Wednesday, June 22, 2005

Why I can never buy a brand new car

This is something that I have given serious considerations to. Everytime we go car shopping and end up on a dealer's lot, the new car smell and shine entice us. Then we look at the sticker price and it still doesn't look too bad. So for every passing moment that we are on the dealer's lot we keep thinking it's probably not a bad idea to get one of these shiny things.

And that's when we walk away.

Once we're out of the lot, our normal thought process kicks in and we realize why we aren't interested in brand new cars. Don't get me wrong - there's nothing wrong with brand new cars, it's just that we're not the kind of people who can ever own one, mostly due to our mentality and thought process about vehicles. More explanation follows:

Normal people make money in two main ways - you have a job that pays and secondly, you invest part of that pay into an investment account(s) which would give you a reasonable (and hopefully positive) rate of return. Your hope and goal is that your income and investments grow faster than inflation so that your money is not just worth a can of soda by the time you're 65. In other words, $10 that you own today should become $50 after 30 years to retain it's buying power.

So that's about money growing i.e. incoming moolah. Now if you look at the outgoing dollar drain pipe, you've got things like mortgage, credit card debts, kids upbringing and education. All these take money away. But note one thing - you are either going to spend on appreciating assets or depreciating assets. If you spend on appreciating assets such as a house or a piece of land or a rental property your money that you're putting into it isn't really lost because the value is appreciating. On the other hand if you put money into a depreciating asset then you lose the money you're paying and your asset loses value as well - double whammy!

That's where brand new cars come in. They are one of the fastest depreciating assets in the world. A car loses somewhere between 15-30% value the moment you drive it off the dealer's lot. If the time it took you to make that car deal was 4 hours, you better show me a way to grow my money at that rate within 4 hours. Here's the kicker - your monthly payments on the car are not going to go down as the vehicle drops in value. So in other words, for a brand new car that cost you $30,000 you are paying $30,000 plus interest on a vehicle that is dropping in value every single day and will never ever be $30,000 again. At the end of say five years, you would have paid off your car and your total payment including interest is, say, $38,000. At the end of five years a good Japanese car would be roughly 50-60% of it's cost so that would put your vehicle at 18,000. Check if you don't believe me. So in five years you lost $20,000 on this purchase (although you have to account for the fact that you had usage benefit). Now, if you can make your investments grow by that much amount plus rate of inflation, then you will come out even (just even, not profitable). If not, then well you lose whatever it is that you lose.

With all that said, some people just want to enjoy life without thinking about these petty money matters. They want to live it up. In that case, a new car is for them. Like I said, I will never ever say that a new car is a bad idea - it's just something that we (Noddy and I) personally would never do but it works for millions of people because it's something that they really want. And if it's something that you really want and you think this whole appreciating/depreciating business is for penny pinching losers, then don't hold back.... go for it!


Blogger Will said...

Every thing you say there I totally agree with. I've only owned one new car---the one I do now. And if I had to I'd do it differently---but I view that vehicle as a depreciating asset but as a "cost of doing business". It's my commuter car and I have to have a dependable vehicle to get to and fro.

I've tried the old car trick for years before--and realized that even though it was paid off I was still putting $600 into it to fix it every quarter or so, which was just about a car payment and also had the downtime.

But believe me, I didn't spend nearly $30K on the car I drive now. Not even close. The depreciation was still there, though. I'll drive this car to over 150K miles easy before I think of replacing ---but when I do I'll follow the other piece of conventional wisdom: Buy one year old, low mileage. That way, by buying last years model just off a lease or something, I'll get a practically new car, usually still with some warrantee, and miss the original depreciation.

At least, this is my hope. I'll tell you in two years.

4:48 PM  
Blogger Denise said...

This is really good information that I will pass on to my husband so that He can see how important NOT buying a brand new car can be.

6:53 PM  
Blogger Archana said...

I agree with you entirely....but I do see myself giving into the temptation [just for the love of cars] if I can actually afford it though it would involve a lot of thought process. My preference would be on fixed assets and then a car. Its too early to say anything....I'm nodding my head now :)

9:35 PM  
Anonymous Anonymous said...

Thank God for voices of reason - a car is a car is a car - I can see being passionate about a certain car over and above its value of simply being a method of transportation, but I cannot, for the life of me, financially justify throwing all that money to the wind unless there was a justifiable business reason (e.g sales staff taking out their clients, etc.)

Admittedly, buying a used car is a fearful and can be a very traumatic experience, but at the other extreme I have this friend in Boston who has a penchant for driving different cars. He buys a used car (usually VERY old) for 1-2k every two years - he's driven just about every Euro import I could dream of driving and a lot of the classics to boot....

10:19 PM  
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