First, a note about semantics.
Some will call it an older used car, while others will call it a clunker or even a piece of junk. These are cars that are mechanically sound, but have certain visual flaws. Often times, an older used car will be given a name, and tears will fall the day the car actually dies.
Most importantly, these older used cars will significantly improve your financial situation.
Interestingly, the book The Millionaire Next Door
Only 23.5% of millionaires own new cars … Most have not purchased a car in the last two years.
Obviously the big question is should you buy a used car or new car?
Advantages of Buying Older Used Cars
Paying cash is both possible and practical. With my pastor’s salary, it would take me quite some time to save up $25,000 to buy a new car. However, saving $3,500 for a car, I can handle that.
Insurance is cheaper. With older (cheaper) cars, the comprehensive car insurance is much less. In fact, in many cases you don’t need comprehensive insurance.
You don’t have to park a mile away from the door. I’m sure there is one of ‘you’ out there. You park your flashy new car at the end of the parking lot just so that someone won’t ding your door. I’ll admit you probably get more exercise than me, but when I see a parking spot right beside the shopping carts, I have no problem parking my old rusty auto by the shopping carts.
The kids can spill and drop crumbs in the car without causing a coronary. I’ve been in some cars that are kept more like surgical rooms than cars. No food. No drink. And if possible, hold your breath so you don’t fog the windows. The new car stress is not appealing to me. Not only will you notice very scratch and ding, but you’ll also feel the pain as if it was happening to you.
Less stuff attachment. Do you worry about someone stealing your car? Instead of putting a security system in the car, here is an option – buy a non-steal worthy car. The older the car, the more doors you can leave unlocked without any concern of theft.
It helps you build wealth. If too large a proportion of your salary goes to pay for and maintain a new car, there will not be enough left for you to contribute any money to savings. You can even make money buying and selling used cars.
It Depreciates much slower. The fact is that newer cars depreciate at a much higher rate than older cars. If you view the depreciation as money lost, this becomes a strong argument.
Disadvantages of Older Cars
Maintenance. Unfortunately, older cars typically require more maintenance. Maintenance costs time and hassle. In the process of shopping for a newer car you can find some very reliable cars. Old does not automatically equal unreliable. I once bought a four year old car that gave me more troubles than my seven year old car.
And yes, of course, you won’t get as much exercise. This can be an advantage or disadvantage depending on how much walking you need to do.
How Much Should You Spend On A Car?
Here are some guidelines I think are appropriate when buying a newer car.
- Can you pay cash for it? Cash always wins the math war when considering car payments vs. cash.
- If you go with payments, (which I don’t recommend) does it reasonably fits in the auto budget category on your budget. Your total (including gas, insurance, payments, and repairs) monthly cost to operate a vehicle should not exceed 15% of your take home pay. Personally, I can’t afford car payments.
- Dave Ramsey suggests that the total of all your cars and other machinery should not exceed 1/2 of your annual income. In other words, if you make $50,000, then you should not have more than $25,000 tied up in cars, boats, trucks, or other machinery.
- Sam at the Financial Samurai says you should not purchase a car that is more than 1/10th of your take home pay.
Photo by KB35.
Do you prefer to buy new cars or older cars? What are some other advantages or disadvantages of used cars?
{ 18 comments… read them below or add one }
Auctions.
That’s how the “rich” people I know get their cars. One friend in particular gets a “new” Mercedes every two or three years. He buys them when they’re about a year old. So while the other “rich” people get to buy one new car a decade (or whatever) and spend most of the decade with a car that’s over five years old even though they bought it new, my friend’s almost always driving something less than five years old. And he can get away with that easier because when he sells he can recoup a large percentage of his money, which goes into his next car.
That’s rich.
Of course, I guess he has the hassle of tracking them down every couple years instead of keeping the same car for longer. But he enjoys it and enjoys the change. For anyone who’s into cars enough to have to have a new one, the “swap” hassle every couple years seems worth it.
-Marshall Jones Jr.
We just bought our first “cash car” except we didn’t buy something older. We actually bought a 2009 model with 20,000 miles on it, which was right in the sweet spot we were looking for (low miles, large depreciation hit already taken).
I have to say that it felt great to write a check and not take on any car payments. That’s the financial freedom that comes with living a debt-free lifestyle the past two years. I actually just wrote a post about our journey to debt freedom, and I plan to follow-up with a post about our recent car-buying experience. Great stuff!
We’re still saving for my car! It’s somewhat hard being this patient and just going to buy a car. I’ve been without a car for 7 months now!
I prefer used hands down. Let someone else take the depreciation hit. I have other things to pay for rather than a huge car payment.
I usually buy new and keep the car 10+ years. If I can save 10% for each year the car is old by buying used I’m willing to do that. For the 3 cars I’ve bought new that hasn’t been the case. The main disadvantage I see in buying used is it makes comparison shopping difficult.
Even if it costs you $100/month in repairs to keep an older car running, that is still cheaper than paying $350/month for a new car…
No matter how you slice it, car payments stink. Pay cash for whatever you buy. No payments.
New cars lose up to 20% of their value in the first day.. Buying a brand new car might be a really cool thing but not a smart investment…
I have to agree that overall it makes the most sense to buy a used car. A few of the rules I try to remember when I am looking for a used car:
-First decide how much I am willing to spend – it needs to fit my budget.
-Don’t break rule one because of an emotional attachment to a car “I have to have this car. ” There are plenty of other cars out there.
-Take your time – be willing to walk away if the deal isn’t right
-Do a “ton” of research on the kind of car you’re buying
-Have the car thoroughly checked out; this will also let you know how much you should be prepared to spend on repairs the first 6 months. With this you can negotiate the price.
***Find a good mechanic who is able to work on the car you’re considering buying – so you will have a place to take the car when needed.
Overall, the benefits of owning a used car outweigh that of a new car (depreciation), IMO.
Mike
I’ve never purchased a new car, and don’t expect to any time soon.
I have been looking at motorcycles recently (as a second vehicle for when my wife has the paid-for car) and haven’t found one yet that fills the perfect spot: within the amount of cash we’ve saved for it and new enough with low enough miles to make her feel comfortable spending the money.
I’ll keep looking and find one eventually!
We’ve got two old clunkers. One is 19 years old and the other is 24.
Back over a decade ago we had saved up the cash to buy a new car but decided our money could serve us better by using it elsewhere. After 911 happened and the clarion call went out from the government to spend, spend, spend to save the country and the economy, it made us even more determined to continue driving our old clunkers.
We have a trustworthy mechanic, carry AAA towing service, and rent new vehicles when we need more reliability for vacations and such. In the last 10 years we’ve had to use our AAA towing service 3 or 4 times.
The Millionaire Next Door, Craig mentioned, is an excellent book. In that book, if memory serves us correctly, the authors recommended limiting automobile purchases to a percentage of one’s net worth. We believe that would be much better than using a percentage of one’s income in the current economic environment.
As someone else mentioned, even with repairs it’s cheaper to own used. My husband is a pastor and puts tons of miles on our car. We have to have something that’ll hold up. We found if you don’t pay cash and take out a loan instead, the insurance is a killer (even on a used car). So we save up and say to a Christian car dealer we know, “what do you have that’s reliable for $…” It may not be the most scientific way of handling it (comparing prices, haggling), but they have done their best by us, underpricing other places and giving great service.
One downside to older cars is safety features. My 99 Grand Cherokee has 2 airbags, my 2008 Accord has a lot more. Generally, I prefer to buy used. However, certain cars trigger major maintenance around 100,000 miles. I spent 50% of the purchase price of a used Acura on maintenance items to get it go for several more years. I had a similar experience with a used Chrysler. Because of this, my preference is to find fairly old cars with low mileage. Its worth the premium.
@bondchristian – thanks for the tip on auctions.
@Dustin – if I could afford newer cars (1-2 years old) cash that is probably what I would do to. For now I’m content with the 3-5 year old cars I typically buy.
@lenci – keep waiting. It will be worth it. My wife and I have only had one vehcile for 4 years now. It takes some coordinating, but it is possible.
@ken + The rich blog – yes. Let someone else pay for depreciation.
@tim – sounds like you’ve got a good system in place.
@Arthur + Olivia – it is true that the car you drive is almost always the cheapest way to own a vehicle.
@Mike – thanks for some great guidelines on for buying a car
@Matthew – keep shopping patiently and you’ll find a great deal.
@Steve and Deborah – wow. You guys really live this stuff. Keep up the great work.
@Brian – you’re right that older cars do not have the same safety features and people should consider that when making a decision.
It is rough when you are in college and need a vechicle. I worked hard during high school so I could afford my own (used and reliable) vechicle. I have had my truck for almost three years now and since I purchased smartly, my used vechicle has performed great. A big key to buying used is buying smart – check the car out for know errors and price its value accordingly.
The Millionaire Next Door is an excellent book. Before reading it, I bought my first car brand new. I was making the monthly car payments, keeping it as clean as possible, loving the new car smell, and had the mindset of buying new when another car was needed.
Then I got my first scratch on the car! And my car doesn’t smell new anymore. I also finally realized the significance of depreciation. And of course, I read about how most millionaires own used cars in The Millionaire Next Door.
I guess all of these factors led me to a shift in thinking about the purpose of a car. I think it should just get you from point A to point B in a safe manner. If it can get you there in an economical and inexpensive way, then all the better.
So from now on, my plan is to go the reliable used car route. I won’t have to worry about small dents and scratches, and most of the depreciation will have already taken place.
With that said, I don’t see anything wrong with buying new either. Some people like the new car smell, taking the time to keep it clean and shiny, and can afford the payments. It’s just a matter of personal preference. I just think it would keep me from building my wealth faster.
With our kid 2 years old now, my wife and I have decided to buy a big car. Most people advise against buying a used car. They say you never know what major work may come up in the car suddenly.
But after reading this article and the comments, I am having second thoughts…maybe I can get my favourite car – the Fiat Linea – cheaper used than new – and that too the top end one! Well, well… Lemme wait and watch. Look around with my headlights and antennae switched on! In the meantime, I’d do well to buy and read The Millionaire Next Door – a used one from Amazon, I guess!!
Great tips! You should also check out Carsala. They help buyers pay 20% off the KBB value, and they will go through the process of finding the right car and guarantee the lowest price for you if you don’t feel like doing the work yourself.
I believe a lot folks buy new cars trying to satisfy the need to look successful in the eyes of other people. I know when I was younger I fell into this phenomenon myself. I thought a new car was a sign of success and little did I realize how foolish I was until later down the road I finally came to my senses. I agree that buying a new car is a very costly venture and If more people would sit down and look at the figures you just quoted when purchasing and operating that car, their would be a lot of soul searching being done before taking the plunge. Should I become wealthy beyond my dreams I will not buy another brand new vehicle.