7 THINGS I LEARNED BUYING MY FIRST CAR (with cash!)
In the world of personal finance, one often witnesses individuals making impulsive decisions when it comes to buying cars. The allure of shiny new vehicles and the thrill of driving off the lot often overshadows the financial realities that follow. In this blog post, we'll delve into how I took a different approach to buying a car and what I've learned along the way.
The Reality of Car Ownership:
Let's face it; cars are not investments in the traditional sense. Unlike real estate or stocks, cars depreciate in value over time. The minute you drive a brand new car off the lot, it loses a significant portion of its value. This depreciation continues over the years, making cars a depreciating asset. Understanding this fundamental aspect of car ownership is essential in making sound financial decisions.
In June of 2019 I made one of my first "big girl" decisions and purchases. That was my used 2013 Rav4 vehicle, that I bought with CASH!
After I paid off my student loan debt, I knew the next thing coming was buying a car, because the 2001 car I was previously driving was on its last leg. So I started car shopping! Online I did some research & found the car I wanted, I found a 2017 make & model that was looking pretty nice. I thought to myself- without my student loans, this car payment will be easy! I can easily get a loan through my bank, or maybe through the dealership (relatable, right?)... I started thinking I need to do my research to know which route is gonna get me the lowest interest rate, I'm smart and prepared for doing this research!
As I continued to educate myself on the world of personal finance, I quickly realized that I might be better off down the road financially if I changed the current mindset I had regarding purchasing a car.
I realized that maybe I should challenge the status quo by justifying a car loan with the fact that everyone has a car payment and that it's normal..
Here's what I've learned:
Avoid determining your budget with the question of "what is the maximum monthly payment I can afford?"
Instead of absentmindedly taking out a loan, I quickly realized that I might actually be able to buy something used, with the cash that I've been saving for a car. Of course, this brought my budget from upwards of $20k down to around $10k... which was a lot more realistic for me, and would allow me to actually remain debt free!
So often we think about everything in monthly payment mindset, instead of the total picture, and that approach is what is unfortunately allow many of us to live beyond our means, until we often come to a breaking point of "how did I get here?"
Depreciation makes buying a car one of the worst investments we ever make
Cars are what we call a depreciating asset, meaning unlike investing in the stock market or real estate, which value increases with time, a cars value decreases with time. A brand new car will depreciate the minute you drive off the car lot! According to CarFax.com, a brand new car will lose roughly 10% of its value in the first month after your drive it off the lot... and it just continues to lose value over time.
Of course the car market fluctuates over time and some times cars don't lose value as quickly.. but either way over the long run, as we continue to drive our cars and they age, they become worth less.
So maybe a car isn't the best investment, but the reality is that many of us need a vehicle to get to and from work, go to the grocery store, etc. So how do we minimize the financial burden of buying a car?
Here is my experience of trying to do just that:
1. BUY USED NOT NEW (or a couple years old)
Buying used, allows someone else to eat all that depreciation and not you! Now this concept is a lot easier said than done. Buying a car can be very exciting and unfortunately our emotions can easily take over, allowing our budget to slowly creep upwards. Buying a used car can be scary, because we don't want something that is going to require a lot of maintenance or break down on us! So you have to be sure to do your due diligence during this process, and be patient.
2. Consider buying from a private party / owner
You'll often find a much better deal, if you are able to find a car that you'd like to purchase from a private party rather than a dealership. A private party simply means buying a car from an individual out there who has posted it for sale on their own, rather than using a dealership. You can find private party cars for sales on websites like CraigsList and AutoTrader. Many people may immediately think of the risk buying from a private party like not having proper inspection. While this is a risk, there are ways to address this risk, like taking the car you are interested in to be assessed and looked at before purchasing & reviewing the VIN number to see the cars history regarding accidents, etc. Buying private removes all the stresses from car salesmen & pressure that comes with a dealership, not to mention all the hidden and additional fees you incur when purchasing at a dealership.
3. Negotiate
Always, always, ALWAYS negotiate. If you are not convinced to be patient and find something you like from a private seller, at least make sure you are negotiating at the dealership. No matter where you are buying- dealership or private- you should negotiate. I've learned that although you may feel uncomfortable at first with negotiating, the literal worst outcome is that they tell you no! Do your research, be knowledgable about the car & come prepared to negotiate. In my recent car purchase from a private owner, I was able to negotiate 16% off the purchase price.
4. Drive the car for as long as it will live
So many people, ALWAYS have a car payment. This is because the minute they pay off their car, typically about 5 years after purchase, they are ready to upgrade again and "need" a new car.
If you were to instead invest $500 as a tradeoff for continuing your old vehicle instead of upgrading, after 10 years that could be $95k, and allowing that money to compound for another 20 years, could bring you to $639k! Quite the opportunity cost.
5. Recognize the other expenses that come with the purchase of a vehicle.
It's easy to forget the rest of the expenses that come along with being a car owner. Insurance, vehicle registration, fuel, maintenance, etc. Almost all of which are more expensive, the more expensive our car is. So once again, make sure you are looking at the total picture when making this big decision!
Buying a car is a big deal, and it's an exciting accomplishment - make sure that you are not getting swept up in the emotions of it and make a decision that aligns with your values and allows you to continue to live within your means & build wealth!
news articles referenced in this post: https://www.usatoday.com/story/money/cars/2019/03/01/care-payments/3001818002/https://www.carfax.com/blog/car-depreciation
