Buy the car you desire, but only after it has been on the road for at least two years, and preferably three. This will save you hundreds of thousands of dollars over the course of your lifetime.
At age 23, I desired a luxurious four-door sedan and was drawn to the Cadillac STS. The new model had a base price of more than $50,000, and with a few optional accessories, the sticker price was nearly $55,000. I was doing well at a young age, but not well enough to spend $50,000 on a new car.
I was flipping through my local newspaper (yes, this was before the Internet changed everything) when I noticed a $19,500 advertisement for a 2.5-year-old Cadillac STS. The vehicle had fewer than 40,000 miles on it and a warranty that covered up to 90,000 miles. It was beautiful, gleaming, and freshly serviced.
Since the original owner was absorbing depreciation, the price was attractive.
The average car loses 11 percent of its value the moment you drive it off the lot, and another 15 to 20 percent during the first year you own it. The second-year depreciation (loss) is an additional 15%, for a total loss of at least 45% over the first two years.
Typically, depreciation is calculated based on the base price, not the extras. This could be the sport package that increases the price by $10,000 but returns only $2,000 after two years. It is therefore possible to find beautiful cars with intact manufacturer warranties for 35 to 50 percent less than the price paid by the original purchaser.
I drove that car for four years and sold it for $3,500 after incurring very few out-of-pocket repairs.
So, what kind of deals are available today? When I was younger, one of my dream automobiles was a Ferrari Testarossa, which cost approximately $200,000. You can purchase one for approximately $50,000, and the majority of them have relatively low mileage due to their owners' care.
Consider the Short Term (for Loans)
If you finance the purchase of a vehicle, you can save a substantial amount of money by limiting the term to no more than 36 months. This expedites equity accumulation and reduces interest costs.
This may be challenging because the monthly payment is greater than when financing over six years and greater than when leasing monthly. If you finance $25,000 at 5% for three years, your monthly payment will be $749.27 and the total amount you will pay back will be $26,974. If you extend the term of this loan to six years, the monthly payment decreases to $402.62, but the total amount repaid increases to $28,989. It will cost you an additional $2,015 to purchase the automobile.
Assuming you purchase the vehicle with a small down payment and finance it for six years, your loan will be paid off at a much slower rate than the vehicle's depreciation, creating a """"underwater"""" situation almost immediately. During the three-year program, you pay off the vehicle faster than it depreciates, giving you options if you need to sell it.
If you can't afford a three-year payment, take out a five-year option and pay a little extra toward the principal each month to pay it off faster.
Leasing a newer model appears appealing due to the lower monthly payment, but you may not want to do so. I'll explain why in my next post, in which I'll also provide several other ways to save a ton of money when purchasing a car.
You might be better off purchasing a vehicle than contributing to your 401(k) or IRA!"""