As I mentioned in my previous post, I finally relented and bought myself a new car.
I can understand why some of you may be scratching your head at my decision to buy new instead of used. Especially when the playbook of good personal finance habits clearly states — right there on page 31, paragraph 6, subsection 2a — that it’s better to buy a used car that is a couple of years old, thereby letting the original owner take the depreciation hit for driving it off the lot.
So, did I lose my mind? Was this another impulse purchase on my part? Have I suddenly moved to the dark side and become financially irresponsible?
No, no, and no.
Remember, despite the conventional wisdom, there are very few financial rules of thumb that are truly sacrosanct, applying to all people all the time.
After all, that’s why they call it personal finance. What makes sense for me might be completely unreasonable to you, if only because our financial situations are light-years apart.
In my case, there were more than a few reasons why I felt it made perfectly good sense to buy a new car instead of a used one. Here they are, including a few that I covered in my previous post:
My savings accounts are fully funded. I have more than six months of savings in my emergency fund, and my smaller rainy day fund is loaded and ready for the next minor crisis. Meanwhile, I’m continuing to make contributions to my retirement savings, which are also in good shape.
I’ve paid my dues. By driving my last car for well over a decade I was able to save more than $40,000 in car payments. That’s money that helped fund my savings accounts and retirement funds. It’s also a big reason why, today …
I can afford it. As I mentioned in my last post, I could have paid the dealer cash for the vehicle, but I decided to take out an auto loan instead because I got …
Ridiculously cheap financing. There’s a reason why it pays to maintain excellent credit scores — they give you the opportunity to borrow money at the lowest rates. In my case, I was able to secure a car loan at just 1.9% interest. Eventually, I’ll end up paying a little more than $1000 on my note — over five years. By the way, this is a great example of why …
The Fed’s policies reward borrowers (and punish savers). As long as lenders continue to give the money away for a song — and I can afford the payments without impacting my other financial obligations — I’d be crazy not to take it. Especially considering …
The declining value of the dollar. Thanks to the Fed’s relentless money printing, inflation is rapidly eroding the value of the dollar. So much so that it made little sense for me to part with a large amount of cash today when I can be slowly paying off my new car over time with increasingly worthless currency. In the meantime, I can invest my money or spend it elsewhere, while it commands maximum value.
I’ll be keeping the car for at least a decade. Holding my car for at least ten years will help temper those painful depreciation costs I’ll be incurring over the next several years in exchange for the pleasure of driving my very own brand new car.
Hopefully, I’ve convinced you that being financially responsible and buying a new car aren’t necessarily mutually exclusive. The truth is, financially responsible folks can sometimes get away with buying a new car — even though the conventional wisdom says that isn’t the most financially advantageous option.
Ultimately, the “right” decision is going to depend on the state of your personal finances.
Photo Credit: Jerry Huddleston
Dude, there were some people who were pretty bummed in the last comment section. Wow! Either way, you can se why they read your stuff and what their takeaway has been. I even have to admit…if you said you bought a CPOd used car with 10k miles it would have been an easier pill for ALL readers to swallow! That said, you are talking to a guy who owned a Porsche here (and loved every freaking minute of it) until I saw the light. Ultimately, if you have the money to spend…go ahead and spend. I mean, come on. Enjoy the vehicle, man.
Doable Finance says
I strongly think it’s your decision. Besides, folks have problems using credit cards left and right, up and down without having a plan how they would pay the debt. As long as I am conveniently out of debt and I have saved enough, why not give myself some reward.
Congratulations on the purchase! It’s not a splurge if you have taken a real quantitative look at how it affects your budget and are ok with how it’s affected. Enjoy the new ride 🙂
If you are in supreme financial shape, there is absolutely no reason for you not to do this. Especially if you are going to drive it into the ground.
It’s not like you bought a full size pickup or SUV, either. You bought a vehicle with reasonable fuel efficiency and reliability ratings.
When I get to be FI, I may just go out and get myself a gently used Cadillac CTS. As they say, the Brinks truck never follows a hearse…
Michael in SoCal says
Enjoy the new car. They’re getting to be something only a very few will be able to afford in the coming years.
The justifications you present still do not make this a sound decision from a personal finance point of view. The first three reasons boil down to you could afford it, which (as I frequently remind my wife) is not a good reason to make a purchase.
Just admit that you made a sub-optimal personal finance decision. It’s okay. It’s your money and you can buy or not buy whatever you want with it (except of course health care).
Len Penzo says
Thanks, Sean. 🙂
By the way, I did note that the decision was sub-optimal in the previous post.
Bret @ Hope to Prosper says
I have seen a number of articles from so called financial experts who say you should either buy a new car and keep it for ten years or buy a used car and keep it for five. Since you got 16 years out of your last car, I would say you were about due.
I am planning to get an electric car in the next couple of years. I am just waiting for something that has a little more range than the LEAF. I would love to have a BMW i3, but I suspect it will be out of my price range.
Grayson @ Debt Roundup says
I am with you on this one. I think you weighed the pros and cons and make a good decision. This is the same decision I made last year, but I actually leased my car(did I just say that?). I did it because I needed the flexibility that a true car purchase would not have given me.
Len: I am so sorry you did not look to find a car a year or two old out of a lease or repossesion. I will not buy a new car until I am a millionnaire.
I am living proof that a ridiculously huge emergency fund can be gone in a flash. While I am most certain HoneyBee is not the same kind of person my ex was, just remember that unusual things can happen.
I would not want car debt hanging over my head in these uncertain times.
@Spedie: That’s my position – I will not buy a brand new car until 1) I have a net worth of at least $1 million and 2) I can pay cash. It’s not a question of whether I can afford it or not. I can afford to buy lottery tickets but don’t because it’s an unwise financial move. Likewise, I can afford a car payment but will not take on debt regardless of the interest rate. My wife and I have a “car” line item in our budget which is funded every paycheck. When it comes time to purchase a vehicle, the money is there.
Again, I have nothing against brand new cars – we bought our 2003 Honda Odyssey new. I just have resolved to never again finance anything that depreciates faster than I can pay it off.
Like you, I’ve had life throw me a few curve balls before. Three years ago I was unexpectedly laid off from my job and was unemployed for several months. With no debt (other than mortgage) and a fully funded emergency fund, we were able to ride out the storm relatively unaffected. In fact, by making some minor adjustments to the budget, we barely dipped into the emergency fund!
Len Penzo says
Spedie: I’ve now got a car debt, but I’m not really in debt, if you know what I mean. I’ve got the money to pay the car off at any time.
If I paid $23,000 cash for a two-year-old Accord, that money wouldn’t be available to help me if I got struck by a huge emergency either.
In my case, if I get struck my a huge emergency, my cash cushion to pay the car off in full if I so desired may be wiped out, but at least I’ll still be able to cover the loan on a month to month basis. Well, unless the emergency I run into is truly catastrophic, in which case it wouldn’t have mattered which path I took.
Len, I’m with you on this one. Last year (July 2012) when I found out my family would be expanding (which it did this past February) for the second time in 2 years we started looking for a mini-van (ugh!, right?). Prices were ludicrously high. So I’m wandering on the lot and see a NEW 2011 Nissan Quest. Long story short – buy the van, get 1.9% (like free money), the wifey’s happy. Look up Kelley Blue Book value for a CPO with 10k miles (I have fewer) — I paid less than that PLUS got an extra 40% above KBB for my trade because “everyone should buy a used car to save money” and the dealers want used cars on the lot. Bottom line — wifey got her new car and I could drive it on to a Nissan lot TODAY and sell it for what I PAID for it. Being fiscally responsible is not about “following the playbook”, it’s about getting the most value out of your resources.
Len Penzo says
Good for you, Paladin.
For what it’s worth, according to the Kelley Blue Book, a 2011 Honda Accord in excellent condition with the same trim as my brand new one is going for $22,380 — which was only $8000 less than what I ultimately got my 2013 for.
One way to look at it is that, I paid an $8000 premium for a car that is two years newer, with 24,000 fewer miles on it.
For people with limited resources — and even folks with high incomes who are on a tight budget — I don’t think that’s a very smart financial move.
Paul N says
I have 4 cars and a motorcycle and even one “project car” in my garage. There all used, so it’s ok. 🙂 I’m not going to pick on you for having one new one. I enjoy cars and fixing on weekends as a hobby, so it’s a little different for me. Plus because some of the cars are older I qualify for really cheap full coverage insurance. Kind of balances out the fact they use more gas.
There is nothing wrong with enjoying a nice new car and the years of research and technology that make them what they are today. The point is not putting yourself in debt when you lie to yourself and say you need to drop $30K that you don’t have on a new car vs. $6K on a really decent 5-6 year old quality, fuel efficient used car.
You have to know when you can make a luxury purchase and not spoil your overall financial plan.
Enjoy… that’s a fantastic pick. If you take care of that car you can easily put 3 or 4 hundred thousand K on that car with little to no problems. You just have to take care of the basics. So your cost per year for your choice is not at all expensive, no reason to feel any guilt.
Todd W says
From some of these comments you’d think Len had drowned a puppy rather than bought a new car! A few things:
-Depreciation is not what it once was: you cannot buy a three-year old, 36k mile $30k Accord for $15k. Cars last longer, and thus depreciate less rapidly.
-the 2013 Accord is new; you cannot get the current updates and revisions on a used model beause they flat out don’t exist.
-I don’t like making blanket statements but will do so here: people who pay cash for a car when they can get 5 year, 1.9% financing are STUPID. Stick the difference in a no-load S&P 500 fund and you’ll be miles ahead with even a piddly 5% average return. This knee-jerk aversion to all forms of debt is primal and doesn’t hold up under reasonable scrutiny.
-It’s an Accord! I fail to see a well-equipped Accord as an extravagance for someone of Len’s age, income, and financial situation.
-It contributes to quality-of-life. He didn’t NEED a new car, but people don’t need vacations or christmas gifts, either. If you have a solid financial plan and are careful with your money, why shoudn’t you buy “wants” with the extra? If they incentivize you to work harder and live happier, all the better.
In closing: just because buying a new car isn’t right for you, doesn’t mean it’s NEVER right and makes no sense for someone else.
So let me see if I’ve got this straight:
There are no universal principles of personal finance, yet only stupid people pay cash for a car.
Ah, jese. Just enjoy it! Your justifications are sound. If ya wanna pay it off tomorrow, go ahead. But, in the interim (while it still smells new), allow yourself to sneak down to the garage at 3 am in your undershorts and LOVE. Sooner or later someone’s gonna ding that thing and it’s all over.
I want to add to my last post, that I at first looked at used cars and found that they were really expensive considering everything and I wasn’t too crazy about what was available. Plus, trying to find the perfect used car involves a lot of time- driving to and from dealers and private sellers, and I don’t have that kind of time. Like yourself I have a nice emergency fund, retirement fund, investments, etc. so when I inherited the money I felt it would be ok to buy new. We intend to keep this car for a very long time…
Sorry, you haven’t convinced me to have car debt. Buy the car because you can afford it? Sure. I do not believe in “good” debt. All debt is bad debt. Yes, even my mortgage, which is my only debt outside of the usual life expenses (utilities, insurance, etc). I don’t understand the idea of borrowing when you could have paid for it. Guess I’m too stupid to see the “good” part of owing money to anybody especially when you could have paid for it. 🙂
Suzanne @ Advisor Business Coach says
You got me on “declining value of the dollar”. Yes, you deserve a new car because you are in great shape! I usually keep my cars 10 years which is why I tend to buy new (in the past). I don’t drive that much (especially in the hot Arizona summers) so it makes no sense for me to have an expensive new car. I will go used next time around.
I wouldn’t make payments on a car because I view it as a “Lost Opportunity.” If someone is having to make say a $500 payment for 60 long months, regardless of the interest rate, if they want to use that same $500 monthly payment for something else, they can’t! Sometimes it can keep a person stuck in a job too that they might not want. 60 long months of car payments and you still have to do repairs and buy new tires, etc. and so for me, I won’t let my ego get in my way. You could pay it off, I get it, but would you? No, too scared. If the car wasn’t as fancy, but 1/4 of the cost, would you? Probably. Just saying, to justify making 5 years of payments due to a low interest rate doesn’t make sense to me. Sorry.
Len Penzo says
I agree with you 100%, Sandy, assuming you don’t already have the money to pay for the car in full.
But if you do have all the money at your disposal, when interest rates are so low that the banks are practically giving the money away — and the rate of inflation is higher than the interest rate of the loan — then the real loss of opportunity results by immediately giving your money over to the bank all at once.
Frugal Pediatrician says
I am surprised too that Len financed it too. But by all means enjoy it! That car is not unreasonable. I have an 11 year old rav4 with 120,000 that I am going to hand down, and will get a ford cmax but will pay cash. Len, did you consider a more fuel efficient car?
Len Penzo says
Well, after driving my 97 Civic (which still gets me between 36 – 40 mpg on mostly highway driving), finding a car that was going to be more fuel efficient wasn’t really in the cards considering that I wanted to get a larger, more comfortable vehicle. My target was 30 mpg (highway).
I did briefly consider getting the Accord 4-cylinder instead of the V6, but 85% of the miles I put on my car are highway miles and the fuel economy difference between the V6 and i4 was surprisingly small (36 mpg hwy for the i4 vs. 34 mpg hwy for the V6). After I did a little research on the Honda forums, most drivers were confirming those numbers. So for me it made sense to go with the added engine performance and smoothness, and additional features that came with the V6.
I averaged 29.5 mpg for my most recent tank of gas (15% city driving) — and I expect that number to improve as the engine gets broken in.
Oh, and for what it’s worth, the 2013 Accord’s city driving fuel economy gap is wider and significantly lower than the highway numbers (27 mpg for the i4 vs. 21 mpg for the V6).
Congrats on the new car! I don’t know why people are falling over in shock that you bought a new car. It’s your money and like you said, it’s “personal finance” and that’s a personal decision of yours. I like all your reasons as well, especially about paying for a car with increasingly worthless money. Spot on dude!
Joe @ Retire By 40 says
We got a new car when we changed vehicle last time too. I want all the latest safety features because we just had a kid. The car we purchased were at the end of model life and had a big discount. There wasn’t much discount buying used.
I see a lot of vagueness and feelings here, not a lot of hard numbers. Everybody splurges to some degree (going out for meals is splurging for someone with a low net worth). I want to see some numbers. Personally, I won’t have more than 10% of my investable assets in something that is depreciating.
You are also giving dangerous debt advice on a questionable premise. Your feeling that there will be hyperinflation that will eat away at your debt is not a given. What secrets are you privy to that the market is not (the market is predicting about the inflation rate the Fed is targeting)? Can you explain why Japan has so much debt and no inflation? Why haven’t we had any inflation yet if money is supposedly so easy? Why is it still hard to get my hands on this easy money(i.e. how can inflation be sustainable if there’s no WAGE inflation)?
This can be a big internal battle for people. Buy new or used? I believe it all depends on personal finances. It is always good to buy what you can comfortably afford. If you save and budget for a new car, it is always nice to get something that you want. Do not just go and buy on a whim, that is where people get in financial trouble.
Adding my two cents here: my mom paid cash for a NEW 1993 Volvo station wagon in 1994 and drove it until this past August (hello, 19 years). During that time, she saved what she WOULD have been paying for a car payment – and then just kept saving it, right up until my dad told her he wasn’t fixing her car anymore. She had done her research and THAT WEEKEND, paid cash for a NEW 2012 Subaru Outback. She has great credit but still paid cash, and she feels better about that decision. The kicker is that she’ll probably keep this car for just as long – and she’s saving for a new car again, just like she did before. Also: she got a HUGE kick out of the reaction of her co-workers when they found out she dropped $30k on a new car (and therefore they had to stop ribbing her about the paint peeling off of her car).
So the moral of this long-winded bunch of words is that I applaud you for being in a place where you can buy a new car. They’re FUN.
I’m a Finance major and I don’t agree with your “borrow instead of pay cash” choice, but I UNDERSTAND IT. Some people (like my mom) want that peace of mind knowing that the car is theirs with absolutely nothing getting in the way, and some people would rather the money sit in their bank account until it absolutely has to leave.
For the record: I’m 20 years old, I drive an ’86 Ford Tempo that my dad bought from a neighbor and then, you know, made it run. That car is the absolute love of my life and knowing that I’m next in line for a new car makes me sad. My tempo doesn’t have all the safety features (despite being a lovely hunk of metal) and also isn’t as reliable as I need. So no – I didn’t get a shiny, new, expensive car the day I turned 16. (: