With dealer incentive programs and 0% interest deals, car dealers are constantly trying to sell new cars. That's fine, someone needs to buy new cars. However, the wealthy know that you should never buy a new car. Find out why.
What Do the Wealthy Know that You Don't
The wealthy know that you should never buy a new car. They let someone else take the depreciation on the new vehicle. Personally I buy a car and drive it until the wheels fall off.
Warren Buffet's car was a 2001 Lincoln Town Car. He now drives a new Cadillac. Of course when you're the richest man in the world you can bend the rules. The Millionaire Next Door also documents the fact that most millionaires drive older or used automobiles.
However, don't get the impression that these millionaires drive crappy cars. In fact the wealthy know how to get a bargain. They also look for value.
Both of my current vehicles were acquired below book value from a friend in the car business. Both vehicles were equipped with all the extras (upgraded sound system, leather, heated seats, etc).
I've created a list of the top reasons you shouldn't buy a new car.
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Depreciation
As soon as you drive your new vehicle off the lot, the vehicle loses its value. Vehicles depreciate rapidly during the first few years. Why take an automatic loss when you don't have to? Any person with a business oriented mind can see this is a bad idea.
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Higher Insurance Premiums
When you take out a loan to buy a new vehicle your lender will require you to carry full coverage. Of course, if you're driving around $40,000 vehicle you should have full coverage anyway.
Insurance is much more expensive on newer vehicles. Obviously it will cost more to replace a new more expensive vehicle than less expensive older model.
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Opportunity Cost
When you spend your money on one thing, you can't buy something else with it. This is what economists call opportunity cost. If you're rolling around in a $50,000 vehicle, that's $50,000 you could have invested in the stock market or just kept in savings. I know I'd rather make a small 3.5% return than 0.
However, most people aren't even doing that. They're going backwards because they owe money and have to make a car payment.
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Car Payments
Who in their right mind wants a car payment? There is no reason why an adult with decent income and even a modest education would choose to make a car payment. If you can't pay cash, you can't afford to drive it.
I've never had a car payment and I never will. I pay cash for every vehicle. It's amazing how much money you can save and invest when you don't have a car (or mortgage) payment to make every month.
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Stuff Disease
I've discovered a new syndrome. I call it stuff disease. Have you ever had a friend who's just purchased a new vehicle? They are so careful with it and so obsessed with their new love, they go a little nuts. They worry about ever little scratch and ding. They have to park in the spot farthest away in the parking lot so nobody dings their new toy.
It's rather childish when you think about it. Do you own your stuff or does your stuff own you? Personally, I don't like driving around an expensive vehicle. I don't want to have to worry about my car or any of my possessions for that matter. I own them, they don't own me.
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Comments
3 Comments so far
Good article. I personally believe that you shouldn't borrow money to purchase depreciating assets if you are trying to grow your net worth or become wealthy.
[...] quite frugal. I don't purchase new vehicles. I buy used cars and I pay [...]
I disagree with this article in part. I bought a brand new car, paid it off, and I will drive it till the wheels fall off. I will keep this car for 15 or 20 years. I've already had it for ten years. Then I will buy a brand new car when this one goes, or when the repairs just get way out of control. I don't ever want used cars again, I've had enough of them over the years. I don't care if it's 1 year old, with 15,000 miles on it with a waranty. I'm treating myself to something brand new again, when the time comes. The main idea is to drive your old car as long as possible, so you can save for your next car purchase.