One question I often get is, “Should I buy a new car?” We love our cars. There’s no better way to let the world know you’ve “arrived” than by pulling up in a brand new car. This time the new car scent isn’t coming from an air freshener. Oh no, it’s authentic. The car was made for you, and you were made for it.
Only there’s one small problem. You owe more on the car than you make in an entire year! This is why I think you should seriously question if you should buy a new car.
We can easily justify our need for a new car. Benjamin Franklin said it best,
“So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for every thing one has a mind to do.”
Why do you need a new car? Well, you tell yourself it’s dependable and your old car isn’t. You might say, “I don’t like buying used items from other people.” “I don’t know what I’m getting with a used car; they may not have taken good care of it.” “I need a bigger car for the family.” “I need a new car!” The list of excuses goes on and on.
You may think I sound bitter toward new cars. Well, I am, and I think new cars suck! And, I bet you’re wondering why.
I fell into the trap one year after I graduated college. My old Chevy Lumina was running fine, but I deserved so much better than the red interior and the bobble head alligator staring at me from the dash board. After all, I had worked hard for a full year!
The used car lot wasn’t appealing – I didn’t even question why I shouldn’t buy a new car! I spent $28,000 on a 4×4 Xterra, but I didn’t have the money for a down payment. You can read more about my struggle after I bought the new car here.
So, what does a $28,000 loan look like in real life? My loan payment was $508/month for 60 months at 4% interest. I thought I pulled one over on ’em when I walked out with a great APR. But little did I know at the time, if I would have kept the car for the loan term, I would have paid over $31,000 after interest payments!
Do you think at I would have paid $28,000 in cash for a new car if I had it saved up? No way! I would have agreed with my current self in the opinion that new cars suck :).
First, I didn’t have that much saved up at the time, and second, paying a huge chunk of cash would have hurt a lot more! It’s always easier to write a small check than a big one – that’s why loan payments change our perception of reality and make us think we can afford more than we really can.
It’s a lot easier to pay a $500/month loan than to pay $28,000 in cash.
So, how do you keep yourself from getting tricked into buying more than you can afford or taking on a large car loan? Buy a car you CAN AFFORD with cash!
Your probably won’t be able to afford nearly as much, but that’s a good thing! It will keep you within your limits and keep you out of debt. Before you decide if you should buy a new car, consider my recommendation to spend no more than 20% of your annual salary on a car.
If you make $40,000/yr, then you could spend $8,000 on a car. This doesn’t sound like much, but we’ve all lost our sense of reality when it comes to cars. See if you can stick to 20% and convince yourself that new cars suck.
If you can’t afford it with cash, don’t buy it at all. When you buy a new car, it’s estimated that you lose 25% of the value as soon as you drive it off the lot. It’s a horrible way to spend money.
Dave Ramsey calls a car payment the “mantra of the middle class”. People think they will always have a car payment and it becomes status quo in life. They always call Dave Ramsey and ask him if they should buy a new car… his answer is typically no (unless they are worth millions). After I sold my car, I learned that I can live without a car payment.
What would happen if you invested the same ‘normal’ monthly car payment amount in the stock market instead?
If you are 25 years old, you have 40 years until the normal retirement age of 65. If you invest $500 per month for 40 years with a 10% return, you will have around $2.9 million dollars!! In the end, that’s what your car payment costs you!
I bought my used car in 2007; a 2002 Volvo S60 with 83,000 miles on it. I plan on driving it as long as I can. I now fully believe new cars suck – well, at least until I’m worth millions!
I make a lot more money now than I did in 2007, and I’ve had a few promotions. BMW says I’m finally ready to join their new car club. No thanks BMW, I’ll stick with my used car.
My car now has over 126,000 miles on the odometer, and I’ve had to pay a few big repair bills. However, they’ve been a lot cheaper than a monthly car payment.
Don’t believe the myth that a new car is better. The only thing that will make you is broke. I’d rather have money than drive around in a new car. Besides, that ‘new car smell’ is from the plastics and glue that are probably toxic anyway!
What do you think, should you buy a new car? Is a new car worth it? I would like to see your thoughts in the comments section.