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“NEVER BORROW MONEY to buy a depreciating asset.” This personal finance tip is often used to dissuade folks from taking out car loans. But does a car really leave folks poorer?
When we value an asset, it’s typically thought of as its dollar value on a balance sheet. The monetary value of my car might indeed decline, and quickly at that, but it has far more usefulness than my personal balance sheet shows. When I consider my car’s true value, I think of how much it improves my life.
I made a major change in 2018, moving from Philadelphia to Scottsdale, Arizona. I landed with two suitcases, a backpack and my cat. I had a job starting in three weeks in the heart of Old Town Scottsdale—a pricey area.
In Philadelphia, I’d never needed a car. There’s great public transportation and I could get almost anywhere by walking or taking the train. If you’ve ever been to Phoenix and its surrounding suburbs, it’s a different story. It sprawls in every direction and lacks decent public transportation.
As a young professional 2,000 miles from home, I needed to travel this big expanse. I also wanted to do some exploring in the West, so I took out a loan to buy a new car.
I don’t imagine I’ll ever recoup the money I paid for the vehicle. In fact, I suspect that my car will always be asking me for more money—for maintenance and repairs—even after I’ve paid off the loan. That’s fine. My expectations are set on this because I see so much additional value in owning a car.
Monetary benefits. Old Town Scottsdale’s rents are at least 20% higher than some surrounding areas. I can live less expensively nearby as long as I can handle a 10- to 15-minute commute.
My car also provides me access to a larger pool of jobs. On top of that, I have reliable transportation, which makes me a more dependable employee. Finally, in this gig economy, a car opens up opportunities for self-employment, a side gig or temporary income during a gap in employment. This could come from signing on with services like Uber, DoorDash and Instacart.
Emotional benefits. My car is truly liberating. It can buy me time by making travel more convenient. It allows me to live where I want and gain happiness through new experiences outside of my neighborhood. The ability to go anywhere at any time is hugely appealing.
If it takes a loan to realize these benefits, I’m willing to bear that cost. I think most Americans would agree with me. Even when you’ve decided that a car is worth buying, however, another financial argument breaks out. It’s about whether it’s better to buy a new car or a used one.
This is where I find the biggest ridicule from finance influencers. They advise never to buy a new car, and especially never to buy a new car with a loan. That’s because the moment you drive a new car off the dealer lot, it takes a big hit, thanks to depreciation.
Perhaps, in an ideal world, we’d all buy a good used car with cash. But that option isn’t available to many people. Moreover, even if you can afford to pay cash, there can be a good reason to buck the conventional wisdom. The benefit I’ve received from buying a new car can be summarized in one word: reliability.
A new car brings me peace of mind, knowing it’s unlikely I’ll be waiting on the side of the road for AAA. I don’t have to leave an extra hour early for work in case my car doesn’t get me there. I also knew I’d be traveling along dirt roads and across state lines to do some exploring, so reliability was nonnegotiable with my car purchase.
A new car works out well for me on another level. I’m not a car guy. I lack the understanding of how to take care of one. The new car warranty typically covers the scheduled service for the first few years. I’m happy to pay more to get that responsibility off my plate.
My goal has never been to turn around and sell my car for a decent sum when I’m done using it. Instead, I want to pull out all the value I can along the way. I’ll increase both my life experiences and my financial wealth through its use—and not by selling it at the end.
Logan Murray is a solo financial advisor. His company Pocket Project offers subscription-based financial planning services to young professionals. For more financial insights, read Logan’s blog, connect with him on LinkedIn and check out his earlier articles.
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When I think about the value I get from my car, going from A to B is what it is used for. So, whether I drive an old Pinto or a new Tesla, I still end up in the same place. And, right now as I write this, my ol Subaru is parked, it has been all day. Where is your vehicle right at this moment? Most folks have transportation that just sits and doesn’t move most of the time in 24 hours, so, don’t buy an expensive car and waste the money.
And, what is a reasonable new car payment? I don’t know, how ’bout $300. So, just put that same amount in an emergency fund for a year or more for the times when repairs are needed.
A car will serve well for a long time with a little maintenance and care. It’s very good to learn some things about automobiles and how to do simple things.
If worried about reliability, buy a good roadside assistance plan. May come in handy even with a new car. I like what I think is Dave Ramsey’s plan – buy a cheap used car, save, buy a more expensive car, save, repeat until you obtain with cash the car you want – without paying “the man” interest. My relative is in an endless cycle of 5 year loans because she can never save for the next car due the payments on the current one…
Some very valid points made here. However, everybody’s situation is different. What makes sense for one won’t necessarily work for another. I have bought new, used and leased. Each time my situation was different. Right now, hubby and I both lease. This makes sense for us for a variety of reasons. Public transportation is not an option for me, and he works from home. Previously we both were driving cars we bought new and owned for close to 15 years. We both choose short-term leases because we are nearing retirement and plan to have one car when that time comes.
Confirmation bias, anyone? After all these years driving without a new car, I can only imagine the wonderful life I would live with the car of my dreams, working flawlessly year after year, still shiny and bright, and perhaps even somehow holding onto that new car smell. I can only imagine!
One time I took a check into the brokerage to deposit it, seeing as it was about $100,000, and the person behind the counter said, “You could buy a Porsche!” https://cars.usnews.com/cars-trucks/porsche/cayenne But I didn’t. Still, it’s never too late!
Buying a new car and driving them forever isn’t a bad strategy.
The safety features on new cars should be considered, too.
Leasing sucks, unless you own a business and write it off as a business expense, period!!! I know, I leased a Camry once. Lost my mind and when I went to pay it off, based on Toyota’s terms at that time, I had to pay off “all” the remaining lease payments, no rule of 72 on leases. So, I learned my lesson about car leases “the hard way” and shame on me.
Now, I negotiate a reasonable price on the vehicle, get a 36 mo. loan and pay it off in 12 months. I have the funds to do so, so that is what I do.
Nowadays, people are screwed for new or used cars, thanks to current economic times, fragile supply chain, chip shortage, and price gauging by dealers; especially, “Used Car Dealers” even at the new car dealerships. Best to fix your car with a reliable Independent mechanic shop that you have vetted and wait for the car market to stabilize, if ever.
Finally, hybrids are the only way to go for now, until BEVs become more ubiquitous and battery technology increases, plus more charging stations. Now, it’s only for the rich IMO or maybe soccer moms/dads that only drive the kids around to school, extra curricular lessons and sports.
Getting around in an EV on the West Coast has become much easier – more charging stations and lots of good apps to find/reserve them. But they’re definitely still a niche vehicle for those wealthy enough to own more than one vehicle and/or have solar power/charging stations at home plus ideally also at work. So, much harder in general for renters…….
Above all, I want to trust my car. I want it to start up when I turn the key or press the button, and I want it to run well whenever I need it. My preference for new cars is mainly the result of this need. I guess I view a car the way one might view a spouse. When something goes wrong, it can be major or minor, incidental or chronic. If it is of the major or chronic variety, you tend never to trust it again. If I bought a used car, I would always fear that there was still some major or chronic fault there under the surface that made the original buyer dispose of it. And with a new car, I feel like I can minimize the risk of problems by treating it well and with respect.
Sigh. Nice post, but it made me realize why phasing out the use of individual internal combustion autos is such a challenge in the US. Most of us sure love the ability to drive where we what when we want as quickly as we want. We are slowing getting used to depending on our EV (a used Fiat 500e, arguably the cutest car ever built) for most of our local driving (we live in the country and have solar panels with a Tesla PowerWall), but still own our farm truck, a bare bones Ford F-150 that we bought new in 1994, plus a 2013 VW hybrid Jetta (also bought new) for longer trips. We’ll keep the Ford as long as we live out here but will probably trade the Jetta for a new long-distance EV next year……….
The impending Brownouts may change your mind about that.
As as a differing view.
It sounds like you recently graduated & have made your plans –
I could not find the good UTube clip that I saw 5 yrs back. Seems “X”, another influencer of the day has hijacked* it but I’m sure you get the message it conveys-
https://www.youtube.com/watch?v=Oh6XaCrSGJ8
I’d also suspect you bought your auto at its peak, financed as you mentioned.
https://reneweconomy.com.au/death-spiral-for-cars-by-2030-you-probably-wont-own-one-93626/
I do find this unlikely by 2030.
Trying to sell your education in finance to others “independently w/a website” will likely be more challenging than you think Logan. Recognizing all the currently established providers for better or worse merging or going under.
You might need bonding, different state & federal licensing & fees, etc.
In BOS, 25+yrs ago, anyone managing over 5M was required to have all sorts of extra educational accreditation, licensing & fees.
I suspect you’ll will need to start with an established operation on a contractually agreed upon basis, w/o a contract you can be fired.
Even then your recourse is only a lawsuit that’s usually timely, costly & educational.
There are well established operations like Citi, WellsFargo, Fidelity, Vanguard, JP Morgan-Chase, BofA, Rick Ferri, Schwab, Edelman & every every back on the corner. Consider the many, many mutual advisory firms networking w/ea. other & banks on every corner. etc.
What you seem to think will be a primary income stream seems better suited as a secondary educational backed income stream. (IMO).
I’ve modified this a number times.
This is my opinion, as a HD participant Logan.
Over and out;
Good luck & Best wishes in your pursuits in AZ.
The last few cars we’ve bought have been new and we paid cash (except for one time when the dealer offered 0% financing for the same price as cash—made no sense to me but I took them up on it).
I’m with you on the reliability point, and when you combine new with a make with a reputation for reliability like Honda, Toyota or Subaru, you are about as worry free as possible. The older I get, the less I want to deal with car repairs.
I’m with you and Andrew on this. My wife and I bought new cars recently even though we don’t use them that much. My thought was buy them, take care of them and use them for as long as possible. My wife’s 2015 only had 25k miles and my 2019 (bought in 2018) has 30k. They provide a lot of flexibility and although not the best financial decisions, we paid cash for both and hope to use them for many years into our early retirement.
Last time I bought a new Honda Accord I shopped for both used and new. The used cars didn’t provide much of a discount, so I went with new.
If you take care of your new car, it could easily last 20 years or more.
I’ve never understood the “reliability” argument myself. I’ve never bought a new car in my life and I think I’ve only broken down once in the last 3 decades.
Nate, you’ve either been very lucky or you have the ability to take care of the cars. Or you get rid of them before trouble comes. Whatever the reason, great job!
Haha, thanks for the kudos! Unfortunately I’m not very mechanical so it’s certainly not that one.
We generally buy used cars in the 40,000 to 100,000 range and drive them until they have issues or until the “wheels fall off”, which generally seems to happen sometime in the 200,000 to 300,000 range for modern cars.
Just a cheapskate at heart, I suppose. Good luck!
Regarding the “depreciation is irrelevant” … I tend to buy almost new and yes then keep them a long time … Still rather have someone else eat those first 2 or 3 years
We buy 2 to 3 year old, higher end, low mileage used cars. One owner, well taken care of with documented maintenance history. I get a nicer car than the same priced new one, and the original owner takes the depreciation hit. Scheduled maintenance isn’t rocket science, and frequently there is some original warranty left.
There are a lot of reasons for getting a very cheap used car for your first car. Insurance, taxes and being a terribly inexperienced driver are some of them. Why not let this first car take the scrapes and fender benders newbie unskilled drivers quite often experience. You also neglected to explain why buying a car with cash isn’t possible for many people. One of the biggest reasons is they have gotten on the hedonic treadmill of spending money they can’t afford on luxury items they do not need when they could get “good enough” functionality for much less.
The reliable employee point is well taken. When my daughter was a nursing major some of her clinical rotations were quite a distance from campus. If you were late or didn’t show it was an automatic zero for the day. Since you needed a high GPA to remain in their nursing program , reliability was essential . We bought her a new Camry (paid cash)which we figured she could keep long after graduation. She wasn’t wild about the style , but she appreciated not being in debt after graduating. She drove other students to clinicals and didn’t charge them as she was going there anyway. She also did the responsible thing and bought high liability limits.
If you keep your new car a long time, the depreciation argument is irrelevant. And you should keep it a long time. Cars are now built to last longer than years ago. When I worked in the insurance industry , the actuaries and claims executives all bought new and drove their cars for well over 10 years. The last two cars we have bought were new and we paid cash . I don’t lose sleep over it. Unless you have a business it generally doesn’t make sense to lease. Most people who lease are probably obtaining a car they couldn’t afford otherwise.
People argue in favor of lease, loan or cash for a car all the time. I don’t know the right answer. I bought two new cars in the last several years and paid cash for both. I’m not sure it was a smart move, but I didn’t want a long term payment obligation and leasing makes me feel like I couldn’t afford the car in the first place.
The dealer told me about 70% of the cars he sells are leases and I know that in my condo community a large number of the mostly luxury brands are leased.