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Why I've never owned a new car

There are few Americans who can save $30,000 in five years, but anyone who buys and finances a new car could be doing exactly that.

By Stacy Johnson Mar 31, 2010 4:51PM

This post comes from Stacy Johnson at partner site Money Talks News.

 

I’m 54 years old and have yet to own my first new car. In this post, I’m going to explain why I never buy new. In the next, I'll go over the steps to finding a reliable $5,000 car.

 

When I graduated from the University of Arizona in 1977, my parents gave me a 1975 Toyota as a graduation present. Much to my parents' dismay, within a few weeks I’d sold that car and used the proceeds for the down payment on my first house: a 900-square-foot concrete box in a dicey section of Tucson that I bought for less than $20,000. For wheels, I borrowed a couple thousand dollars from a credit union and bought a 1958 Triumph TR3, a car I drove every day for more than a year.

 

While I did ultimately sell both house and car for a profit, the point of this little story is that the way you approach cars, houses, saving and investing is really limited only by your imagination. And most people don’t seem to have much.

 

When it comes to buying cars, the vast majority of people I’ve known over the years approach the subject with no imagination at all. They simply do what the commercials tell them to and what their friends do: trudge down to the nearest dealer and buy a new car. If they want to feel like informed consumers, they comparison shop, kick a few tires and talk to a few salespeople in an attempt to get a decent deal. But even if they drive the hardest possible bargain, that new car is still guaranteed to lose thousands of dollars in value before they can get it home.

And that’s especially true if they pay interest by either financing that car or leasing it. Paying interest to finance a depreciating asset is not how you get rich. In fact, with the possible exception of gambling, it’s one of the fastest ways to get poor.

 

While I’ve explained this concept several times during my TV news career and written about it in books, it came up again recently when a friend of mine approached me asking for advice. We’ll call him Jim, because that’s his name.

 

Jim had recently been laid off. He found a new job relatively quickly, but unlike his old one, this one didn’t come with a company car. The only car he had was the one he shared with his wife, who needed it to get to her job. He was able to work partially from home, but not all the time, and his new boss was starting to notice that Jim was attempting to arrange his office visits around his access to the family car. Not good.

 

So Jim needed a car to keep his new job. But he didn’t have much money or much credit available: $5,000 max. To make matters worse, he and his wife had both had issues with used cars in the past and were dead set against getting a clunker.

 

The first thing I did was try to change Jim’s attitude by introducing him to the idea of an old accounting term known as opportunity cost. Check out the following news story I did about opportunity cost and new cars, then meet me on the other side for more.

 

 

So the point of this story is that when you buy a new car and make $400 monthly payments for five years, your opportunity cost is about 30 grand -- money you could have had if you’d earned 9% rather than paying it.

Whenever I run an example like this, I invariably and understandably get responses like this: “I can get a car loan for less than 9%.” And “Please tell me where I can earn 9% on my savings.” Well, I used 9% in my story because it better serves to illustrate the point. And paying and/or earning less interest would lower the $30,000 opportunity cost of owning a new car.

 

That being said, however, there certainly are people who pay more than 9% on a car loan, plenty of them. There are also plenty of people who can and do earn more than 9% on their savings. The stock market has averaged about that over the last 100 years or so, although it didn’t for the first 10 years of this century and has never done it without risk.

 

But that doesn't change the message. The next time you’re thinking about shelling out for something really expensive, especially if payments are involved, don’t just consider the cost. Consider the opportunity cost -- the money you could have made by putting those payments somewhere else. Then think about ways to make more on your savings with things like stocks (here's a recent story I did on that) and to spend less on life’s major expenses, like cars.

 

Speaking of which, understanding opportunity cost is only half this story. Tomorrow, I’ll post the next part where Jim and I go over the details of finding and buying a $5,000 car.

 

Related reading at Money Talks News:

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