Buying a brand new car has to be one of the worst financial decisions a person can make. I’ve said this before and I continue to harp, even though I know it sounds a tad… oh what’s the word… hardline? Crazy? Like a frugal evangelist? Nevertheless, I persist because it’s one of those purchasing decisions with the power to impact your longterm financial health in a profoundly negative way.
My past harping on this topic is enshrined in the following:
- Help Us Choose The Next Frugalwoods-mobile!
- Ode To An Old Car: Our Money-Saving Machine
- Our Frugal Solution To The All-Wheel Drive Conundrum
Most of us need a car in order to get to work, buy groceries, take our kiddos to the doctor when they have their fourth fever of the month… and so it’s easy to be lulled into thinking a car is a necessity. The key is to recognize that a car is a necessity in the same way that food is a necessity. Few of us would consider eating at a five-star restaurant every night to be a necessity, even though it’s a delivery mechanism for the nutrients required to stay alive. Most of us view prudent grocery shopping as a much more economical way to meet that need. It’s the exact same calculation with a new versus a used car.
While a car might be necessity, a new car is nothing more than kidding yourself into thinking five-star restaurant meals are a ‘need.’ The caveat here is if you’re a billionaire. If that’s the case, then this article is totally irrelevant to you and you should stop reading now. Ok, if you’re still here, we’ll assume your net worth is somewhere south of $1B, which makes this article quite relevant to you indeed.
But I NEED a New Car!!!
Let’s start by examining the reasons most commonly touted as justifications for buying a new car:
1) I must have safety and reliability.
I am with you 100%! I too want a safe and reliable car, especially since I frequently transport the priceless cargo of my daughter and the 1 million toys that now live in our backseat with her.
It’s quite true that some cars are safer and more reliable than others. However, new cars do not offer either of these attributes in any greater quantity than a good used car. Just as you wouldn’t buy a crappy new car, don’t buy a subpar used car!
Plus, new safety “must haves” are rolled out onto the market annually–so, are you going to buy a new car every single year? Hopefully not! While I certainly don’t advocate driving an unsafe vehicle, there’s a happy middle ground. Use your best judgment and know that everything touted as “top of the line” this year will be dated just 12 months later.
2) I’m afraid a used car will break down!
Buying a used car does not mean buying a hunk-o-junk. There are plenty of lovely pre-owned vehicles that offer top-of-the-line features. A good car is a good car, whether it’s a 2017 or a 2010–and the same goes for a bad car.
Avail yourself of the multitude of research materials available on car reliability (more on that below) and choose a vehicle wisely. A new car is in no way guaranteed to never break down or need a repair. And a good car that’s a few years old isn’t going to exhibit an endless stream of needed repairs. Plus, it’s still cheaper to pay for repairs on a used car than to buy a new car (we’ll get to the math on that in a minute).
2) All-wheel drive is a requirement.
I’m with you here again! If you live in an exceedingly icy and snowy climate–for example Vermont–then all-wheel drive can be the difference between making it out of your driveway or not making it out of your driveway. Here again, you can achieve this result with a used vehicle.
If I can get out of my quarter-mile long, hilly, gravel, snow/ice-packed driveway in a 2010 Prius with snow tires (not to mention in my all-wheel drive 2010 Subaru)? You too can navigate your roads in a used car.
Living in a snow-laden climate does not mean you need a brand new truck or SUV. It’s simply not necessary. What is necessary is a vehicle that makes sense for your lifestyle and your geography.
3) I like how new cars look…
Aha! Now we’re getting to the heart of the matter. While it’s easy to find safety, reliability, and all-wheel drive in a pre-owned vehicle, it’s not possible to find brand new shine. And that’s a good thing. A car is not intended to serve any other function than to safely transport us. It’s not a status symbol, it’s not an indicator of our success, or our wealth, or how cool we are. It’s a freaking car, people.
When we imbue our material possessions with power that outstrips their intended functions, we’re setting ourselves up to: 1) be disappointed; and 2) overspend. A car, and any other object, is not a stand-in for human emotions. Its purpose isn’t to make us happy. When we look to things to deliver happiness to us, we’re liable to stretch our budget and find ourselves ensnared in cycles of debt.
Naturally, there’s a caveat here. If you can afford to pay cash for a status symbol car–and that’s how you really want to use your money–then go for it. But do so with the full knowledge that it’s a luxury purchase. And you know what I say about luxuries: if you can’t pay for them in full and with cash, you can’t buy them.
4) But I got a good trade in!
Really? If you’re trading into a dealer for a new car, they’re very likely paying you well under what your existing car is actually worth. You’re better off selling an older car through Craigslist and then buying your own used vehicle (possibly also through Craigslist).
I, for example, sold my 1996 Honda Odyssey Minivan for $1,000 through Craigslist in 2016. No dealer would’ve ever come close to that dollar amount in a trade-in situation, even though it’s a great car that runs just fine. Car salespeople are there to make money–not to cut you a deal. Eliminate that middleman and you’ll reap savings.
5) But I’ll drive it forever!
First of all, are you sure? In 10 years, in 15 years, you won’t be lusting after the latest models? I’m a proponent of “drive it forever,” but you can do this just as well with a used vehicle. Might you need to replace a used car sooner than a new car? Perhaps.
But consider the following: I drove my first car (a 1990 Toyota Camry station wagon that I bought used for cash when I was 16) until it was 16 years old… and then my brother drove it for another few years. And my second car–that 1996 Honda Odyssey minivan–Mr. FW and I drove until it was 20 years old… and then we sold it because it still worked great.
The Compounding Horror Of Buying A New Car
Buying a new car is like shooting yourself in the foot not once, not twice, but three times. Here’s why:
- The mark-up on new cars is astronomical.
- The opportunity cost of buying a new car–even if you pay cash–is profound.
- Most car loans have interest rates, which means you’re spending even more money.
A financial triple whammy. Cars lose value the minute–nay, the second–they’re driven off the lot. Hence, you’ve paid a price that you will never, ever recoup (unless it’s a vintage/antique car situation, which is not germane to this conversation).
Unlike a home–which sometimes, hopefully increases in value–a car is almost guaranteed to decrease in value. A car is not an appreciating asset.
Hence, you’ll never re-sell a new car for anywhere near what you paid for it. A raw deal, to be sure. With a used car, however, since you’re paying a price stripped of the brand new dealer mark-up, you won’t sell it for what you paid for it, but the margin is likely to be much narrower and will help offset the purchase of your next (used) vehicle.
On top of that, unless you pay cash, you’re now saddled with a loan that very likely has an interest rate attached to it. Thus, you’re paying even more for this depreciating hunk of metal.
Thirdly, even if you do pay cash, purchasing a new car represents a massive opportunity cost since it robs you of doing a plethora of other things with that money. It’s not just the money you’re spending on the car, it’s also all the money you’re not making in the stock market by not investing the money you spent on the car.
Let’s look at some real numbers, because who doesn’t love math?!?
- 2010 Subaru Outback for $12,000 (paid in full, with cash)
- 2010 Toyota Prius for $9,000 (paid in full, with cash)
Had we instead bought brand new 2016 models of those vehicles, we would’ve paid:
- 2016 Subaru Outback: $28,216 (that’s $16,216 more than we paid)
- 2016 Toyota Prius: $24,592 (that’s $15,592 more than we paid)
In addition to saving a whopping $31,808 on both cars, we also deployed that money in a vastly more effective way: we invested it. The opportunity cost of buying new cars is profound–even if you pay cash and avoid a loan. Here’s why:
The $31,808 we saved by not buying new cars, if invested in the stock market for 30 years, will yield $242,130 (based on a 7% annual rate of return, which is considered average over decades of investing). I don’t know about you, but I’d rather drive six-year-old cars and have $242K in 30 years. Just saying.
Even if Mr. FW and I need to buy another set of used cars in, say, ten years? We’ll still spend less overall than we would’ve had we bought brand new cars in 2016 for the simple fact of how egregiously marked-up new cars are. Same goes for any repairs these two vehicles might need–we’re never going to spend anywhere near the $31,808 we saved by buying used.
How To Find Your Very Own Used Car!
Ok Mrs. Frugalwoods, you say, we get it! But just how exactly should I go about finding the used car of my dreams? I’m so glad you asked because I’m on a roll today. Here are the questions to ask yourself and your significant other before embarking on a car purchasing trip:
1) Do you need a car at all?
For years, Mr. FW and I lived in cities (NYC, Cambridge, Washington, DC) without a car. We used ZipCar when we needed to drive somewhere and otherwise, we walked, biked, and rode public transit. If you live in an urban area and are able to skate by sans car, milk it for as long as you possibly can.
Cars are convenient, but they’re money pits. In addition to the purchase price, there’s insurance, taxes, gas, repairs and maintenance, parking, tolls… need I go on?
2) Get a car that matches your lifestyle.
If you do need a car, be sure that you’re calibrating car ownership to your needs and your lifestyle. For example, can you get by with just one car for your family? Or do you require two? We don’t all have the same lifestyle or live in the same climate or use our cars in the same way. Identify what you need a car for and only buy as much car as you need.
If you’re single? Probably don’t need an SUV or minivan. If you have five kids? Probably not going to cram them all into a two-door coupe. And if you do have kids, make sure that a carseat(s) fits in the back of any prospective cars (this is how Mr. FW and I eliminated a number of truck models that can’t safely accommodate carseats).
Remember too that you can change your mind about what kind of car you need as the years go by.
Don’t buy a car for where you think you’ll be in 10 years. Buy the car you need now and then sell that car and buy a different one in 10 years if you need to.
Mr. FW and I went carless for years, then got one car for the two of us, and now we’re a two car family. Before moving to the country, we knew we’d need two vehicles owing to the absence of walkability and public transit–a minor drawback to living on 66 acres in the middle of nowhere. We also knew we’d need at least one car with all-wheel drive and that both cars should be as fuel efficient as possible since we drive long distances. Conversely, if we still lived in the city, we would’ve purchased one smaller, fuel efficient car without all-wheel drive (likely a Honda Fit).
3) Research, research, research.
Some cars are better than other cars. Not being judgmental here, just being honest. Do your research and figure out what’ll work best for your needs. In general and over the years, I’ve found Toyotas, Hondas, and Subarus to be quite reliable and cost efficient.
It seems that the sweet spot for used cars is when they’re about five to six years old, but you’ll have to do your own research on the models you’re interested in. Be wise to what years are best for the make and model you want–don’t assume that a 2009 and a 2010 will have the same features.
We used CarGurus as a resource and found their market value search very useful as well as their graphs tracking depreciation over time. Additionally, we read Craigslist car ads for years before we bought–we knew we’d need to replace our aging minivan at some point, so we casually gathered market research by scrolling Craigslist. I recommend doing this for as long a period of time as you can before buying so that you have a robust sense of the used market for the make, model, and year you’re interested in.
This longterm research is akin to my strategy of going to tons of open houses before putting in an offer. This way, when you’re finally ready to write a check, you’re confident you’re getting a good deal and you know you’ve selected the make, model, and year that’ll work best for you.
4) Start saving money now.
Don’t wait until the month you need a new-to-you car to start saving for the purchase. Maintain an ongoing savings regime for all of your future car needs, including repairs, maintence, insurance, etc. It’s not an emergency when a car breaks down–it’s an anticipated expense associated with car ownership, so be prepared.
Wondering how to save enough money to buy a used car with cash? Take my (totally free!) Uber Frugal Month Challenge, which will guide you through the steps Mr. FW and I took to bump our savings rate to up over 75%. Over 12,000 fellow frugal sojourners have already taken the Challenge and saved thousands of dollars.
5) Test drive!
Be sure to test drive any car you’re considering purchasing and try to drive it under different conditions (stop and go city traffic, highway speeds, dirt roads, etc). Test out your whole family in the car too–do the carseats fit? Is there room for the dog?
We took Babywoods with us on our test drives so that we could make sure her carseat fit and that it wasn’t too difficult to get her in and out. Look for any unnatural wear and tear on the car, look underneath the car to see if anything’s leaking, make sure the windows, locks, doors, heat, AC, radio, and lights work properly.
Ride in the backseat too–this is how we discovered that one of the used Priuses we test drove had almost certainly been used as an Uber or Lyft car–the back seat was excessively worn out (not to mention that the mileage was unusually high).
6) Know your state’s lemon law.
States have laws governing the sale of defective used cars, called lemon laws, and there’s usually a limited time period after the purchase in which to bring a grievance. Find out what your state’s lemon laws are before buying a used car.
Used Cars Save You Money On Insurance
If you drive an inexpensive used car, don’t have a car loan, and have a nice emergency fund saved up, you probably don’t need comprehensive car insurance. Why? Because comprehensive insurance pays to replace your car. And if you have an inexpensive car and enough money in the bank to easily buy another (used) car if you had to, there’s no reason to pay for insurance because you’re effectively self-insured. For this reason, we don’t carry comprehensive insurance. For more on how we manage our money, check this out.
In general, insurance exists to cover rare events that you wouldn’t be able to pay for on your own. But if you could replace a vehicle without facing financial distress, then comprehensive insurance is a waste of money because you’re paying the insurance company for the possibility that they might need to buy you a new car when you’re perfectly able to pay for the car yourself. In addition to self-insuring against the possibility of needing to buy new cars, we also pay out of pocket to replace things like cracked windshields. Our Subaru’s windshield cracked last year and we paid $265 cash to have it replaced. Cheaper than if we paid for comprehensive insurance. This is yet another way in which frugality saves you money every month. It’s also a great example of the virtuous cycle of frugality: the less you spend, the more you save, and the more you have saved up, the less you need to spend.
On the other hand, it is incredibly important to carry more than the minimum required in liability insurance. The reason is that liability insures you against more expensive events that you likely wouldn’t be able to cover out of pocket. If you were found at fault in an accident and the other person was injured, your expenses could spiral into the millions of dollars. And the liability minimums set by most states are ridiculously low and often wouldn’t cover the cost of someone going to the ER to get a headache checked out. For this reason, we feel it’s imperative to purchase a large amount of liability. We carry the maximum that Geico allows in liability ($1M per person), which costs us $628 per year for both people for both cars. That’s all we pay in car insurance full stop.
In summary: we do not carry comprehensive because we could easily replace both of our cars (in full with cash) if we needed to. However, we carry the maximum in liability coverage because we feel that with healthcare costs as they are, the risk of a large liability claim is one we don’t want to self-insure against.
The Bliss Of A Used Car: Who Cares What It Looks Like (nobody)
Dings and dents? No problem! Mistakes and accidents are bound to happen. You accidentally scrape a barrier in a parking garage. Someone opens their car door into yours in a parking lot. Acorns/squirrels fall out of a tree and dent your hood.
Any number of low-grade maladies can occur to your used car and you don’t have to sweat it. Since you’ve already accepted that your car is not a status symbol, and is not perfection incarnate, you’ll save thousands of dollars by not fixing dents, dings, scratches, and scrapes.
The caveat here is if the repair would prevent significant rust damage. In that case, you’re probably wise to do it, unless the car is so old that it’s likely to die a natural death before rust eats it. Cosmetic fixes to cars aren’t required, aren’t necessary, and are usually a giant waste of money.
Our consumer culture has normalized car loans. It’s seen as a perfectly reasonable and acceptable part of life to tack a car loan onto any other debt we might have. But it’s not.
Don’t drag yourself down with debt over a vehicle that you could instead pay cash for and be done with. If you have a car loan right now, don’t beat yourself up. Pay it off and prioritize putting aside enough in savings to buy your future car used.
Don’t fall victim to the insidious marketing that says you need a new car in order to be safe, look successful, be popular, or feel good about yourself. You know that’s not true and you know a car won’t do any of those things for you. By instead prioritizing the freedom that financial independence brings, you just might find you feel quite good about yourself indeed, no matter what kind of car you drive.