Buying a a brand-new car is the worst investment you could ever make! I am not saying that because it is my opinion. I am telling you this because if you crunch the numbers it is a fact. It can cost you over $1 million in the long run, yet many millions of people still purchase vehicles brand-new.
You need to really be careful when you buy a brand-new car in terms of your personal finances because it will chew you up and smack you cross the face if don’t know what you are doing. On the flip side, if you understand the reasoning and are educated and disciplined on the subject of finances or you need the right car for the right reasons for a job or some other means, then by all means, go for it and get a new car.
Classifying a car: Assets or a Liability
When you go to the dealership or to your account, the vehicle gets classified as a depreciating asset. This term for a car is totally incorrect. Let me simplify things for you between what an asset is and the liability.
Asset: something that goes up in value over time.
Liability: something that goes down in value over time.
It’s that simple. However in finance and accounting terms we like to over complicate things for the following reason. Since a vehicle still has cash value in it if you sell it this is where the asset part comes in. The depreciating piece comes from the fact that a car goes down in value over time, it depreciates. This is where we get “depreciating asset.”
When it comes to the personal level of discussing cars, why not call it what it is. In this case a liability. When you phrase it like that, we already have less appeal to the car.
Buying a New Car: The Expensive Stuff
Rate of Depreciation
The rate of depreciation depends on the vehicle make and model. It is not the same for every car so it does change depending on what you purchase. This is probably one of the most expensive pieces of buying a new car is that the car value dropped significantly as soon as you drive it off the lot. You’re much better off to purchase a vehicle that’s one year old then on the dealer’s lot because of this huge expense. In 2012 here are some car models and how much they depreciate over 5 years.
- 2013 Suzuki Grand Vitara Premium RWD: $14,373
- 2012 Jeep Liberty Limited Sport 2WD: $15,239
- 2012 Kia Sedona LX $17,730
- 2013 Chevrolet Impala LT: $17,983
- 2013 Jaguar XJ AWD $52,014
Imagine that Jaguar that in 5 years your car’s value goes down the drain over $50,000!!! That’s a down payment on a house for some people!
There are always hidden costs when you buy a new vehicle such as extended warranty you decide to go that route, car insurance which will cost more for a new car, sales, dealer and manufacturing fees, license and registration fees, and who knows what else. Be aware and budget for these in advanced if you are running a tight ship.
Monthly payments really kill a lot of people when they buy a new car. I have seen people pay $800 to $1,000 per month on their mortgage and also seen those same people pay $350 to $400 a month on their cars. That’s nearly 40% of your house every month! Monthly payments on a car can be a killer. Be prepared to pay for the car for quite some time especially if you are financing and remember that these financing these will immensely over the years.
Not everyone gets into an accident or have to have the car repaired. Your new car should have a warranty and not to mention at the beginning stages you should have to deal with slightly less maintenance. However, if you do get into an accident, hit something, or something isn’t covered or your warranty expired – you could run into much higher expenses since the availability of parts may be limited.
#1 Reason People Buy New Cars: Social Recognition
I see and hear this as probably the #1 reason for purchasing a brand new car. Even if people don’t say this specifically, and they say they buy it because it has a warranty or it’s cheaper to maintain, there are many people purchase a brand new car or one that is much better than they can afford for the social recognition.
I’ve had this experience with at least a few people that I knew. One person was always trying to look good or gain recognition. She was a mid-twenties lady who would drive spicy colored cars like bright yellow, red, or orange. She did it purely for the attention whether she realized that are not. However she struggled greatly with her job working overtime and getting a second job just to pay for the car. And don’t forget the car goes down in value over time.
One of my other friends wanted a expensive car for quite some time. It was always in her dreams to drive this vehicle make, but for the last 18 years she was not able to afford it. Finally after putting some things together in her life pushing 50 years of age, she decided to splurge and get her dream car. Of course the payments are very excessive for her level of income (about $400 worth per month) but she still purchased it because it was one of her dreams. This is still considered social recognition since an specific object makes you “feel” better.
Remember that when it comes to social recognition, owning a certain car has nothing to do with actually having it in your possession. It’s actually the experience you go through when you purchase the car, use the car, and other people see the car as well as their actions and reactions toward you.
Reasons People “Say” They Buy New
I found that social recognition is the number one reason, there are however other reasons but are not as big as social recognition. These could be classified as reasons that people will tell you why they bought a new car (in no particular order)
#1 Reduced maintenance cost
I hear this reason fairly often. People assume that the cost of maintenance will be far lower because you get a warranty and since it’s new it will have less problems. This is not always the case.
Yes it may be true that there will be slightly less maintenance, but the downside is it something happens that is not covered by maintenance or warranty if you don’t use the dealership your warranty may be revoked. Not to mention maintenance on the vehicle is not that expensive unless you get a high-end vehicle that is extremely expensive to maintain or breaks down frequently and requires international parts.
Another common reason and very closely tied to the earlier reason of reduced maintenance cost. Again I don’t really believe this reason too much – it’s not a viable reason if you are watching your pennies.
#3 Roadside assistance
Roadside assistance is another common argument. Roadside assistance by AAA is $30 to $60 per year, so if you are looking to spend thousands on a brand-new vehicle just so in 5 years you can save $300 this is absolutely crazy. Don’t think this way.
#4 Less Stress and Headaches
Maybe this one reason works better than the others. If a new car gives you less stress and headaches, then nothing is worth better spending money on than a new car. After all pain-relief is one of the biggest motivators. However, stress usually comes from something that enters your boundaries, so what would you be stressing about with a new car versus a used car? Roadside assistance? Warranty? Maintenance? We covered these earlier.
#5 Business / Tax deductions
If you are running a business, having a new car for tax deduction reasons could make some sense according to my account. However, even if you don’t buy new – you could just record and track your mileage. Now if you had a dedicated car specifically for work, then basically everything for it would be a deduction rather and it would make things easier to track mileage, but this does not mean you have to buy a car brand-new. This only means you have to have a car and use it exclusively for business.
Calculations of a New Car Over the Years
Let me show you how much money you would invest your car. Take special note to what year you would reach $1,000,000 dollars! (It’s less than 50 years).