Don’t you love that new car scent?! Just imagine the dust-free dash, the black rubber wheels with shiny chrome hubs, a perfect paint job, and all the bells and whistles. And imagine the peace-of-mind and carefree feeling of having a car with no problems and a new car warranty in case something was to go wrong. All these things and more make having a new car an exhilarating experience. Is there a way to have a new car without becoming a slave to the new car payments? Yes, I believe there is.
Cars depreciate, meaning that they just keep on losing value. Yes, there are a few classic or exotic cars that keep or increase in value but that isn’t the norm. Cars lose about 20% of their value after the first year. After 10 years a $30,000 new car could be worth only $5,000. In fact, cars lose 10% or more of their value just driving it off the car lot. If you were to sell a brand new car to someone on the street 10 minutes after purchasing it, you would only be able to sell it for 90% or less of what you had just paid for it. Doesn’t seem fair, right?
But how can we use the system to our advantage and get the benefits of a new car without paying the new car price or loosing the 10% right off the lot? We can let others do it for us.
There are many other people who also want a new car. If this wasn’t true, there wouldn’t be so many new car dealerships everywhere. People purchase new cars and drive them for a couple of years and then purchase another new car. There are also people who have had a car lease and return those cars after a couple of years to the lender who puts that 2-year-old car up for sale.
There is a significant depreciation of car value between the age of 0 and 2 years old. But essentially, a 2-year-old car is practically new. It has just about everything that a new car has, except the price tag. It is also typically under its original warrantees. This is a good time to purchase a car. It’s often a great car at the best value.
For example, a $30,000 new car could cost about $20,000 at 2 years old and $15,000 at 4 years old. You save $10,000 purchasing a 2-year-old car and it costs you $5,000 to own that car for 2 years. That’s about $6.80 a day, $210 a month or $2,482 a year.
If you have a great credit score and purchase that same $30,000 car new at an interest rate of 4.5 for 60 months (5 years) you’ll be paying $559 a month! When you’re finished paying for the car you’ll actually be paying $33,577. That’s $3,577 dollars above the original value of the car. And after 5 years of paying for the car, it is now worth 40% of its original value.
What could you do with $3,577?! I’m sure you can think of something other than giving it to a bank. Whenever possible, we encourage NOT taking out a car loan to purchase a car. This is lost money that doesn’t need to be lost.
As an alternative, we suggest that YOU be the bank and that you begin to pay yourself what your typical car payment would be. Place this money into an account that is set aside for your “new” 2-year-old car. You’ll have that $20,000 in 35 months at $559 a month. That’s a little more than half the time you would be paying for a new $30,000 car over 60 months. You’ll be able to save up the money for the car more quickly then you would be able to pay off a car because you are saving all of the interest that you would be giving to a bank. You can also put that money away into an interest-bearing account or stocks to grow it while you save up. (Note: Stocks are not a for sure investment until realized and could end up in a loss. Only invest if you can afford to potentially lose that money. I only suggest this because this is what we did for our last car and the investment paid off, making a couple thousand extra that we were able to put towards the new car.)
Now, you may be asking yourself what you should do in the meantime as you’re saving the monthly payments for the new car? If you don’t already have a car, I suggest purchasing a safe but older car. You can find a 10-year-old Honda Civic, Accord, Element, Pilot, etc for a couple thousand dollars on Facebook Marketplace or Craigslist. They tend to last forever and are easy to fix yourself. My last Honda Accord lasted around 600,000 miles with mostly basic maintenance. Once you’re ready to sell the car to purchase your “new” car you’ll likely be able to sell it for the same price you purchased it.
Now here is the key to making your buy-at-2-and-sell-at-4 plan work. You need to keep paying yourself the car payments after you purchase the 2-year-old car. After 2 years of saving those payments, plus the value of the now 4-year-old car will afford you a new 2-year-old car. Wash, rinse, repeat.
Now, to make this work, there is one additional element. If for some reason you choose not to sell your car at 4 years old then you’ll want to hold on to your car until it expires. All the while paying yourself car payments into savings so that when you need a new car you’ll have cash-in-hand. These self payments can be in the amount of the depreciation value. In our previous example, your car’s value went from $20,000 down to $15,000 in the 2 years that you owned it. The $5,000 difference can be divided into 24 months (2 years), which is $208 per month. Save that $208 per month in an interest-bearing fund until you need to get a new car.
By the way, this savings can be simplified by automating the process. You can set up an auto-deposit from your active checking account to a car savings or other account.
Another option is to drive a junker and invest the $20,000 into an interest account which over 40 years could be worth over $200,000! But that is the subject of a different post.
This car purchasing principle was modified from James Rickard’s 2-4-junk method. James is the director of The Stewardship Services Foundation.
How to Have a “New” Car Every Two Years
