Broker Check

New Car Buying

| September 20, 2016
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Today I purchased a new vehicle.  I hate to admit, because I try very hard not to be a typical materialistic American, but I do enjoy new vehicle shopping.  I am not immune to the thrill of that new car feel.  However, my "new" vehicle is a actually a used vehicle.  One financial lesson I learned many years ago was to never ever purchase a new vehicle.  

There have been times when I've violated this rule and regretted it.  I'll tell you why in a few sentences.  

I'm not going to say what make and model I purchased because it is immaterial to my blog, and you, the reader, would think more about my vehicle choice than my financial strategy.  But here are the relevant facts.  The vehicle I purchased has 24,000 miles on the odometer, which I calculate to be about 20% of the useful miles in this vehicle.  I define "useful" as the number of miles this make and model can be driven before it starts to show its age - that stage when the vehicle is still very serviceable as a means of transportation, but it has some squeaks and noises, the interior shows some wear, and the repair bills start to become a little annoying. Actually, it is likely I'm underestimating the useful miles of this vehicle. Most vehicles of decent quality, given a reasonable amount of care, can go far more than 120,000 miles.  But I'll stick with the 20% figure because I can easily substantiate that the vehicle I purchased will serve its purpose just as well as a brand new vehicle for the next 96,000 miles.

I was a patient shopper.  I looked at hundreds of vehicles online, researched the purchase on numerous websites, reviewed both expert and amateur consumer ratings on the potential vehicles I was interested in owning.  I carefully considered which option packages I wanted.  Then I compared asking prices of vehicles from different sources, looked at consumer ratings on these dealers, and determined which dealers were asking the most reasonable prices for used vehicles.  I avoided shopping vehicles "for sale by owner" just for the time savings; if you have more time, you can probably find a good deal this way, but I find it a waste of time setting up appointments with individual sellers.

Using my research, I was able to identify a handful of vehicles at dealers from who I was comfortable buying, and with vehicles I wanted to purchase. The final evaluation was to verify that the vehicle had been well maintained.  Fortunately, one of the vehicles I targeted was in almost new condition.  This vehicle was so clean the floor mats still have the factory plastic wrap.

But here's the exciting part!  Based on a popular website that gives average price paid for new vehicles (as opposed to MSRP, which is even higher), I paid 64% of the new car price for my purchase.  So I got exactly the vehicle I would have purchased brand new, in almost new condition, for tens of thousands less than new price.  So by my estimates, the original owner of this vehicle paid more than twice as much on a per mile basis for owning the vehicle than I will pay. 

The financial gain of my used vehicle purchase, versus buying a new vehicle, is more than the initial purchase price.  By leaving the difference between new and used price in my investment account, I will potentially earn money on the funds that I didn't spend, making the real savings of the used vehicle, as compared to a new purchase, even greater.

I will also pay less in taxes, insurance and registration fees on this vehicle than on a new purchase.

My second financial lesson regarding vehicle purchases is to never purchase a vehicle you can't afford.  Now, I could have purchased almost any vehicle if I was willing to go into debt, but I wrote the dealer a check for this purchase.  The money I spent was money I had saved specifically for this purchase.  I have paid cash for every vehicle purchase in the last 29 years, including the vehicles I purchased for our three children. This is not bragging; over these years this has meant I have driven some less than impressive sets of wheels!  Despite this, one of my rules for prudent financial management is to never go in debt for a luxury item, and anything more than wheels sufficient to get you to and from work is a luxury.  Sometimes that meant all I could buy was a vehicle that was 10 years old; but those vehicles served us well.  

Following these two guidelines - never purchase a new vehicle, and never go in debt for a purchase (and yes, a lease is the same as being in debt), I have been able to keep vehicles from being a drain on our personal finances. This has allowed me to use the money I would have spent on vehicles for higher priorities, such as tithing and education for our kids.

So if you are shopping for a new vehicle, I encourage you to look at your financial priorities, to determine your true needs, and to follow my two rules of being a good steward with your financial resources.  Give these things consideration before visiting the new car dealer.

Daniel Cook, CFP®, AIF®

CFO

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