The Most Common Financial Mistake We Make With Our Cars
Posted: Wednesday, October 14, 2009
by Jim Anderson
Weddings That Last
Most everyone in America that has a job owns a car. It is seen as a necessity these days. Americans love their independence and transportation that is at their command is expected. It is also pretty much accepted that we will always have a car payment. In fact, we don't even really consider the total price of a car anymore; we are mainly concerned about the payment. If you think you can afford the payment, then you can afford the car, right? Well, let's take a closer look at that assumption. Cars are a depreciating asset. They quickly lose value, especially when they are new. Kelley Blue Book reported in 2006 that the average new car loses 65% of its value in the first five years. That number probably hasn't changed much since then. This isn't something people think about, but it has a significant impact on your personal finances. Many people only drive their new cars for two years before they get tired of it and find a new one. The depreciation happens on a curve, not in a straight line. So the greatest amount of depreciation happens during these first two years. Some experts even say that your will experience a 50% reduction in value of a new car in the first two years. Of course it varies with the car, because the balance of supply and demand for the car in the used market will affect the resale price. However, when planning your car purchase, you need to take this into account.
So what is the solution? We all need some form of transportation. There are some locations where you can take the bus to work and manage to meet your needs in other ways, but for the majority of people having a car for transportation is pretty much a necessity to hold down a job. So you have to be a little smarter about buying a car. Buying a car that is at least 2 years old is an excellent way to get more car for your money and take less of a hit on the depreciation curve. It also makes sense to avoid borrowing money to get the car, because if you save the money you would otherwise be making on payments, you could trade up every few years and eventually have quite a nice car with no loan against it and no payments weighing down your budget.
If you are in debt, this is one of the quickest ways to make a significant impact on your situation. Get rid of the car payment by selling your car and then buy a cheaper one that gives you what you need, transportation, and little more. The amount of extra cash this can give you in your monthly budget will be significant, depending on the size of your payment, even if you had to pay to get out of the loan when you sold. It also gets rid of the continual decline in your net worth as the car declines in value. The depreciation of an older cheap car will have little impact on your net worth. This extra cash will accelerate your ability to get out of debt more than any single thing you could do outside of getting a very big increase in your pay.
Incidentally, this includes the government incentives used to tempt you to buy the new hybrid cars. They are not the deal everyone seems to think they are. Usually to take advantage of these programs you have to buy a new car and you instantly lose all the benefit of the incentive plus much more the minute you drive off the lot. These incentives do more to just encourage you to go into more debt than they help you.
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Top-level comments on this article: (2 total)Interesting thoughts about financing.Please log in to respond to this comment.Thanks for the comment.Please log in to respond to this comment.
Hybrid cars are a scam. You will not save in gas the cash you over-paid. I like your thoughts on the matter. Nicely done.Please log in to respond to this comment.They are certainly not a good buy, from financial perspective. Thanks for your comment.Please log in to respond to this comment.
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