Here we go again. Another article from some “self-made millionaire” is here to give regular people car buying advice, complete with the sub-text of “if you do this you can be just like me.” I’m talking about the fallacy that any new car purchase is financially foolish, of course.
This story was originally published on March 1, 2019
CNBC has a habit of running the same theme every few months, where a very wealthy person like David Bach or Suze Orman or Grant Sabatier, comes out to drop some serious financial knowledge on the dumb masses and it’s invariably some form of “buying a new car is one of the worst financial decisions you can make in your life.”
But it’s not, quite simply. There are a lot of really dumb things you can do financially that would qualify as “one of the worst financial decisions of your life.” Buying or even (gasp!) leasing a new car wouldn’t even break the top five.
It’s a debate we had on this website a while back, but the fact that some of these would-be financial experts want to paint everyone that buys a new car as financially stupid and those that buy used as financially smart is absolutely nuts.
Do used cars often provide more value than new?
Yes.
Does it make them automatically the better purchase?
No.
One of the key fallacies of this argument has to do with looking at cars as investments. Unless you are collecting vintage Ferraris, a car is not an investment, but for some Mr. Sabatier thinks otherwise:
Buying a $40,000 car, for instance, he says, would require a year’s worth of work if you’re earning $20 per hour after taxes and working 200 hours annually. If you had invested that money instead, it would be worth more than $240,000 after 30 years with a 6 percent rate of return, or more than $440,000 with an 8 percent rate of return.
I’ll give CNBC’s Make It the benefit of the doubt that they meant to say 2,000 hours instead of 200. But no one is suggesting that someone who is taking home a net income of $40,000 should spend $40,000 on a car.
It also doesn’t mean, however, that they should exclusively buy a used one. What the Professional Millionaires often fail to consider is that someone just getting by on a modest salary doesn’t have the time to properly research, shop for, and vet a quality used car. There are people who do it, sure, but, there is something to be said for buying reliable transportation from day one with a full warranty and not having the risk of missing work or daily functions because your car broke down because of a problem caused by an unforeseen repair.
The second fallacy is this fear of depreciation, as “financial guru” Suze Orman says a new car is a no-no because it will lose value:
“The second you drive that car off the lot, it depreciates, 10 percent, 20 percent,” she tells CNBC Make It. “Let somebody else get that depreciation.”
What Suze doesn’t understand is that that the 20 percent depreciation figure is an average across all segments, and more than that, it’s all a bit relative. Ever look at the price of a used two-year-old Toyota, Honda or Subaru? It doesn’t make much sense to buy one of them when the new version can be had after discounts for almost the same price and usually at a lower interest rate.
Where you get the most out of your depreciation is in pre-owned luxury cars. Again, I don’t see how buying a used E-class is more financially savvy than, say, a new Camry. Depreciation only matters if you plan on selling that car within a few years, when those “cost of ownership” calculations are important.
Let’s also not forget the risks and running costs that come with buying a well-depreciated luxury car. That upfront “value” can disappear real quick when out of warranty expenses add up. Purchasing a modest, but a quality new car and keeping it well beyond the point at which it is paid off is how to maximize your value.
Buying a car is complicated, and to assume that everyone makes this purchase from a purely rational perspective is just unhelpful. To focus the conversation around “new” or “used” misses the big picture.
Instead, we should focus on the concept of “affordability,” which basically comes down to not “overbuying” your car regardless if it has some miles on it or not.