Driving Too Much Car? The Simple Car Principle

| March 19, 2011 | Comments (3)

car depreciation

Ok, I know, just about everyone or at least someone you know has a car.  A car is a very useful tool to get us from point A to B and many times as an enjoyable voyage.  Having said that, have you ever thought to think just about if you are driving a little too much ‘car’.  Having driven everything from old beaters to cargo vans to luxury vehicles, I have possibly ridden in almost every car ‘type’ out there.

 

The reason you should be looking very carefully at your automobile purchase is that it can very easily wreck your finances.  Not only that, but they are generally not good investments as well.  Good investments usually net you some sort of return and there are very few cars that do that.  In fact, a vehicles worse enemy is usually time and even worse, depreciation of the car.  I like to call these types of consumer buys – negative assets because they are devalued over time until they become almost useless.

 

Point in check:  Have you ever saw a vehicle from as far back as the 1980s or 90s that is still on the road today?  How much do you think they are worth?  I’d bet not every much money.  I’ve seen vehicles that were once $15K – 20K brand new that sold for $100, yes $100!  Vehicles definitely don’t age well like a fine wine. Quickly, the new car smell goes away and you realize that you are losing money every time you drive it.  It’s interesting, but every one that buys a new car goes through the same revelation, they realize that the new car is not so new anymore and even worst yet, can feel trapped with fairly high car payments.

 

Consumers have all right to worry about buying more of a vehicle than they can afford.  Here are some worrying stats:

  • Gas Prices are at all time high – prices in the U.S. will eventually hit the $5 / Gal. mark
  • Vehicles can lose serious value from the time you drive it off a dealer’s lot.
  • Hybrid cars have excellent technology but usually priced 10K-15K more than their ‘normal’ models.
  • A vehicle’s value can drop anywhere between 15-20% Annually and some as much as 35-40%!
  • According to fool.com, a $20K dollar vehicle can very easily be worth $16K from the initial purchase.
  • New Vehicle models generally get pricier every year, but the level of depreciation stays constant.

 

Yes, generally not the best news that consumer likes to hear.  Of course, they are some that would rather play dumb and just know that they are driving the latest car to satisfy their ego and the keeping up with the Joneses mentality.  Many others just lease, even though it wrecks their finances even more yet they own nothing at the end of the lease.

 

I digress though, there is still light at the end of the tunnel if you are willing to do research on what vehicle you should actually purchase.

 

Tips on Buying Your Next Vehicle

If you plan on buying new, make sure you can easily afford the monthly payments. Also, if buying new, you should plan on keeping the vehicle for a long time.  This makes you a lot more financially savvy, and you will save serious dough over buying new constantly every few years.

 

In fact, what I call ‘trading up’ or trading in your new car every two years just so you can look the part is a very unwise financial move.  A lot of people do this for the status, many do it to keep up with the Joneses, and many just like to buy new.  I know people that buy new and keep their vehicles for 10 years literally writing them off as depreciable assets.

 

Personally, I like to look for quality used vehicles just a few years old and look for desperate sellers.  You can quite easily find a super deal like this.  I once bought a vehicle worth around 10K for about 6K literally buying the vehicle for cash.  Real life tip: New Vehicles will be the most expensive in the first two years of ownership.  Try to find vehicles just after this threshold and you will find a sweet spot for buying.

 

How Much Car Can You Really Afford?

This question varies, but I tend to agree with bankrate.com that you should limit your spending on monthly car loans to be no more than about 20% of your take home income.  This is wise advice and they are so many people out there driving more car than they really need.  So much so, that they have an expensive car and can’t afford real assets such as property or a home for example.

 

Always factor in other additional necessities like gas, insurance for the year, maintenance and anything else.  This can be something very substantial, so make certain to use a quality Auto Loan Calculator to calculate just what you know you can afford.

My Really BIG ADVICE and Take Away

As you know, I love to blog on all sorts of Financial Freedom topics and this is one that is close to what I believe in.  To get out of debt faster, I really propose that you pay cash outright for your vehicles or put down the biggest lump sum from the get go.  Doing so, allows you to put your cash towards other debts so that you can finally be Financially Free.

 

Another good Tip: If you do hold a car loan, make certain to pay towards unscheduled payments or principal to shorten the life of the loan and save you much interest.

 

How do you buy your vehicles?  Have any good tips to share?  Would love to hear them, join me in the discussion by commenting on this post.

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  • Anonymous

    Hey,
     
    You should really re-read the post.  It shows you how to get the best bang for the buck when buying a car.  No big loans or funding is necessary unless you like paying alot of interest and losing money on cars

    Dwight Anthony