One of the bigger money mistakes I’ve made so far in my (relatively) short career?
Aside from my massive emergency fund, buying my nice new(ish) car nearly three years ago has to be near the top.
Tell me if you’ve heard this story before:
My $20,000 car
Straight out of college my parents lent me their old backup car for a few months.
I was very lucky as this allowed me to save up for a small down payment on my eventual car purchase.
When the time came to give my parents back their car, I had worked out that I could comfortably afford a $300/month car payment in my budget.
With about $2,500 saved up for a down payment, and assuming a 5 year loan, this put me in the range of a $20,000 car.
When I walked out of the dealership with my lightly used, one year old 2014 Ford Fusion (this was in 2015) at a 1.9% interest rate, I remember thinking I had just gotten a steal.
A couple of my friends had just bought some pretty nice cars in the $25K-$35K range.
As my car looked really nice (in my opinion!) and getting it for less than what my friends had paid made me think I was some kind of genius!
Not knowing any better, I figured a 5 year car loan was just something that everyone had to go through.
In my infinite wisdom back then, I projected I’d have the car 5-7 years, then eventually trade it in when I wanted to upgrade to something “nicer” and get another 5 year loan to pay for it.
How wrong I was! And it certainly has cost me.
The $6,000 car I should’ve got
Above is a picture of the type of car I should’ve got.
Older, used, and most important: low cost!
As this picture was recent (found it over the weekend), I’m sure back in 2015 I wouldn’t have had any trouble finding a similarly priced 2008-2009 Ford Fusion with about 100,000 miles on it.
$6,000 vs $20,000. The choice seems so obvious now!
With my $2,500 down payment and $300/month payment I would have paid this car off in less than a year.
1 year instead of 5!!
Sure, older cars will bring more maintenance costs with them, but $14,000 worth? I don’t think so.
Say you assume $1,000/year of maintenance costs for the used car, and maybe $200/year for my newer car.
Over the 5 years of my original car loan, how much in savings does that lead to? Let’s add it up:
Savings Buying New vs Used
$20,000 purchase price ($2,500 down payment, $17,500 5 year loan)
$1,000 interest from 5 year 1.9% loan
$1,000 maintenance over 5 years ($200/year – probably a low estimate)
Total Expenses New Car: $22,000
$6,000 purchase price ($2,500 down payment, $3,500 1 year loan)
$0 interest (slight interest (maybe $20-$30) from 1 year loan but negligible in this case)
$5,000 maintenance over 5 years ($1,000/year – high end of estimate)
Total Expenses Used Car: $11,000
Straight Savings from New vs Used Car: $11,000
$11,000!! That’s a crazy amount of money to be saving in a 4 year period (after the used car was paid off) just from a car!
However, even $11,000 doesn’t tell the whole story.
It doesn’t take into account if I had invested those savings.
How Much my $20,000 car ACTUALLY cost
Dividing the $11,000 by 4 years, would give me an additional $2,750 each year.
As you know, I already had plenty of Cash on hand at this time, so this money could’ve gone straight to investments.
Assuming I would’ve invested $2,750 at the end of each of the 4 years, and held it for roughly 40 years (I’d be 65 – traditional retirement age), compound interest would work it’s magic.
Anyone want to take a guess as to how much it’d be worth?
Well, assuming an average 7% return, that $11,000 of investments would turn into about $149,000.
I’m a little more conservative with my projections and usually assume a 5% average return. This would turn into about $72,000.
So, how much did my $20,000 car actually cost?
$20,000 (price) +$1,000 (interest) + 1,000 (maintenance) + $72,000 (opportunity cost) = $94,000
Had the car came with a $94,000 price tag there’s no chance I would’ve bought it.
And yet here I stand!
With about two years left to pay off the car, it would be tough to sell for a high enough value and subsequently find a valuable enough car to make it worth it.
Thus, I continue to make the payments, and will likely pay it off early sometime next year.
To get the most value out of it, and try to recoup some of my costs, I will be keeping this car as long as I can!
I’m hoping for 10-15 more years, though I have no idea if that’s way too optimistic or not.
Final lesson for those thinking of buying a brand new, expensive car:
Don’t be like me; don’t buy a $94,000 car.
Anyone else purchase a way too expensive car when they were younger?