Personal Finance Friday - Cars
Cars... a surprisingly controversial subject when it comes to personal finance. Why? There is the "never buy new" camp, the "I drive it until it falls apart" camp, the lease camp, the never lease camp, the "don't spend on your car camp because it only loses value" camp. Don't forget the car people, sports car people, only cash for cars, multi-car people, and new cars every 6 month people (no literally I knew someone who did that).
So what is the right answer? Well, we all know there is never a one size fits all answer for everyone but there are some principles to consider when thinking about the cars in your life.
First, a car is for the most part a depreciating asset, meaning it generally does not go up in value over time. So when you take debt out against it, you are manufacturing a certain level of risk for yourself. Unlike a house, that generally does go up and gives you some protection over time, a car can many times be underwater in value. Meaning you'd need to pay some additional amount even after you sold the car to get out of the obligation. All that means a car IS NOT an investment! (classic cars, might be the exception.... maybe) So treat them accordingly, don't try to justify spending more on any kind of personal finance basis!
Second, buying a used car is not always the slam dunk people make it out to be. Depending on the market, used cars can be quite expensive in comparison to a new car. If you go to buy a used car that is $20,000 that is 3 years old, and the car new is $25,000... ahhh just buy the new car! Why buy the new car in that situation (if you can afford it of course)? If you are a responsible person you can take care of that car well and get a very full and long life out of it, which is probably one of the more efficient ways to own a car. Now if that same car is selling for $12,000, oh man as long as its in good condition, which is always the risk with a used car, then the used car is a better option. I'm biased because all of my working adult life I've bought new cars (properly negotiated for invoice price :) and then just took good care of them, cleaned them, got them serviced, etc. I've never had the headache of wondering if my car is going to start every morning, or looking under it to make sure its not leaking oil again, like when I used to have older used cars in my late teens and early 20's. But what I've also done is keep those cars a loooongggg time (not as long as my brother but that's another story ha ha). My first car I had for 13 years, and my current car I'm already in year 5, and it's still near perfect!. Now that being said, I bought cars I can afford, and paid them off as soon as I could. If you can't buy a new car then your options are different of course and you can make out well by buying the right used car at the right price. The principle is still the same.
Third, leasing versus buying... this is also a "depends" type thing. Again most often, if you buy a new/used car take care of it and keep it a long time that's usually the most efficient thing from a personal finance perspective. But depending on your personality, and other economic factors, leasing isn't a terrible idea. For many, they really feel like they need a new car every few years, for those people leasing can actually be pretty efficient. You can just budget that you'll have a car payment forever and enjoy that new car every so often. If you know life circumstances may change dramatically in the next year or two, leasing can be a good option as well. Beware though, leases have interest rates embedded in them, and sometimes those can be negotiated, don't just take the first offer, ask the dealer some questions about it.
Fourth, how much should you spend? Well I'd say this, your first priority, is saving 10 - 20% of your income, and making all your other obligations. Then looking at whats left, people can spend a ton of money on cars, we think of them as part of our identities. What value are you really getting from it? If its something that really brings you joy, and everything else is covered in your finances? Sure go ahead move it to the higher range. If it doesn't bring you huge amounts of joy then take that gift and save as much of that for other things that do.
As a side note, a friend introduced me to this site, it lets you rent cars in your area, or rent out your car peer to peer.
There are other sites as well. But if you find that maybe your car is overwhelming your finances, this might be one small way to alleviate the pain.
Cars are deeply personal for many people. I get it, I drive a lower end sports car, it's fun. But be careful, don't put your identity into a THING that is a recipe for disaster on so many levels. Your car is first and foremost a tool you use to get stuff done. Make sure it meets that requirement first in the larger context of your financial life, and then move on to the fun side.