Don’t think the auto industry hasn’t noticed you eyeing that convertible Mustang. My advice: Don’t do it. Don’t get sucked in by “great” financing. Don’t get sucked in by dealer specials. Why not, you ask? As I once heard a financial advisor say, “If your ass is in it, it’s not an asset!”
Assets are something we twentysomethings have very little of. From savings accounts to “back-up” funds, we usually come up short. More often we’re living paycheck to paycheck, with debt to boot. If this is your situation, a new car is one of the worst choices you can make.
A new car doesn’t qualify as a “need”… no really, it doesn’t. Most people simply want a new car. And I understand; I recently wanted one too. Seen the absolutely sweet Mercedes C230? If you’re into hatchbacks with luxury on the side, I advise you to stay away. The car is about the same price as a new Jetta, or F150, but look at the cost: Retail cost, about $23,000. The down payment runs roughly 10%, knocking the amount I’ll need a loan for to something near $20,000.
Off to the financing department, where I’ll get a “great” deal, wink-wink. At 6.25% I’ll pay around $388 monthly, for five years (yes, this is really how long a 60-month payment plan is…don’t even get me started about 72 month plans, or about leasing…SUCKER!).
With payments complete, I paid $23,339 for my loan of $20,000. Result: I’ve lost $3,339.
I’d like to say the news gets better here, but it doesn’t. Ever heard of depreciation? Each year my really impressive car looses resale value. When I go to sell my car, I won’t be able to get the money back that I’ve already paid to own it. Depreciation looks like this:
On the Lot, Car Value: $23,000
Year One Depreciation: about 30% (or) $7,000
Car Value: $16,000
Year Two Depreciation: about another 17%
Car Value: $12,000 (or) about 50% of car’s initial value
In the first two years a car will usually loose half its value. Of course different cars, and different areas of the country will alter these figures a bit. Keep the car longer (more than five years) and depreciation eventually levels out.
Why does depreciation matter? Think of it like this: I pay $388 per month to own my car, around $4,600 yearly.
Let’s do some simple math. I put $2,300 down. I pay $4,600 to own my car. Total for two years of car ownership: $11,500.
If my car has depreciated, and is only worth $12,000 after these two years, this seems great. I’ve paid $11,500 already. The car is now worth $12,000. I’ve only about $500 to pay!
Loyal readers, I know this is the part where—if you didn’t know me better—you’d start celebrating. But you know me … Don’t celebrate. Remember how I promised to pay for the car over a five-year period? You guessed it, I’m essentially screwed here.
Though I’ve paid nearly all the car is worth after two years of ownership, I have three more years left to pay on the car. Translation: Over the next three years, I’m paying $13,900 on top of the $11,500 I’ve already paid. And, all for a car worth only $12,000!
Buying a car we’ll sell in a few years is like throwing $4,600 dollars away every year. I love to do that, don’t you?
Let’s return to our talk about assets. Repeat after me, “If your a$$ is in it, it’s not an asset!” Say this over and over as you covet cars all summer long. Keep your old car and keep that $4,600 for yourself.
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