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
New Car:
$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
Used Car:
$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
I’m speechless.
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?
I enjoyed this post because I grappled with the same thing myself. Nearly found myself rolling around in a Porsche – not very frugal at all!
I always use mind games like these to try and keep my spending down. Thinking about the value of money if it were invested well over a lifetime manages to prevent a few (seemingly) frivolous purchases.
Just try not to beat yourself up too much. If your worst money mistake thus far is buying a sweet looking ride in your 20s it sounds like you’re probably not doing too badly at all. Enjoy the ride and kill off the car loan!
That’s a great idea with the mind games! Especially when it’s a bigger type purchase having the visualization of the purchase in one hand, and all the extra invested money in the other probably works wonders.
I’ll knock out this loan soon enough. Thanks for reading!
Interesting post. I bought a new 2016 Kia Optima a little over a year ago. I’d have to look up the actual numbers, but the price I paid was something like $18,500 (before taxes and fees). The MSRP was around $22,500 if I remember correctly and I used truecar.com to get my “discounted” price. After taxes and fees, it came to around $24K. I put down $10K from the sale of my previous car and an additional $3K, so I financed around $11K on a five year loan at 2.39%. All told, I thought that was a pretty good deal and it came out to a payment of around $200 a month with around $750 in interest to be paid over the five years.
Last year I was so determined to pay it off early that I actually did that by November. I paid an extra $1K a month on top of the scheduled monthly payment, beginning in March or April of last year. As I was making my budget for this year, I analyzed my spending from last year and realized that I probably made a mistake. Sure, it’s great to pay off the loan early and pay as little interest as possible, but I could have put that extra money (around $8-9K) into my investments during a roaring year for the stock market. In the end, I cost myself those future returns to save around $600-650 in interest immediately. Not quite worth it, haha.
But it’s too late to fix that now. You live and you learn and it’s not all bad. I now fully own the car and it only has a little over 11,000 miles on it as of today. I guess I could always sell it in the next few years while it still has a good resale value and downsize to a less expensive car (maybe used) and take the profit and invest it. But I’m happy with the car and I think I’ll drive it for the next 10-15 years until whenever it wears out and/or isn’t worth the maintenance. By doing that, I’ll save by not having a car payment in my budget for that entire time.
Congrats on paying off the car way early!
Great point though, nothing you can do about it now so definitely good to learn from it.
I personally think now that it’s all paid off it’s probably just worth it to keep it for the next 10-15 years like you said. Nothing wrong with having a nice reliable car to get you around, plus the near future costs should be minimal as it’s so new.
I lived here for about two years without a car (my roommate had one, so she was my Costco/hiking lifeline) because I didn’t need one. And I still don’t NEED one, even though it’s mighty handy to have one, especially since I can visit my parents without being beholden to bus schedules and ticket prices. But now I own one, which is obviously costing me money—thank goodness it was a gift from my parents! There’s no way I would’ve been able to afford a car (even a cheap used one) plus all of the associated expenses otherwise. The even better thing is that it’s an old car with a bunch of miles (and dents so I don’t tend to worry too much about any new cosmetic issues) and yep, I plan on driving it into the ground. But also I LOVE the car which means my standards for vehicles I’m willing to own/drive are pretty low haha.
As far as your car mistake, it wasn’t the worst one you could’ve made (and at least it was slightly used so you didn’t take the hit on the immediate depreciation!). At least you know better now and you’re in a great place to pay off your loan 🙂
That’s clutch you had a roommate to help drive you around when needed! But I agree having a car is just so much more convenient and your parents gifting you their old one is even better!
I know it’s not the end of the world, but just one of those things where I wish I had known about FI sooner!
On the other hand I do really like my car and would be totally happy to keep it for the rest of its lifespan 😄
10-15 more years seems more than reasonable, consider I plan on keeping my 2008 Toyota for at least that much longer 😉 The one piece of this I’d argue with is that the dealership wouldn’t give you a loan on such an old car, so you’d have a higher interest rate if you hadn’t been able to pay cash. But then again, I paid straight cash for my first car ($3500), so you might have been able to wait just a little bit longer and pay for one outright.
That’s a good point, I hadn’t thought about the higher interest rate. Just did the quick math and at a 5% interest rate it’d be an extra $100 over the year so not terrible but definitely would need to be considered.
I also just looked back at my cash totals at that time and I definitely could’ve just paid for it all at once had I gone that route haha 🤦♂️
Whoops… well, you live and you learn. Better to have the money go to the newer car though that have it disappear in restaurant tabs at least?