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New Cars Are the Worst Investments

Updated on August 1, 2013
Shiny new cars make you feel good, but...
Shiny new cars make you feel good, but... | Source

Everybody loves the idea of buying a new car. Number one is of course the new car smell (it rivals that of a fresh pair of sneakers). Then you have the fact that you know it has never been used so everything will likely work for a very long time. It also looks shiny and neat and it makes you feel good.

Now that that’s over with you need to face the fact that buying a new car is likely the worst investment you will make in life. The reason? Depreciation. Essentially, your car loses value at light speed. First, as soon as you drive it off the lot your car is worth considerably less. Estimates range from 5 to 10% of your cars value And you only moved it several feet! Imagine buying a computer for $1,000 dollars, and then walking out of the store causes you to lose $100 of its value. Even if you tried selling it back in the box never used! And it gets worse. Each year your car depreciates 15-25%. By the 5-year mark, your car may have lost up to 65% of its original value! Essentially, by the time you’ve paid off your brand new car including interest for $32,000, your car is worth around $9,000. This is assuming it’s still in relatively decent condition and you have a buyer willing to pay that much. So for 5 years you’ve thrown away about $380 a month. Right in the garbage. Would you do that if I asked you? Of course not! So why do a large portion of Americans keep buying new cars?

Illustrative list of depreciation values for several cars
Illustrative list of depreciation values for several cars | Source
Stop throwing money away
Stop throwing money away | Source

There are also other factors that contribute to this pitiful investment:

1. You pay higher premiums for insurance

2. You’re paying interest on the car (almost everyone finances their new cars)

The only saving grace is that after about 8 years or so your car’s value remains around $1,200 to $3,000 depending upon the condition (e.g., mileage, scratches, etc.). This is because a car will always have some value providing that it can still function. So what does this mean? The only way to truly squeeze every last bit of value from your car is to buy it new, and then use it for 15 years until you’ve practically ground the wheels off. And then, if it still runs, you can sell it for about 5% of what you paid for it.

But the sad reality is that most Americans buy new cars, then sell them within 5 years and sometimes even sooner! You might as well keep throwing your money away. That is why it makes the most sense to buy a used car. The value depreciates steadily (instead of wild jumps as happens within 5 years) if you buy a 5 year or older car. It will still cost the same to perform the usual maintenance and repairs (e.g., oil change, new tires, etc.). The insurance will be lower. And if your car lasts 5 to 6 years, simply get another used car. Doing this will save you thousands over your lifetime. And you can use that extra money you were tossing in the garbage every month with your new car payments, and apply that to good investments that actually appreciate in value (e.g., stocks, bonds, savings account, etc.), or use it to buy things you really need. Your life will be that much better and you won’t have to have constant high car payments that you are forced to pay each month.

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