Dividend Growth Bunny: How Your New Car is Making You Poor

Sunday, December 23, 2018

How Your New Car is Making You Poor

Since the booming Automotive Industry in early the 1950s, cars have become an integral part of our society. Buying a brand new car could usually symbolize success or achievement in life. Car companies spend billions of dollars on car advertising each year to attract new consumers, and that number is rising every year. Most new car purchasers believe that buying a new car could give them the reliability and the luxury. It feels good when others such as friends and families know that you bought a brand new car, and of course it feels better to actually drive a brand new car. I’m not against people buying new car. I myself prefer brand new cars over used one, however, if you are not financially stable, your brand new car can actually cost your future financial freedom and security. Let’s what your brand new car is really costing you.

New cars can be a financial treat towards your financial freedom!
Most people sees car as an investment, an asset that they can use. However in my point of view, a car is actually a liability since you need to actually put money down to maintain it. And the worst part, these cars actually depreciate in value. So what is depreciation; if you Google deprecation on the internet, it mentions a reduction in the value of an asset with the passage of time, due in particular to wear and tear. Another word for it the so called asset actually decrease its value over time. Studies show that a new car will depreciate as much as 63% in the first five years. And the worst part, new cars depreciate as much as 10% the moment your drive it out the dealership. This is the reason why a car is not an investment, and why I see these so called assets as a liability. In addition, don’t think you can get away from this depreciation by leasing the car. Leasing companies set their price so that you pay for the depreciation, and when it’s over they still have these so called assets that they can resell. If you guys didn’t know, leasing a car is actually the most expensive method of purchasing a car. 




So what are some ground rules to purchase a car vehicle?
In order to buy a car, there are some methods we can do so that we wouldn’t be eaten up by depreciation.
1. Buy a car that’s at least 5 years old
One method is to buy a car that’s at least 5 years old.
I know some of you will complain that a 5 year old car is not as good looking as a brand new one. But buying a car that’s at least 5 years old, you are skipping majority of its depreciation.
2.  Save up to buy that car in CASH
Buying a car on credit (paying interest) can drain your finances. When a person buys a car on credit, they are paying more money for the car since you have to pay interest rate on top of the purchased price.
3. Save an equal amount to your car payment
Some people don’t have the cash to buy a car but needs to have one now. So the best method to calculate if you can afford to purchase the car or not is to see if you are able to save equal of money of the car payment. So for example, if the car payment is $300, and you are not able to save up $300, then shouldn’t buy that car. This is a pretty conservative way of checking out if you are able to purchase the car. I personally still prefer to buy the vehicle in CASH.

Let’s compare the monthly payment if you buy the car brand new to a used one.
I know some people reading this may not have the cash upfront to buy the car right away. So let’s say you still have to make monthly payment. I want to compare the monthly payment differences between a new one and a five year old car. So let’s say you buy brand new HONDA CIVIC car at a price of $20,000 and you place a $4000 down payment. With the remaining amount of $16,000, you finance the rest at 60 months at 4.25% annual. This will give you a per month monthly payment of $295.42. This sounds reasonable, but wait let’s compare this if you buy the same car model which is a HONDA CIVIC but just 5 year older. Since the car is 5 year older, let’s assume the car has depreciated 63% from its original $20,000 value. Which make this 5 year old HONDA CIVIC a price of $7,400 ($20,000 x 0.63). And assume you put the same $4000 down payment which gives you a remaining amount of $3,400.  And assume you also finance the remaining amount of $3,400 with the same loan arrangement of 60 months at 4.25% annual. This make your monthly car payment for your (5 year older HONDA CIVIC) at a monthly payment of $62.78. Let minus the BRAND NEW HONDA CIVIC monthly car payment to the same 5 YEAR OLDER HONDA CIVIC monthly car payment ($295.42 - $62.78 = $232.64). From here, we can know that you are able to save up $232.64 a month by buying the same car model but just 5 year older.



This is where it gets interesting, let’s say you place the saved amount of $232.64 and place into a SPDR Index fund (Ticker: SPY) every month which generate roughly 9% compound annual growth return. In 35 years you would have future value of $689,509.57. This might not be enough to retire on, but in it just one thing you can start doing NOW towards your early retirement or financial freedom. There are many more you can do to achieve your financial goal!


I hope from this research on what brand new car really cost us, it gives us different views why we should buy a car that is a little bit older. Like I said, I’m not against people buying brand new car, but if you are not financially stable, I think it’s better to play it safe. I personally prefer the safe side of buying an older car that is reliable at a discounted price. This will not only save me more money in the monthly basis, but of course lead me closer towards early retirement and financial freedom. When you achieve the financial stability, you can always buy a brand new car anytime. And don’t worry of missing out. There will always be newer and more advance car with better technology in the future. You can impress your friends and love one once you have that massive cash flow coming into your wallet. 

1 comment:

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