“I have a buying decision question for you, when you have a sec.” -Text I received from a friend last Friday
Ring ring.
“Yo.”
“Yo. I’d like to buy my friend’s car. The dealership is offering her $2,000, but it’s really worth more than that. I’d like to buy it, and then sell my car. Play devil’s advocate.”
Done. Believe it or not, there’s a lot here. But first you need some more background. My friend owes about $6,000 on his car. He’s quite confident that he can get $10,000 for it if he were to sell it. I don’t have a reason to doubt this. His monthly payment is $300. He currently is fighting through some credit card debt.
Assuming that he’s okay with driving his friend’s car and it’s of reasonable quality, he should do this. Here’s the rationale. Our cars are often anchors. The payments that come with financing a car are a part of your life for years. The sooner that you can get past the payment phase, the better. Your goal always should be to payoff a car as soon as humanly possible. A car, in most cases, is a depreciating asset. You don’t want depreciating assets to drag you down.
I hate car payments. I think you should too. In this instance, my friend has the ability to “exchange” cars and eliminate a car payment. He should do it. And you should do it too, if you ever get the chance.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.
I’m no expert, but I have owned a few $2000 cars, and I’m pretty confident guessing there will be repairs needed during the next 12 months that will eat up cash he thinks he is saving by buying a cheap car. I wonder if there is a study out there somewhere that predicts the average yearly repair bill of a car based on its sales price? LOL
Edmunds.com is a great website for new and used car shopping. I know, Pete will probably ban me from the website for even mentioning new car. One of the great features of Edmunds is their True Cost to Own Calculator. It calculates depreciation, fuel, insurance, repairs & maintenance, taxes, etc. Those are all key factors in determining if you are really saving by driving a $2,000 car. There might be more savings then you think. Insurance cost is usually reduced if the car is paid off. Taxes (registration and licensing fees) are usually lower for older cars as well. On the down side, you might be paying more for fuel and have a gas guzzler fee on certain models.
I’m no financial expert, but I have to disagree with this. I owned an older vehicle outright and it cost me so much in repairs, I couldn’t afford to save any money to buy a reliable car. As a matter of fact, I went into debt trying to keep it on the road. With all ownership and operating expenses (including payment, maintenance, repairs, insurance and gas)averaged out, I spend about $30 a month less to own a new vehicle. Having a new car payment for me is like being able to pay a monthly budgeted amount for all the repairs that were hittting me unexpectedly before. I’m sure saving up to buy a car with cash and setting aside money for repairs works beautifully on paper, but you must also consider the person, not just the numbers.
I meant to also point out that I left depreciation out of the calculation. I know the importance of this expense in business, but I’ve found it means little to individuals and their planning. I believe businesses should run on the accrual method and the vast majority of personal finances (especially budgets) should be on the cash basis. To be honest, I track my finances using both methods just for fun, but I use cash basis for decision-making.