[Lesson] Should you buy a new car or an old car? A 2022 case study by @dhanishree

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Introduction

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Isn't it just wonderful to smell the fresh smell of a new car when the first one is being delivered to your household? A fragrance like this is definitely unique, a scent that is both soothing and inspiring at the same time. A fragrance like this is a combination of power, freedom, and beauty all rolled into one scent.

It will be interesting to see whether you still like the smell when you learn what it actually costs you.

In the 1950s, the auto boom led to the development of a culture of automobile ownership in the United States, and since then, they have become popular all over the world due to their high quality and efficiency.

A huge amount of money was spent by the automotive industry on advertising alone in 2014, and it is expected that every year the amount of money that was spent will increase.

It's as if they are attempting to convince us that once we get behind the wheel, we will have more love from our families, more envy from our neighbors, and the right to drive anywhere we like will be ensured. However, this is not the truth. In fact, they are more likely to take your freedom and your security than you can ever imagine.

Things to be careful about before buying a new car

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If you buy a new car, then you should be aware of three things that can threaten your financial well-being.

A large part of the cost of owning an asset consists of borrowing money at an interest rate, paying to maintain that asset, and then...this is the big kicker...the asset slowly depreciates in value over time.

If you're wondering what depreciation is, let me tell you what it means.

How about buying some ice cream to cool off on those hot summer days? You would have to shell out about three dollars for the ice cream. But think about it for a moment. I bought the ice cream twenty minutes ago from the ice cream vendor for three dollars, and now I am selling it to you for a price of three dollars, an ice cream that has turned liquid now.

Do you think you would want to pay that much for it? Of course not, I know you wouldn't have even the slightest desire to pay even a dollar for that.

That is what we call depreciation. Essentially, a depreciating product is a product that gradually loses its value and charm over time.

Cars seem to retain their value about the same as ice cream does on a hot summer day. During the first five years of ownership, a new automobile will depreciate by 63%. In addition, 10% of that amount is depreciated the moment the vehicle leaves the dealership.

The idea that cars are a "bad investment" is like describing a monkey as an incompetent surgeon of the heart. In fact, they're a lot more of a liability than an asset!

Could you think of anything else in your life that you would spend that much money on if you knew it would lose the value that quickly?

Don't think that you will be able to break out of this by leasing instead! If you pay your lease every month, then you are paying for the depreciation of the vehicle you are leasing. This is the way the leasing companies work. In this scenario, even after you have paid for the depreciation, they (the leasing company) still have an asset left to sell after the lease has been completed. In order to make sure you are in the driving seat instead of being taken for a ride, let's lay down a few simple rules.

1. Buying a car that is at least five years old is the best thing you could possibly do. It is immediately noticeable that you have skipped most of the depreciation for the asset.

2. I think it would be better if you saved up some money so you could buy a car with cash at a later date. Paying interest on something that fails to appreciate is the equivalent of exercising and gaining weight in the process. There is nothing fun about it, and it does not pay off.

3. A car can only be bought if you have the capacity to comfortably save an amount equal to the amount of your car payment. If you are not able to do this, you will not be able to own it. A $300 car payment is not something you should take on if you aren't saving $300 a month.

How much money are you actually at risk of spending here?

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In the case of purchasing a new car, let's say it costs $30,000. With an initial down payment of $6,000, I am planning to finance the rest over 60 months at a rate of 6.25%. This will result in a monthly payment of $464.

That sounds like a pretty normal scenario. I'd like to point out something interesting, though.

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It would make sense to buy that same car, but a 5-year-old model, which costs 63% less than a new model. Assuming that you put down the same $6,000 down payment, and assuming that you take out the same loan arrangement, you'll have a monthly payment of $99 to make.

This means that you will save a minimum of 365 dollars a month!

What can you do with this saved money?

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This amount of money could be used to go to a spa every other week if I wanted to! Alternatively, we could have a nice lunch out as a family at one of the nicer restaurants locally.

In addition to saving this amount each month, you can also invest it in a growing asset, such as your home or mutual fund, so that you can use it when you need it.

You will have over $609,374.48 in 35 years if you do this same thing EACH and EVERY time you pay off the car, and that is assuming a very conservative 7% return on investment.

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The question is whether or not that is sufficient for retirement? There is a possibility that it may not be sufficient. In the meantime, however, you can only do this one thing, for now, to prepare for your future.

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