The biggest expense in most American’s lives is their car. And so I often hear people talking about this purchase, and it’s an interesting dilemma that both people making minimum wage and six-figure salaries share. The twist here is I would give the same advice to both!
- Don’t Think In Terms of Monthly Payments – For most people, the default thought that crosses their mind when considering a car purchase is the payment amount. After all, we think in monthly terms, and the idea of scrapping together $20k seems pretty daunting. That’s your first sign it’s probably out of your budget. A car is a depreciating asset, meaning you are GOING to lose money in it. You should try to optimize the amount lost, over the amount spent.
- Consider Reliability/Service – Most people forget about this part and figure once the car is purchased, every car is equal. Not true. If you car requires Premium fuel or synthetic oil, get ready to spend an ever increasing amount on your car. Also spend the most time researching how reliable the car is. I’ve seen people get a “good deal” at purchase time, only to pay almost the car’s entire value in repairs.
- Understand the Depreciation – You probably know that a car loses up to 20% of it’s value after you drive it off the new car lot, which is why I won’t waste space here telling you never to buy a new car, but used cars have depreciation too. The first 5 years of most cars continues a sharp drop in depreciation. Oddly, high-end cars depreciate much faster in many cases (I believe this may be because the type of people that want to own these cars would rather have a new one). The ideal used car for me is one that has already lost at least 50% of it’s value, but still seems like a modern car (Such as a 2008 car now).
- Financing or Cash? If you can buy a car outright in cash, I guarantee your budget will be better. Buying in cash means your insurance will be cheaper, you’ll lose less money to interest, and generally feel better about your finances. That said, with interest rates so low, it can technically be a better idea to finance, assuming you actually use the money you would have put into a car to on investments that return a higher rate of interest then the loan instead.
- Consider Resale – It seems odd to think about how you’re going to sell a car right now when you are wanting to buy it, but should you need to sell your car fast (new job overseas, new family situation, etc…) you’ll want to be able to. I find it’s always worth it to look for the highest trim level of a car. What I mean is typically car dealers offer base level cars with no options, and high level cars with lots of options. The price difference between the two on the used market is usually insignificant, but it will make a big difference in terms of the speed of your sale.
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