My first car was a real clunker my grandfather gave to me. My dad was kind enough to drive across the country to pick it up for me. I’m surprised it even made it home. But I was 16 years old, with new-found freedom and responsibility. It didn’t really matter that the air conditioner didn’t work and the radiator leaked all the time.
I paid for the gas and insurance with my after school job and was thrilled to be able to drive to school and friends’ houses. But alas, like all good things, it went up in flames.
No, seriously. It caught fire one day and that was that.
My next car was a super cool (very used) Ford Probe. I thought I was hot stuff, even if I did have to pay half the purchase price and everything about it cost more. I was still a teenager and had my parents’ help when things went wrong.
College was what did me in. At that point, I was living alone, my Probe was getting older, and I became nervous about what I’d do when it broke down. So, like all perfectly informed and brilliant young adults, I purchased a new car.
And I mean new. I went to a lot, chose a Honda Civic LX (still economical I thought), signed the dealer papers, and walked away 20k poorer. Little did I know that as soon as I drove the car off the lot, it immediately lost 10% of its value and continued to lose value every day after.
I loved that car and drove it well into my married life, until we decided a minivan would make more sense for the family. And trust me, that was a used, cash-in-hand purchase. I had learned my lesson.
Why does it matter that I bought a new car, you may ask? I drove it for years, so I got my money’s worth, right? Well, yes and no. It’s all in the numbers.
A Modern Example
Let’s look at a standard Honda Civic LX today. They are still considered pretty basic, economical cars with good gas mileage and resale value. According to the Honda website, the very basic, no-upgrades-added 2020 Honda Civic LX is $21,605 (no sales tax included).
If you finance the car, like 35% of American adults, you are looking at monthly payments of $406 for 60 months (at 4.8% interest, a pretty good rate). Maybe that seems low to you, like it’s no big deal.
Now, consider what you could do with that money instead. We could play the investment game of course. The payment monthly payment applied toward investments or your home mortgage loan would yield some lovely results:
- $406 car payment for 60 months = $24,360 total paid (principal and interest)
- Instead, $406 invested monthly at 7% interest for 60 months = $28,587.04 ($4227.04 earned)
- $28,587.04 left to accumulate interest for 10 more years = $56,235.03 (almost double the investment!)
- $21,605 purchase price towards home loan
- Calculated with 30 year home loan of $250,000 at 4% interest, the one time payment saves $43,566.83 in interest and shaves 4.5 years off mortgage
- Calculated as monthly payments of $406 for the life of the home loan (not 60 months like car loan, but assuming you could afford this perpetually) = $75,897.12 saved in interest and 11.5 years shaved off mortgage
Of course, you still need a car to drive so it’s a little unfair to say you could put all of the money toward something else. So let’s consider the purchase price difference in a used Honda Civic.
According to Kelley Blue Book, the average price of a used 2015 Honda Civic LX is $11,890. That is only 5 years old and in good condition. And half the price of a new one! Payments would therefore be half as much, and if you have planned ahead, you can pay cash and save the interest.
And truly, I would encourage you to go even older. A 2010 is $6,618. And this principle applies to every make and model available. Do not align yourself with the majority of Americans, with a total of $1.3 trillion in car debt!
Get Over Yourself
Maybe you are concerned about maintenance. Maybe you are concerned about image. Let me give you some good advice.
My husband and I have a great affinity for 2001 vehicles—both of our rides happen to be in the slightly elderly category. We have the oldest cars of all of our friends, and they do show some age. But, we know exactly what to expect from them, and frankly, we look at cars as liabilities, not assets. We will always have expenses related to repairs; we will always have kids spilling drinks and dogs spreading mud in them, so why stress?
The purpose of a vehicle is to get you from point A to point B. Certain features are important, like gas mileage and reliability, and certain vehicles work better for families or city living. But all that aside, a car is just a car. It does not define you or give you prestige, as much as you may wish it did.
If you are concerned about purchasing an older car and having maintenance issues, consider the costs. Even if you had to install a brand new engine, it would cost less than the money spent driving the new car off the lot (10%). Even if you are not handy yourself and know you would have to hire every repair out, it would take some serious issues to cost more than a new car.
If you are concerned about image—what that hot date will think of your (debt-free) self or what a client will think when you arrive in your (paid-off) older car, don’t overthink it. Remember, you are striving to live the Minority Mindset. This means throwing off the confines of living beyond your means for any purpose, but most especially to impress your neighbor.
Aged Like Good Wine
As I have shown, new cars cost easily twice as much as the same used car and do not hold value for long. In fact, according to Carfax they lose over 20% of their value in the first year alone. Why pay extra money for a new car smell? In the grand scheme of things, an older, well maintained used car can save you thousands of dollars in purchase price, money you can instead invest in something that ages well, like investments or real estate.
How can you make an older car, well, not so old? Keep it immaculately clean. Have it detailed professionally if you want—still cheaper than that payment. Consider an inexpensive paint job or new carpeting. Our 2001 Suburban will shortly get these treatments to spruce up the look.
And trust me, your date would much rather see you be financially savvy in an older, clean car than sporting a new vehicle you can’t afford.
Contributor’s opinions are their own. Always do your own due diligence before investing.
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