Guest author David Bakke shares his insights on money management, smart shopping, and getting out of debt on Money Crashers, one of the top ranked personal finance blogs.
In this day and age, people are constantly upgrading just about every appliance, device, and gadget they own. Therefore, it’s not surprising that many people feel the need to buy a new car every few years. Personally, I think the obsession with “upgrading” is silly, but I also understand that it’s just one of society’s latest trends.
Unfortunately, this trend can often cost you more than just the retail price—buying a new car rather than keeping your old one carries quite a bit of added expense. Here are five great reasons why you should hold onto that “outdated” vehicle a while longer.
5 REASONS TO KEEP YOUR OLD CAR
1. Life Without a Car Payment
It took me a long time before I got to experience the joy of life without a car payment. Unfortunately, I wrecked my first two cars right before they would have been paid off. Then, in 2000, I finally paid off a car that I was still driving.
Let me tell you something: not having to write a check for a car payment every month amounts to huge savings in your personal funds. Just imagine having an extra $300 or more left over at the end of every month. I was able to use the funds to pay off all my credit card debt and begin seriously saving for retirement.
If you are currently driving a car that is paid off but are contemplating purchasing a new one, ask yourself this: “Do I really want that chunk of money coming out of my pocket on a monthly basis again?”
2. Opportunity to Save for Your Next Car
If you’ve just paid off your current car, why not use the opportunity to save for a new one? Continue to “make” your car payment, but set it aside in some sort of interest bearing account.
If you hold onto your current car for three more years, putting that $300 or so payment away each month, you would have almost $11,000 to put towards your next car. And that doesn’t even include the interest you’d gain on that money!
I’m sure you’ve heard it a million times before, but it’s important to remember when you’re tempted to purchase that shiny new vehicle: a new car begins to depreciate in value as soon as you drive it off the lot.
It’s impossible to give you any hard numbers on the matter since it fluctuates based on the purchase price of the car. Here’s a rough estimate to keep in mind: you can expect to lose somewhere in the area of at least 50% in value during the first five years of owning a new car. Compare that to the cost of maintaining your current car over the next five years. I bet Old Reliable’s looking pretty good right about now.
4. Indirect Costs
Oftentimes, people do not take the indirect costs of owning a car into account when considering whether to buy a new vehicle.
Take auto insurance, for example. If you purchase a new car, plan on paying significantly higher insurance premiums. To illustrate, I obtained quotes for insurance on a 2010 Toyota Corolla and a 2005 Toyota Corolla utilizing identical factors (including age and driving record). If you purchased the newer car, you would be paying almost $300 more annually for your auto insurance coverage. (Note: it is important to compare auto insurance quotes from multiple companies whichever car you decide on, as rates between companies can be dramatically different, even for the same coverage).
There are also tag renewal fees to consider. I currently own two cars: a 1994 Toyota and a 2005 Toyota. The annual tag renewal fee for my 2005 car usually runs about $150. The renewal fee for my “clunker,” however, is less than $30. Combine these two expenses alone and you’ll save over $400 per year by keeping your current auto.
5. The Environment
Did you know that keeping your current car helps the environment?
The act of replacing your vehicle has direct effects on the world we live in. The process of building a new car expends both energy and resources, and there are also environmental costs to disposing of an old car. It takes energy to shred and recycle metals, and some car parts that cannot be recycled end up in a landfill. The leftover fluids, refrigerants, and other chemicals simply turn into hazardous waste.
I drive a 1994 Toyota Tercel. Yes, 1994. It is not the most attractive car in the world, but it gets me from point A to point B just fine. For several years, my reasoning has been that I will continue to invest money in the maintenance of this car until a repair comes along that costs more than the car’s current value. That hasn’t happened yet.
If you’re worried about the repair costs involved in maintaining your current car, ask your friends and family members if they know someone who does repairs on the side. Alternatively, if you’re handy, learn DIY car maintenance tips. You’ll save a bundle over taking it into the shop. If you think that you “need” a new car right now, look at the overall financial cost. You may just want to hold onto your current car for a while.
Did you choose to keep an older car rather than purchase a new one? How did you use the extra money?