their annual income away. In my experience, there are more people who are very generous than those who give a couple of hundred bucks. The vast majority give nothing.
It bears emphasizing that many Americans claim to care deeply about specific causes. Homelessness, immigration, racial progress, gender equality, gay rights, the institution of marriage or family, etc. The number of causes to care about is endless. And the passionate advocacy espoused by many on their values might cause you to believe they genuinely value these causes.
Their spending would disagree. The vast majority of people give absolutely nothing to causes they pretend to care about.
Put your money where your mouth is.
If you are not actively donating to a cause, shut up about it.
“I can’t possibly give to all the causes I care about!”
Then care about fewer causes! Make a donation and a difference on a few critical issues instead of spouting off on social media about all of them.
If everyone stopped trying to care about everything and did something for one thing, the world would change.
Spouse & Children
If you have a family, chances are you would rank your relationships with them right up at the top of your values. Does your spending reflect that?
How much do you spend on your marriage? Not how much do you “let” your spouse spend. How much does your household spend on your marriage?
Do you have a monthly “date” budget? Are you actively and intentionally spending time and money cultivating and fostering intimacy and a deeper relationship?
Do you spend money and time on marriage books, conferences, and counseling?
What about your children or grandchildren? If you have minor children, you are spending a boatload on keeping them alive. But beyond their existence, are you investing money into growing the relationships? Are you spending money on experience with your grandchildren versus sending them a Christmas or birthday gift?
If you truly value these relationships, you will invest money into them.
What Does This Have To Do With Buying a New Car?
Vehicles are the largest depreciating asset we buy. They are a significant expense and have the potential to be a massive expense. For many, they are so expensive that they don’t have the money to invest in any of their other values.
Let’s assume that you are financially fit to buy a new car. You could pay for it in cash (even if you don’t), and you’re on track for retirement.
Should you still buy a new car? Is that the best use of your money? Does it most closely align with your values?
I know way too many people driving new cars who would rank their satisfaction with their new wheels at a ten and give their relationship with their kids a five out of ten.
I know far too many people driving the car of their dreams, and their marriage is a nightmare.
Too many people cry and rant on social media about issues and causes they pretend to care about but don’t give a dime to any charity doing anything about it because they have too much going out in their car payments.
Align your use of capital with your values.
Even if you can truly afford to budget $800 per month for your vehicle, perhaps you should budget $400 instead. Spend an extra $200 on your marriage, $100 on experiences with the kids or grandkids, and give $100 to a worthy cause.
In part one, we talked about the opportunity cost of investing the extra money in the stock market. But what about the opportunity cost to your relationships and personal character of sinking too much money into new cars? You can always get more money. You can’t always repair a broken relationship.
Put your money where your mouth is.
You aren’t buying a new car because it’s cheaper to operate. We dismantled that in part one. You aren’t buying a new car because it’s safer. Safety hasn’t advanced measurably from 2018 to 2022. You aren’t buying a new vehicle because your family needs it. A used vehicle has just as much utility. And the newer connectivity and tech in the latest model aren’t worth the tens of thousands of dollars you’ll pay extra.
The only reason to buy a new car is the status it gives you.
There is nothing wrong with that. And if you truly value status above your family, faith, and friendships, then buy a new car before you spend money on those things.
But for most people, we will rank those things higher than new-car-status. Invest money into those higher values first.
So we come back to our original question.
Should I Buy a New or Used Car?
If you are financially and emotionally fit, you can choose to buy a new car.
If you could pay cash for the car, you’re on track with your financial plan for retirement and other goals, and the five-year operating expense is less than half of your annual income, you are financially fit to buy a new car.
If you rank your relationship with your spouse and kids as a 9 or 10 out of 10, you are investing the right amount of time and money into those relationships, and you are giving to the causes you truly care about, then you are emotionally fit to buy a new car.
Check both of those boxes? Have at it?
Not yet? Then buy used or very used, and invest the difference into the people, causes, and goals you genuinely care about.
This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are the opinions of the people expressing them. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. RetireMentorship is not affiliated with any Registered Investment Advisor, Broker-Dealer, or other Financial Services Company.
