While thinking at work the other day my thoughts turned to cars, especially new cars. Having a new car would be fun and nice to show people but I got to wondering how much does a new car really cost? I keep reading articles on the average new car price, the average car payments, and how much a new car depreciates, but after doing some research I now have a clearer picture.
After digging around and doing some research, I came across some recent data from Automotive Digest. The average new car purchase price is $24,265 with an average payment of $453 over 64.4 months. Finding depreciation rates was a little difficult as it varies from car to car, but the consensus is that a new car loses 25% of its value in the first year alone and then anywhere from 15%-20% each year for the next 4 years and by the end of the 5th year the total depreciation is approx 65%! Assuming a $24,265 purchase price with $453 a month payments over 64 months, I made a graph showing the car value v. car loan balance as well as a chart breaking down the payments.
As you can see from the graph above, with the big depreciation hit in the first few years the car is actually “underwater” for the first 2 and half years, meaning you owe more on the car than what is it worth. The chart on the right shows the total loss with the car in the last two bottom columns. At the end of the 6th year you will have paid nearly $29,000 in payments and the value will only be about $7,300 for a total loss of ~$21,700 or $300 a month!
What if you instead invested the payment monthly into a mutual fund? I did the math using a 10% annual rate of return and calculated the following:
After six years the $29,000 paid into the mutual fund would be approximately worth $44,000 or a $15,000 gain. That is about a $36,000, or $500 a month, difference over buying a car. Just for fun, what if you decided to not buy a new car for your working lifetime (40 years). What would you have?
After 30 years you would be a millionaire and after 40 years you could retire with over $2.8 million! Hope you find the car enjoyable. I think then you would be able to drive any car you wanted to.
As you can see, over time the new car with a payment will cost you big time. Obviously you need a car, but what if instead of buying a new car every 5-6 years you instead decided to buy a used car paid for in cash? In our simulation the average car is approximately worth $10,000 after the fourth year. That is still a lot of car for a fraction of the original cost. Basically by driving a used car, you are driving a nice car while investing for your future and letting someone else take the initial beating in the depreciation, how can you go wrong with that? Sure it is not the cool thing to do and it might not be the most convenient thing to do and your friends and family will probably make fun of you, but in the long run you will be better off financially.