Why Buying a New Car Is a Financial Trap

By MintLife  OCT 02, 2012 1:50 PM

A new car's value depreciates very quickly.

 


Investing in assets is an essential component of building your financial future.

However, many people don’t take the time to think about what might be the worst investment an individual consumer can make: Buying a new car.

A Bad Investment

There’s a piece of common knowledge that underscores why buying a new car is such a waste of money: The second the tires hit the road, you just flushed half the car’s value down the toilet.

When you purchase a used car, you retain the chance of selling it for close to the dollar amount you bought it for.

This is because a new car is a depreciating asset — an asset that loses value over time. In general, all cars (new or used) are depreciating assets, but the depreciation is particularly pronounced when it comes to new cars.

Even if you think you are buying a car every collector is going to want in ten years, the reality of that fantasy coming true is unlikely.

Unless you’re an expert in collectable cars, your chances of picking the collectable car of the future is about as good as winning the lottery.

To put this into dollar terms, cars depreciate in value by at least $1,500 each year. The average depreciation is even higher — about $2,500.

Unless you miraculously buy the right car, this value will never be recovered, no matter how much money you dump into the upkeep of the vehicle.

Other Reasons Not to Buy New

The sticker price of a new car isn’t the only cost. You also have to pay interest on the payments, as most consumers use some kind of financing to purchase a new vehicle.

You’ll also have to pay more to insure a new car with a higher value than you would with a previously owned car.

Other costs, such as registration and maintenance, would apply to a used car as much as a new car.

However, the fact remains: Buying a car is not an investment. Buying a Car the Smart Way

Let’s assume you’re going to purchase a previously owned car. This helps you avoid the massive depreciation that takes place during the first year.

Now, let’s figure out how much car you can afford.

How much cash do you have? If possible, don’t finance a previously owned vehicle. Save your money and buy one outright to avoid the interest charges and additional insurance that comes with not actually owning a car outright.

The most you should pay for a car is half of your annual income. Anything more than that you really can’t afford in the big picture, even if you can afford to make monthly payments.

Over the life of your used car, take the money that you would have spent on car payments and throw it into investments.

Rather than throwing the money away like you would be on a brand new car, this money is now actually making money for you.

The tangible reward is that you will have more money stashed away for your other financial goals.

Editor's Note: This article by Nicholas Pell was originally published on MintLife.

See more from Mint.com:

Persistence Pays: 7 Ways to Win Your Customer Case

Election Season Economics: What Does 'The Economy' Mean to You?

How do New Inquiries Affect My Credit Score

Moving Up: 5 Ways to Prepare for Moving to an Expensive City


Twitter: @mint
No positions in stocks mentioned.