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Why Buying a New Car Is a Financial Trap

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A new car's value depreciates very quickly.

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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:

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Twitter: @mint
No positions in stocks mentioned.
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