Thriving Millionaires

By Eric

Breathe in.

Breathe out.

Do you smell that?

It’s New Car Smell.

Some will tell you that is the scent of luxury, others will tell you it’s the smell of wasteful spending. The truth? It’s entirely dependent on your unique personal financial situation.

Because their is no right answer, we wrote posts on both. We outlined when buying a used car may make sense in our post The Case for Used Cars, and we’ll outline when buying a new car may make sense below.

Price Per Year

One of my favorite ways to assess the cost of a car is to look at how much you’re paying per year for the vehicle. It’s a very simple calculation – but can help you understand when a new car may make more sense than a used car.

To calculate, take the expected price of the car and divide it by the number of years you expect to own/drive the car.

There are certainly exceptions to these assumptions – but most things in personal finance are based on making reasonable assumptions to build the best plan given the known facts at the time.

For example, if you are in the market for a car and find that a Brand X sells for about $25,000 new and a three year old used Brand X sells for $21,000, you could complete the calculations to see what the estimated cost per year would be. If you believe the car has a life of 10 years when it rolls off the assembly line (based on research and history of the brand), then you can drive the New Brand X for 10 years and the Used Brand X for 7 years (10 years – 3 years old).

That puts the cost per year of the new Brand X at $2,500 and the cost per year of the used Brand X at $3,000. In this case, it may make sense to buy the new car if you can afford the extra $4,000.

Low Mileage Driver

If you are a low mileage driver, used cars may be a difficult value equation to make work when looking at the total value equation. This bucket rings specifically true to me, because my wife and I recently bought a new car rather than used for this very reason. My wife puts about 4,000 miles per year on her car. For context, the national average is around 12,000-13,000 miles per year.

What we found while shopping for cars is that most used cars – even those with relatively low mileage – were much older in “use years” than they were in model years. For example, we found a car that was three years old with only 29,000 miles on it. For most, this would be about 7,000 miles below average for a car three years old. The problem was, that because my wife drives so few miles, that 29,000 was actually had more than 7 years of mileage on it given her driving habits. We could buy a new car and drive it for 7 years before we would reach the amount of miles on that three year old car.

It’s worth noting that miles aren’t everything. Wear and tear occurs every time you start the car, every time you open a door, every time you roll down a window, and every day the car is parked outside. I’m not saying you should shop only by mileage. I’m only suggesting that you consider your driving habits when comparing mileage of a used car rather than using the national average – because, averages are good for statistics, but meaningless when talking about your individual situation.

Depreciation vs Lost Value

One of the most common reasons cited for buying used cars over new cars is the argument that new cars depreciate significantly the moment you drive them off the lot.

I’m not going to debate whether or not this is true, because it is. I will, however, make the assertion that, depending on your situation and planned usage for the car, it doesn’t matter.

There is a difference between depreciation of an asset and lost value of an asset. Deprecation of an asset occurs only on paper. When you drive the car off the lot, the retail price tag that vehicle carries may decline by 10-20% – but the value of the car hasn’t changed. The car still gets you from Point A to Point B with the ease, gas mileage, features, and style that existed before you left the dealership. Yes, the “book value” has gone down – but the actual useful value of the car is the same.

Additionally, I don’t personally believe in including cars in Net Worth calculations. There are many reasons I hold this viewpoint and I plan to write a future post on that topic, but if I don’t count a car as an asset on my personal balance sheet – the on paper depreciation of that asset doesn’t bother me.

Time Restrictions

There are some cases in which you need to get a car within a certain time window. Even if you prefer to buy a used car – you may be unable to find a used vehicle that meets your list of criteria within the deadline. In these situations, you may be forced to buy new from a dealership if you are unwilling to settle for cars that don’t meet all your criteria.

When I changed jobs and went from a remote job to a corporate office job, I had to give up my company car. We were fortunate to have a long time window to make the transition, which allowed us to plan ahead – but for some, a company could revoke the company car with only a few days’ notice. It would be difficult to do all the due diligence required for a used car search and purchase in that time window, and renting a car in the short term may not make sense.

Another way in which time restrictions can impact the new vs used debate is if you simply don’t have the time to dedicate to the used car search. The ability to walk into a new car dealership, tell them exactly what car, feature package, color, and trim you want without the weekends spent looking at used cars and getting inspections is convenient. And for some, that convenience is worth paying more for.

If you can reclaim 2-3 weekends during your car buying season and spend those with family and friends, that may be a cost worth bearing. Most will depend on how much supply exists for the type of car you’re looking for and how flexible you are with your list of criteria when looking for used cars.

All in all, there isn’t a “right” and a “wrong” answer to whether or not buying a new car is the correct path forward. For some, new cars will make more sense – for others, used cars are likely to fit the bill. It all depends on your personal circumstances, and how you plan to view the car from a personal finance lens.

Patrick’s Thoughts:

What I love about the debate between buying a used car or a new car is that there is no right answer except for one that makes the most financial sense while balancing your wants and needs. If I gave you $100 Million, would that change your answer to this question? I’m pretty confident it would factor in to your decision.

You see, the goal when making a big purchase like a house or a car is to stay within your means. You’re not making financial sense if you make $50K a year and buy a $100,000 used car. The opposite can be said about purchasing an $18K Kia when your pulling in over $200,000 a year. In the scenario I just described, the new car makes a lot more financial sense. Now, what if that $100,000 purchase for the individual was an RV that he was going to live in? See where I’m going with this?

Eric does a nice job illustrating some great situations where you should consider buying new. I’m not going to lie, both the cars sitting in my parking lot at home were purchased new. I’d like to add some additional perspective on why I think it makes sense to buy a new car at times.

You Time it Right

One of the biggest arguments for buying used is that you automatically save a bunch of money due to the depreciation of a new car. While that is correct in principle, there are times where you can buy a new car and receive a significant discount on the list price. This makes a lot of sense for people who want to buy a trustworthy car with a relevant body style and feature set. Let me give you an example.

Automakers traditionally roll out new model years like clockwork, but only every 5-7 years do they really make a significant change to the body style or features. When the end of a model year approaches, and they start taking delivery of the newer models, they can offer big sales to move the older model year off the lot. My wife an I recently took advantage of this with over $14K off the list price of a 2018 model. It was the exact same as the 2019 model, but at a significant discount. Since we plan on driving the car for 10 years, a model year difference doesn’t matter that much to us.

You Find a Killer Financing Deal

We’ve all seen the commercials offering 0% APR for 72 months. These often are offered as some sort of incentive to purchase a brand new car from the manufacturer. The beauty of these offers is that you can essentially borrow money for free. One of the points Eric makes above is the difference between outright buying a car and financing. The financing option allows you to free up any cash you currently have for investments or other productive activities.

If you are able to borrow at 0%, and the other terms of the deal are reasonable, you have essentially freed up your cash for investments, and you don’t need to pay any sort of interest on the money you are borrowing. Not a bad position to be in if you ask me.

You Want a New Car

This one is simple. You work hard everyday to earn your money. If having a new car is important to you, and you’re in a good financial position, what should stop you from buying a new car? Not every decision we make with our money needs to be all about the dollars and sense. Sometimes it’s worth it to splurge for exactly what we want. If you are someone who appreciates cars and wants to drive something brand new, then you should buy one.

The other benefit of a new car is it allows you to get exactly what you’re looking for. You have more flexibility when it comes to colors, options, etc. I know people who are very particular about the color or a certain feature set, and sometimes it can be more difficult to find these configurations when you’re looking at used cars. Used cars also come with a lot of other criteria you have to watch out for. For example, you may find a used car in your preferred White Color, but you find out that vehicle has been in an accident. With a new car, you don’t have to look in to the history of the vehicle or worry about whether it was a rental or has been traded in for a third time. You are the beginning of the vehicles life.

Either way, whether you buy new or used, let me offer some simple advice. First, be willing to walk away from the dealership. This is how you are going to get the best price. Second, extend your search radius to several hundred miles. Even with new cars, you will find certain dealers offering their best price. It’s certainly worth it to drive a couple hours to save a couple thousand dollars. The third, and most important, is to do your homework beforehand. If you’re going to finance, get pre-qualified and know what kind of interest rates to expect. If you’re looking to trade in, get a couple appraisals. The worst decisions are made when we don’t know what to expect. If you follow these criteria, you will be in a great place to purchase a car, no matter if it is New or Used.

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