How to Save $200,000 When You Buy a Car
Posted by Guest on Sep 6, 2012 in Saving Money | 35 comments
Today we feature a guest post from our good friend Jason from the excellent blog WorkSaveLive. Jason is a financial advisor and Dave Ramsey-trained counselor. He aims to educate his readers on a variety of financial topics while sharing his family’s journey out of debt.
Avoiding Mistakes When Buying a Car
Over the years of being a financial coach I often get baffled when I see people that try to be frugal in parts of their lives (i.e. clipping coupons, avoiding cable and dining out, etc) while on the other hand they’re making devastasting financial decisions with the largest, most important purchases of their lives.
It’s great to save money but pinching pennies here and there isn’t how you’ll find financial peace and eventually build wealth. The best way to avoid being strapped for cash each month, therefore ensuring you’ll have money to save and invest, is to make intelligent decisions when buying cars and houses!
I realize that it’s easier said-than-done as these MAJOR decisions are often made with other peoples’ perception, our desire, and distorted view of reality in mind. However, if you’re looking to kick those bad financial miscues you’ve made in the past, here are a few mistakes to avoid when buying your next car.
1. Ignoring the Cost of Gas
While I don’t think you HAVE to buy a hybrid or the new electric cars, comparing the miles per gallons of various makes and models is an excellent way to save THOUSANDS of dollars over the course of a few years.
I personally know people that drive trucks and SUVs that have absolutely no reason of owning one – other than the thought that it looks cool. So why waste an extra $100 or $200/month on gas when you can opt for a sedan that gets twice the mileage?
With a little math, if you were to invest $100/month over the next 30 years by buying a more economical car, you’d have built a small $150,000 nest egg (assuming an 8% interest rate).
2. Buying Without Comparing
In the age of the internet it’s never been easier to shop, and that holds true for car purchases as well. You can easily browse the inventory on Craigslist and every dealership in your city with the few clicks of a mouse.
When my wife and I were in the market for a new-to-us car we looked at nearly every site that we could find. Finally, we stumbled across the Hertz Rent2Buy program where Hertz sells their “old” rental cars for ridiculously cheap prices.
By doing a little legwork and comparing prices all over the city, we were able to save $2,500 which will net us $27,000 in our retirement account 30 years from now (again, 8% interest).
3. Not getting a CARFAX report!
Over 6 million vehicles are wrecked each year, and many car buyers don’t do the diligence of getting a vehicle history report prior to purchasing it. Vehicles that have been seriously damanged are much more likely to have issues down the road, and it could easily save you a few thousand dollars in the short-term by paying for that little $30 report.
If you were to avoid $1,000 in car repair costs by making sure your vehicle has a clean history, you’d have really saved $11,000 over the next 30 years (8% interest rate).
4. Financing Your Vehicle
While some think that paying cash for a car is unfathomable, I’d encourage you to reconsider as my wife and I recently did it on our newer vehicle. In fact, I’ve been fortunate enough to never have a car payment in my entire life.
Some of you out there may sport great credit scores and therefore can get an amazing interest rate on a loan, however, the majority of people get strapped to loans that yield a 6-12% interest rate! If you finance cars for the majority of your life, you’re paying the banks thousands of dollars and literally throwing money away that you could invest for yourself.
Assuming you finance a $15,000 car at 6% every 10 years (with 5 of those years being financed), you’d have passed up $31,000 that could be sitting in your retirement account 30 years from now (assuming an 8% interest rate on the investment).
I realize most of us don’t look at the future value of our decisions and the money we’re spending today, but making poor decisions when you buy a car can really hurt your ability to build wealth and eventually retire. Keep pinching the pennies when you’re able, but most importantly, focus on making a wise decision when it comes to one of the biggest financial decisions you’ll make.
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I would love to buy cash but I don’t feel comfortable using that big a chunk of my cash reserve on a car. I would rather use financing now with a plan to pay cash in the future. I did pay cash for my last car, but that was when I was in college and I wasn’t concerned about unexpected expenses as much as I am now in my post-grad life.
DC @ Young Adult Money recently posted..Ways to Eat Healthy on a Budget
We always buy used and will never finance a car EVER again! A car payment is such a huge drain on your monthly finances. When we finally got rid of ours, it was amazing the amount of extra cash flow that we had. Now, we’re throwing that at the mortgage so we won’t have that drain either:)
Also, like you say, you can find great deals simply by shopping around. With the internet, there really is no reason that you shouldn’t be able to do your homework and find great deals ahead of time.
Greg@ClubThrifty recently posted..My Money Confessional: Edition 1
Even if you buy a 2-3 year old used car, that’s still better than buying new. I’ve never had a car payment and we recently paid cash for our 2011 Camry. Sure, it took a long time to save up but having another monthly payment and lowering our discretionary income wasn’t something we were willing to do.
Jason @ WSL recently posted..Tragedy Strikes Close to Home: Why You Need to Have Life Insurance
Solid excellent common-sense tips that are ironically often overlooked. A car is the worst investment in terms of depreciation and I would love to drive my current model into the ground and aim for paying cash upfront for my next vehicle.
No car payment would equal, heavenly!
Jennifer Lynn @ Broke-Ass Mommy recently posted..The Best Piece of Writing Advice, Ever.
Good luck with paying cash for your next car! My wife and I have a specific targeted savings each month where we save a little towards the purchase of our our next car. When we new my last car was about to break down, we even stopped paying extra on debt and used all of our disposable income each month to save up for it. Sure, it takes awhile but I’m all for not having payments!
Jason @ WSL recently posted..Tragedy Strikes Close to Home: Why You Need to Have Life Insurance
I recently purchased a new-used car, financed it over 4yrs, and I’m hoping to have it paid off within 2yrs. I’m totally with you on buying a car with cash, but sometimes that’s just not possible, but should be something everyone strives for.
Depending on the car, one thing to keep in mind is the depreciation value. I chose new-used mostly because someone else absorbed the deprecation, and more importantly I couldn’t afford the same car I bought brand new. One key factor for me in the decision was making was the deprecation value. The car I bought ran me $19k with financing and taxes, the same car 3-4 years older and with 120 miles roughly is selling for $7k.
Cheers.
Eddie
Eddie recently posted..How Your Finances Affect Your Health
I don’t think I will ever finance a car. It just seems like such a money dump. Saving up and paying with cash will be my method. And definitely a fuel-efficient car!
MoneyAfterGrad recently posted..How to start investing in the stock market
We set aside a chunk each month so we can buy a new (to us) car in cash. We’ve made it 2 years sharing one car and may need a 2nd car next year depending where we live. It’s funny how the frugal survive because of others’ financial mistakes. I wouldn’t be able to buy a newly used car if someone else didn’t buy it new first!
Jessica @ Budget for Health recently posted..Get Fit Challenge: Week 3 results
Jessica, I love to hear that you’re currently saving up for a car! For a long time my wife and I were putting in $150/month towards our targeted savings account for the purpose of saving up for a car. We only have $1500 in the account right now, but we’ll start adding to it more aggressively once we’ve sold our house and purchased the next one. Keep up the great work!
Jason @ WSL recently posted..Tragedy Strikes Close to Home: Why You Need to Have Life Insurance
michelle will argue with me on this.. but i know that we are eventually going to need to get a mini-van.. we have a mid-size SUV now, but my 5 kids are only getting bigger and bigger.
when we do get a van.. i am hoping to get one that is already a few years old, and if i can save enough money ahead of time to where i can avoid having to finance the car.. that would be amazing.
i can’t say with certainty that we will never finance a car again.. but we will certainly save as much as possible before going that route to keep the loan short and sweet.
5 kids…I thought you only had 3? Did Michelle just give birth to twins??
It takes a long time to save up and pay cash for a car, but I’d encourage you to try it! There were many large car repairs that we bit the bullet on simply because we didn’t want to get a car loan and our car savings wasn’t build up enough. 2 steps forward, 1 step back is how it felt…but we avoided the payment!
Jason @ WSL recently posted..Tragedy Strikes Close to Home: Why You Need to Have Life Insurance
Maybe it just feels like 5 kids, because I am flying solo right now (with Michelle at Fincon)
I meant five family members, of course..
In reality, there does reach a point with used cars where it costs more to repair the vehicle than the car is worth.
I’ve made the mistake of not getting a Carfax report before. Never again. Never again! That purchase was probably the worst purchase I’ve ever made, car nearly blew up on me (gas was leaking and person who sold it lied about it not being in an accident). If you buy any used car get a CARFAX report, period.
Veronica @ Pelican on Money recently posted..Unemployment Up, Income Down, Better Off? – Yes.
Great point Veronica! It will definitely save you a lot of money and even if it doesn’t it was only a “waste” of $30.
Jason @ WSL recently posted..Tragedy Strikes Close to Home: Why You Need to Have Life Insurance
And most dealers provide a CarFax for free, right?
Good tips Jason. I’m still not totally against financing a car though. The way I see it is the interest is lower than you can make on investments. Chances are you are saving up that car purchasing money in a very low interest savings account. It just seems like too much profit to miss out on.
Modest Money recently posted..5 Frugal Tips To Get You Through Hardship
I’ve read Lance’s post about this and Michelle (Sense of Cents) had one as well. I understand the math and it definitely will work out in your favor, but I just hate monthly payments. I feel trapped…even if I had the cash there to pay it off.
Jason @ WSL recently posted..Tragedy Strikes Close to Home: Why You Need to Have Life Insurance
I love all these tips. I am passionate about cars because I think most people waste entirely too much money on them. Thanks for pointing out the real losses over the long term. I think the BIG one that you did not account for is depreciation. If you buy new, your car WILL LOSE 70% of it’s value in the next 5-7 years. That’s a big drop, especially if you buy something that’s $40k +. If you take that number at 8% over 30 years, UGH! What a waste!
Jacob @ iHeartBudgets recently posted..Michelle’s Frugal Finds: Half Price Emeals!!
At the time of writing I was also working on another guest post for J$ where I included that. I didn’t “miss” it, I just passed on putting it in there because I think it’s something that most people think about (well…most financially savvy people).
Thanks for pointing it out though Jake because it’s a great point! I did the math for my other post and on a $25,000 car it’s likely that you’d lose $6 in depreciation each day!
Jason @ WSL recently posted..Tragedy Strikes Close to Home: Why You Need to Have Life Insurance
That’s a pretty powerful concept.. the “daily depreciation value”..
That’s why new cars are typically just a bad idea.
Of course, a number of folks in these comments are advocating getting a zero percent interest loan instead of paying cash, and that is typically only available on new cars
I would entirely disagree with paying cash for a vehicle. Many finance companies are offering 0% loans right now. Paying cash up front represents a huge OPPORTUNITY COST. My most conservative investments offer annual yields of 5-8%. So why lose out?
Additionally, where I live (in Canada)and being self-employed the interest expense of leasing AND the entire lease payment is a tax deductible business expense. (pro-rated to your business mileage) So say I’m paying a 3.99% lease (rates are generally less) but this gives me a deduction against income that I’m paying 15/24/35/42% income tax on. (Depending on your tax bracket) so I would be a minimum of 10% to the good by leasing.
thestarvingartistcanada recently posted..Inflation vs. paying down the mortgage
Three guest posts in one day! You sir are sick!
Gas costs were a larger factor in why I for a smaller car. My civic gets 30ish MPG city and 40ish MPG highway… definitely save me a ton over my 1990s accord.
Lance@MoneyLife&More recently posted..Six Ways to Make Christmas Shopping Easier
I really can’t wait to be able to get my wife a new-to-us car. The old ’97 Accord is getting pretty beat up but the mileage has been pretty consistent. She averages about 29mph. 40 would be a lot better but we’ll definitely wait until we can save up and pay cash!
Jason @ WSL recently posted..Tragedy Strikes Close to Home: Why You Need to Have Life Insurance
Jason is going to be the guru on saving money on a car purchase before the week is done!
We used to have a car but sold it in favour of car-sharing with companies like modo and car2go. The amount we pay in per-month usage is far less than car payments, insurance and gas.
CF recently posted..Should I, or should I not?
I like how you extrapolated the returns out through time – it shows the impact of what seems like a small amount!
I’m in the finance-it category, we didn’t have straight up cash for the whole purchase and the finance rate was so much lower than the mortgage that it just made sense. We financed the entire value of the vehicle, including the taxes, because it makes sense in percents. We continue to pay off the mortgage aggressively and have the car payment. That said, I dislike having larger outgoing commitments than before.
Anne @ Unique Gifter recently posted..Gifts from Afar: Wine
Gas is a huge cost to factor in. Our truck is so hard on gas so we weigh the cost of purchasing a newer more efficient One with the cost of gas for a month all the time.
Crystal recently posted..I’m addicted to crystal meth….
A few months back I coached a client that was COMPLETELY debt free but decided they wanted an awesome BIG truck. So on top of their $700/month payments their gas costs rose from $300/month to $800/month.
They were spending more on the car/gas bills than they were their mortgage.
Needless to say, if you don’t NEED the truck, then I’d definitely consider getting away from it if you could. But I’m a cheapstake.
Jason @ WSL recently posted..Tragedy Strikes Close to Home: Why You Need to Have Life Insurance
We will absolutely be considering gas mileage when making our next (and all future gas purchases).. Especially since the government has mandated fuel efficiency standards.. It is especially silly to purchase a gas guzzler at this point, since they will all be phased out in the next decade..
The Hertz Rent2Buy program sounds very interesting! I’ve never bought a new car before since they depreciate in value the minute you pull them off the lot so to save money buy buying used is a great idea in my opinion (but dealerships can still charge a lot for a used car). Luckily I live in a city in which I don’t need a car, but if I did, I would definitely check that out!
Shannon-ReadyForZero recently posted..Better Know… Gyutae from Money Crashers
I’d love to live in a city where we didn’t need cars. I’m convinced my wife and I were hippies in a past life.
Anyway, the Hertz R2B program was pretty awesome. Saved up a ton of cash and there haven’t been any issues with the car.
Jason @ WSL recently posted..Tragedy Strikes Close to Home: Why You Need to Have Life Insurance
Excellent advice, Jason! I also think that if you buy a new car, always ask for the drive-out price; that removes all the fluff, and gives you a clear idea of how much you are going to pay.
Also, you should be willing to walk away if you don’t get the price you wanted.
Shilpan recently posted..Building Wealth With Smart Financial Decisions
This is so true. I’m glad that I thought of all of these before buying my most recent car, but I did have to finance it. Next time, I’m going to buy with cash.
Jordann @ My Alternate Life recently posted..Attending a Concert on the Cheap
These are excellent advice when buying a new car.
We only have one car and it is already 16 years old. My husband bought this brand new and really kept up with the maintenance schedule. So far, we may be thinking of buying another car in case this old car gave out.
Ces @ Filamwords.com recently posted..Joining The Yakezie Network
Not an easy decision to buy a car but this article gave me a sign of relief save some money. Yes, this really makes a difference in my financial planning.
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