If you’ve spent any amount of time reading financial advice blogs, there’s a good chance you’ve come across an article (or twenty) that bemoan the automobile as the single-worst thing for your bottom line. Depreciating rust buckets! Climate-killing pollution machines. Ridiculous status symbols.
They’ll go onto preach the virtues of driving a 10-year old Honda or Toyota until it literally falls apart beneath you. From a strictly financial perspective, they’re right.
But these are not the people that grew up with Lamborghini Countach posters in their childhood bedroom. These people don’t know what it means to drive. Sure, they manipulate a wheel and pedals to go from Point A to Point B. But they don’t appreciate the pure joy of carving up a canyon road in a roadster, mudding in a Jeep, or even just cruising along on a cold day in a quiet luxury cabin with heaters in your seats and steering wheels and marveling in modern automotive engineering.
If your goal is to stop working as soon as possible and live on your investments for 50 or more years, then follow their advice—cars are not something you should be spending a lot of money on. If, however, you believe that affording things you enjoy is a part of why you work and why you save, read on.
Why I believe you should have a nice car
From the day I started Money Under 30, I have always said that money’s not worth earning if you can’t enjoy it. Of course, it’s crucial to put aside money for emergencies and retirement. But if you save everything you make and leave nothing left over for your interests and passions, what kind of life are you living?
Most of us have to go through a period of early adulthood in which money is extremely tight—we’re paying off student loans, saving for an emergency fund, and possibly working up to big expenses like getting married or buying a home. But hopefully, one day, you will find yourself on the other side of that mountain with a growing nest egg and some savings left over. Savings you can (and I might even argue should) use to indulge your passions.
For me, that happens to include cars. You might be an A-to-B person, and that’s fine! Keep the old Honda and spend your savings elsewhere. You can still apply some of the principles in this article. Just replace ‘car’ with ‘mountain bike‘, ‘boat’, ‘motorcycle’, ‘travel’, or another preferred discretionary expense.
Can you afford it?
While we have written several times about how much you can afford to spend on a car, for this article, let’s use a higher standard. I’m going to assume you’re here because you’ve been dreaming about not just a new car, but a nicer one. And hopefully you’re pondering such things because you have your other financial priorities squared away and are sitting on some extra cash.
If not, let’s pause for a second. I recommend sticking with basic, affordable transportation until you’ve reached the following financial milestones:
- No credit card or other consumer debt
- Six-months’ worth of living expenses saved in an emergency fund
- Saving at least 10% of gross income in retirement accounts
Compare the amount you can spend with the cost of the cars. Check out a respected online source like Edmunds to get competing dealer quotes.
Pay cash if possible
If you’re hoping to add a vehicle to your garage, I would strongly encourage you to save the money and pay cash. Although I’m not entirely opposed to financing a primary vehicle, I don’t like the idea of financing “toys”, be it a second car, a motorcycle, a boat, etc. These are truly discretionary purchases, and you should have the cash on hand—and be comfortable spending it—before you buy.
I recently saw a question on a financial forum from a guy who was wondering whether to pay cash or finance a boat. He had the cash, but was feeling uneasy parting with it. Most commenters agreed that those feelings were a good indicator that he was spending too much, and if he felt uneasy parting with the cash, he shouldn’t finance either!
If you do finance, keep the terms at four years or less
Banks and car dealerships keep on extending the terms of car loans. Whereas five years/60 months used to be considered a long term on a car loan, now it’s common to see terms of six years/72 months or longer.
It’s never a good idea to finance a depreciating asset that long. When you finance a vehicle, keep the term as short as you can afford. You’ll save thousands on interest and minimize the amount of time you’ll be underwater (meaning you owe more on the note than your car is worth).
Buy used almost always
We all know that vehicles depreciate rapidly. You’ve probably also heard of the “off-the-lot” depreciation, and it’s a real thing: The highest rate of depreciation is in a vehicle’s first year of ownership. Yes, that new car smell is awesome. But it’s really expensive.
Or pick a card that doesn’t depreciate as fast
Not all cars depreciate at the same rate. Reliable and in-demand, Honda Accords depreciate more slowly than American sedans. Due to high demand and utility, pick-up trucks depreciate more slowly than cars and SUVs, as a rule. On the other end of the spectrum, luxury cars depreciate fastest—with the depreciation on German brands like BMW and Mercedes being especially brutal.
Luxury models cost significantly less when they’re used
Now, if there’s a silver lining to first-year depreciation, it’s that you can get a fancy luxury car for half the price if you’re willing to find a model with a few miles on it.
A new BMW 5-series might cost almost $70,000 new, but you can find models a few years old for $30,000. Of course, there are reason for a Bimmer’s sharp deprecation: Reliability and maintenance costs. German cars are paradoxically known for quality materials but below-average reliability.
On top of that fact, repair bills on most European cars are higher than domestic and Asian models.
Avoid extended warranties
In a lot of cases, I decline extended warranties. If I were buying a pre-owned luxury car, I might think twice. Alternately, make sure you find an independent mechanic to do your service.
I once owned a 15-year old BMW M3, a model especially prone to eye-popping repair bills. More often than not, my local mechanic could do a repair job for a third of the price of the BMW dealer. The differential might not have been so great on a newer model, but the savings would still be significant.
Sometimes you can buy new
All that said, there a few cases in which you might reasonably decide to buy new. Make no mistake: You’ll still take a depreciation hit. But, with select types of cars, the first-year depreciation is modest and you might decide that it’s worth it to you pay the premium.
Pick-up trucks and Japanese cars
As I mentioned earlier, pickups and mass-market Japanese cars tend to depreciate slowly due to their demand.
When I sold Hondas years ago, plenty of people came into the dealership looking at used Accords and Civics only to drive off in a new one because they were only a few thousand dollars more than lightly used models.
Low-production specialty cars might also fall into this category. If a car is rare enough and desirable enough, it may actually hold value. A prime example is BMW 1M.
Today, nine-year old models in decent condition are selling for more than their original $49k MSRP. How did this happen? Well, this particular car achieved legendary status among BMW enthusiasts for its unparalleled handling. Second, BMW only sold about 700 1Ms in the U.S.
The problem with taking the plunge on a specialty car is that you don’t know for sure that it won’t depreciate. However, expect a car with enthusiast appeal, strong reviews, and a limited production run to depreciate more slowly.
A note on leasing
This isn’t the place to get into a long debate on the pros and (mainly) cons of leasing, but I will recap the advice I’ve given elsewhere.
An auto manufacturer’s ideal customer is someone who leases a brand-new vehicle every two to three years. It’s the ultimate subscription model. You make monthly payments forever but never own the car. The dealer turns around and sells the used car and makes a profit both on your lease and the used car sale.
So, you have to ask yourself: If it’s such a good deal for the manufacturer and dealer, who’s getting screwed? Most of the time it’s you, the lessee.
At the end of the day, buy the car that makes you smile
Even for the financially-enlightened like you and me, it can be difficult to tune out the persistent advertising and cultural conditioning in the United States that whispers “you are what you drive.” We both know that’s bull, but the messaging works its way into our subconscious anyway.
It’s why, when I was 24 and shopping for my first vehicle that wasn’t a hand-me-down, I bought a Toyota Tacoma. Let’s be honest: I merely needed a car with two seats and four wheels. A Corolla or Civic or any other compact sedan would’ve been just fine. Sure, the truck came in handy on a few camping trips and during a couple of moves, but that’s not really why I bought it. I bought it because I wanted to believe I was rugged and adventurous. You know, a pick-up guy.
Today, I daily drive a nice-if-boring Volvo SUV because I have two kids and a large dog. Makes sense.
And, last year, after a business milestone, I treated myself to a BMW M2 as a weekend fun car. I was tempted by other cars: The larger and faster M4 or a Porsche 911, for instance. But I took a long look at what I wanted: A small car that was ridiculously fun to drive but still had four seats so I could take the kids to school in it. The 911 and M3 fit that bill, too, but were dramatically more expensive…and flashier.
As I found myself dreaming of a 911 or wild-colored M3, I realized I was drawn to those other cars for the wrong reasons: Trying to show off or adopt some persona from the car. Total silliness. At the end-of-the-day, it’s impossible not to smile driving the M2, even if most people just see “some small BMW”. In the meantime, I saved tens of thousands of dollars.
You might still think I’m crazy for buying a superfluous second vehicle just for fun. That’s fine. But I might think the same of something you’d like to buy.
When it comes to cars, you might realize can get a lot more bang for you buck in what you drive than you thought if you stick to these basic rules:
- Only spend more when you’ve achieved the three basic pillars of financial stability (no consumer debt, 6-month emergency fund, and 10% retirement savings).
- Pay cash if you can, and don’t finance for more than 48 months.
- Buy used unless you have a solid reason not to
- Find an independent mechanic for all non-warranty repairs
- Consider an extended warranty on European cars
- Buy a car based on what you want, not based on what others will think