Buying a new car is fun and exciting, but it is one of the worst things that you can do financially. In America, we are obsessed with the automobile. What you drive has become a statement of who you are. The marketers have done a fabulous job of selling us on this and we have bought it. Let’s face it, we often want a new vehicle for the image it portrays rather than for any practical reason. I’m guilty of this too. Here are some examples of the marketing spin that we are being sold.
If you drive a…
- Xterra, Jeep, or Hummer you are adventurous and nature loving.
- SUV, minivan, or Volvo you are practical, family-oriented, and safety conscious.
- Scion or Honda Element you are hip, cool, and young.
- Lexus, Mercedes, or BMW you are successful, smart, and sophisticated.
- pick-up truck you are manly, hard-working, and all-American.
- hybrid you are green and financially wise.
Do the math before buying any car.
Of course, what the sales and marketing people are selling doesn’t usually tell the whole story. For instance, let’s take the example of a hybrid. Lots of people are thinking of trading their cars for something that gets better mileage since gas prices are so high. Now don’t get me wrong, I am as environmentally conscious or green as the next person. However, there are some financial considerations that one should take into account before buying any vehicle. For instance, you will pay more up front for a hybrid. Let’s say that you buy a Ford Escape Hybrid and that you pay $3,000 more for it compared to the standard gasoline version. According to Ford, the hybrid gets 30 miles to the gallon in the city compared to 22 miles to the gallon in the standard gasoline version. If gas costs $3.00 per gallon and you drive an average of 15,000 miles per year, you are saving an estimated $543 per year on gasoline. This means that it would take you over five and a half years to make up the $3,000 premium you paid up front for the hybrid! Your situation may be different and there are other reasons to buy a hybrid. The point is to do the math before making an emotional decision about buying any kind of car.
Logical considerations in buying a car.
For most Americans, their car is their second most expensive possession behind their home. However, we will trade-in our perfectly good, existing automobile for a new one on a whim. If you consider this from purely a logical perspective and remove all the emotional marketing hype, it is ridiculous. A vehicle is simply a mode of transportation. It is not who you are. We don’t get all jazzed up about buying a washing machine. We don’t trade in our old one knowing that we are going to lose money just to get the latest model with the new digital display. We don’t do these things because washing machine manufacturers haven’t brainwashed us into thinking that our washing machine defines us.
Interesting facts that drive my point home .
Facts don’t lie. Here are some that are very interesting:
- The average new vehicle costs over $28,000.
- A car on average loses 45% of its value in the first three years.
- The monthly loan payment on a $28,000 vehicle is over $540 for five years.
- Over 11 million cars were scrapped in 1996 and 25% of the material was landfilled.
- About 20% of new car transactions are leases.
- Leasing will cost you at least, $11,000 more than buying over a ten year period.
What else would we spend so much on that is going to depreciate so rapidly? If you take the $540 you will pay in monthly payments for the average car and invest it in a growth stock mutual fund that earns 10% annually, you will have over $40,000 in 5 years. You could then pay cash for a vehicle and have money left over. Plus, if you did this, you would save almost $4500 in interest!
I’ll keep my 1997 Ford F-150 pick-up truck.
At this point, you might be wondering what I drive. I have a paid for 1997 Ford F-150 pick-up with over 120,000 miles on it. It is dependable transportation that is very handy when I occasionally need to haul or pull something. It isn’t the million mile truck, but it has a few scratches and it makes a noise here and there. However, it is worry-free and debt-free. I’m going to hang onto it until I can pay cash for something else and then I’ll buy something that is two to three years old. I’ll let someone else take the hit on the depreciation. I hope its not you!
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