Ahh, the smell of summer. Tank-tops on, drop-tops down. 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 ass 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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