Looking to Buy a New Car? Are you Crazy?
| By Jacob Inman | Category: Career and Personal Finance
Photo by ToyotaUSA
Advertisers are great at making us believe that we “need” their product and that it will ultimately bring happiness and life fulfillment. Car manufacturers are especially known for selling their brand based on the emotional response derived from driving a certain make or model. Who can blame them? It’s a great feeling to sit behind the wheel of a brand-new car. It brings about a feeling of power, excitement, and enjoyment…at least for a short time.
Obviously, some form of transportation is necessary whether it be a bicycle, bus, subway, or automobile. All are relatively adept at moving us from point A to point B albeit through slightly different means, and with varying degrees of effort. It is the automobile, however, that has taken on a much more powerful function. Society, through its demands for improved power, luxury, and beauty, has turned the automobile into a symbol of status – a hunk of metal that is supposed to define who we are as a person.
I’ve done it three times – buy a new car that is. In all instances, my purchase was fueled by impulse and emotion. I was excited at the thought of a “step up” in my socioeconomic status, and that others may think of me in a more positive light. I was sure that, with each purchase, beautiful women would be within arms reach and the world would be at my fingertips.
I’m sure there are others out there who have made similar decisions using quite the same reasoning. In fact, I know of several individuals who value their new car more than most other relationships in their lives. Most interestingly, I find that those who feel the need to purchase extravagant automobiles as a means of increasing their status are the ones who are least able to afford such a major expense.
You may ask, “But isn’t the purchase of a new car an investment?” After all, you need a car for transportation and will have a tangible asset to show for the money you’ve spent. If you want to think of a car as an investment, fine – it’s just not a very good one. For example, would you pay $47,000 for something that costs $40,000 and is worth only $18,000 five years from now? Well, this is a very real scenario for someone who chooses to purchase (and finance) a $40,000 automobile.
Here’s another way to look at it. Assume you are a 35-year old who owns a 5-year old car in good condition, worth $10,000 that you have just finished paying off. The car should easily last you five more years before you start to incur major repair bills. At this point, you can choose to keep this car, or purchase the newly-released luxury model that costs $40,000.
What to do? Most opt to purchase the new model by rationalizing the fact that they have just “freed-up” cash in the form of the monthly payment they were making on the old car. The wise choice, however, would be to hold onto your current car and invest the amount of your increased cash flow.
If the person in this example were to follow such advice and invest the would-be monthly payment ($578 assuming a 5.9% loan interest rate and 60 months of payments) receiving a 5% interest rate, they would have a cash balance of $39,348 at the end of the five years. Of course, the current used car would need to be replaced in five years at a cost of $18,000. All considered, this wise man would end up with over $21,000 in the bank and a nice used car after 5 years.
Compare this to the not-so-wise man who decides to purchase the new car. His monthly outlay would be the same ($578 in the form of a car payment to the bank), but after 5 years would have amassed a savings of $0 and would have a nice used car worth $18,000.
The decision to not purchase the new car would result in a net gain to this individual of over $21,000! It’s also interesting to note that at the end of this 5-year period, you’re right back where you started – you have a 5-year old car in good condition that is paid off. What decision are you going to make this time?
Keep your current car
Savings after 5 years - $39,348
Purchase used car after 5 years - $(18,000)
Net savings balance- $21,348
Buy the new car
Savings after 5 years – $0 (money went to car payments instead!)
Purchase used car after 5 years – $0 (you already have a used car at this point)
Net savings balance - $0
It’s hard to fight the emotional response we feel when discussing the potential purchase of a new car. To some, wasted money isn’t enough to hold them back from obtaining the symbol of status they so desire. Maybe they have so much money they don’t know what to do with it. Maybe not.
I know for me, a car has become less of a status symbol and more of a commodity. It gets my family and me from point A to point B. It’s just unfortunate that it took me this long to come to this conclusion. After thinking about the financial impact my past decisions have made, I look forward to driving my “clunker” around town each day!
Related Posts
No related posts found
Loading ...
You would not believe the pressure from other customers and agents when I was in Real Estate to buy a newer car!
Why don’t you get a mini-van with a drivers side passenger side door? Buy one with TV’s to keep the kids busy while driving around clients…etc.
I was able to pay off my mini-van early, thus saving myself thousands of dollars in interest payments. Then afraid my illness would cause me to soon become totally disabled and not be able to work, (which it soon did) I did not want to incur any more debt I might not be able to pay off. Like you said, I would rather save the “payments” to either purchase with cash, or have the money I was able to save for when we needed it for an emergency or other more important things like my childs higher education.
No, I don’t have a fancy car with GPS, TV’s, Drivers side sliding passenger doors, satilite radio, heated seats, etc.
But, I am financially stable after becoming disabled and unable to work We even bought a new house that is handicapped accessible, and able to send my last child off to college. It could have been disasterous if I had spent to keep up with the “Jones” or tried to portray myself as a “Top Agent” with a luxery car, etc.
But, my family and our future was much more important than trying to show off my status. My car was in perfect condition inside and out. I can say now that even in these horrible economic times, we were able to survive, buy a home, send a child to college after loosing my job because of my illness all without even getting disability….yet! How many folks can say that these days?
I love my older “goober mobile” (which the kids call it) and I do not plan to buy another until I can pay for it outright and it is a car I desire the most which is one that is best for our enviroment. I already have an electric scooter coming which Papa will be taking back and forth to work. And when I get my settlement, I can pay outright for a more green car and be able to have enough for savings, emergencies, and my kids. Until then, my “goober mobile” is in perfect shape, still looks great and will serve its purpose for many more years to come without costing me except for upkeep.
We even have 2 cars. Both paid for outright. We are now able to give one to our son who needs it most while attending college in a state a thousand miles away, which he only needs to pay upkeep on. He learned a lot about saving and spending wisely. He is going to look into selling it and buying an electric scooter himself when he gets back to school. And since it is a popular model car in great shape, I am sure he will have no problems.
This is a great article. One I hope many people will learn from. Cars are not here to show others your “status” in this world they are only here to show us how intellegent you are when it comes to making sure you are financially sound.
Good article Jacob!
I too have purchased a few cars and the novelty of a new car eventually wears off. It is a nicet feeling to get behind the wheel of a car you really wanted though. I guess the key is paying off the car(s) and trying to get a few years outta them after that point. Thanks for your breakdown of the finances to keep your current car vs buying a new car. My next car will probably be an older model car that costs $10,000 or less. Thanks.
Can I count this last statement as being “in writing,” Trey?
Love,
Your Wife
New car finances definitely add up. I try to get a car no newer than two years.
WIth higher oil prices and plenty of people getting laid off. Think twice before buying a new car. Buy only when you really need it.
I totally agree with this article. Especially living in Singapore, where merely owning a car requires a certificate that costs several thousands dollars, parking is really expensive, and even driving into certain popular parts of Singapore is discouraged by charging you several bucks as you pass through a gantry. If you think about it, public transport is so much cheaper, and though it’s slightly more inconvenient, you do get to exercise more (all that walking around during transit, to/from the train station, standing on buses etc). Even on the days when you’re tired, you can always catch a cab, which is still reasonably priced compared to a car, and you get the benefit of someone chauffeuring you around
Though I never purchased a car newer than 15 years old, my guy made the mistake of buying a new car last year. He has never purchased a used car before, (though he’s been driving for 34 years) but with some research, he learned that he could have gotten the same car CPO a few months later for much less. You live and learn.
i know some people here that go “gaga” with their cars and they even buy time by time accesories for it just to boast on others!… never realizing what they are missing…
its nice that this article gave some suggestion whther to buy a car or not… this will really open the minds of those impulsive car buyers…
Nice article, hopefully will make people who waste their money just for their status is aware, about fact that buying a new car is just giving temporary happiness and in the end it’s become you burden because you have no net saving balance.
I don’t like people like that since the past, there is many more important thing than buying a new car, especially if their purpose is just for status. And also, new car mean new polution added.
[...] 9. Because advertising just makes you spend aimlessly. [...]
Hey Jacob great article, I really appreciated the work you have done.
As we all know about global warming I personally think that all people should take it seriously & buy new car when & only when they really need it don’t buy new car for status.
people will think that just by not buying new car global warming is not going to stop, Ya it will not stop completely but this is one step against global warming. I think every one should think seriously of this one step then one day we will definitely finish the global warming step by step.