To Buy a Car or to Not Buy a Car

I have long argued that one of the financial banes (wastes) of the middle class is the cost of cars. More pointedly, the issue of replacing cars. I know that I’m stepping on the feet of people who like to have a new car every 3 years or so. However, frankly, that is a very expensive way to manage your car dealings. I would suggest to you that keeping a car for say 10 years (and just about any decent car made nowadays will last at least that long) will save you a lot of money as compared to say a 3 or 4 year turnover. But, let’s assume for the moment you’ve done what I just said, and now it’s 10 years that you have a car and you’re contemplating its replacement. Do you replace it?

This article will provide a numerical exercise about whether it makes sense to replace an otherwise good 10 year old car. Let’s assume for this purpose you have a car that is 10 years old, with 100,000 miles on it. There is no loan, the car is worth $10,000 on the used car market, and you’re pretty sure you could get another 10 years out of this car – but it will cost you an increasing amount starting at about $2,000 a year and going up to $3,000 a year as the years go along, to maintain the car. Let’s further assume that your use of money carries with it a 5% ROI; that a new car would cost you $60,000; or alternatively you could buy a “slightly” used car that would cost you $30,000. And, in all cases, we’re looking at a 10-year horizon going forward. 

Further assume that the new car at $60,000 would have a value of $10,000 after 10 years; its maintenance cost for years 1 - 3 would be zero; years 4 & 5 at $500; years 6 & 7 at $750; and years 8 – 10 at $1,000. Or, if instead you were to buy a $30,000 used car, after 10 years it would be worth $5,000; maintenance for years 1 – 5 would be $1,000; years 6 & 7 at $1,500; and years 8 – 10 at $2,000 per year. Also assume that in terms of auto insurance, a new car would cost you $500 a year more than your current car; and another used car (of more recent vintage) would cost you an extra $300 a year in insurance. You will notice we’re ignoring for this purpose various intangibles such as the pleasure of having a new car, and we’re further assuming there are no safety type issues. 

With the above assumptions, let’s lay out the cost issues.

• Keeping the existing car. It’s now worth $10,000, and after 10 years we’re assuming it will be worth nothing. As we premised, the annual maintenance costs are going to run from $2,000 a year to $3,000 a year over those 10 years, with incremental increases each year. In other words, about $2,500 a year on average. Thus, in this scenario, the costs specific to this car over the next 10 years will be $35,000 – the loss of the $10,000 current value and an average of $2,500 a year in maintenance. Keep in mind we’re not worrying here about gas, oil changes, or insurance – because we’re only dealing with the differential between this and the other alternatives.

• New car purchase at $60,000. Firstly, with the assumption of a 5% ROI, laying out $60,000 for a new car (buying on a loan doesn’t change this scenario at all – it probably makes it a bit worse) means it’s going to cost you $3,000 a year to have that money tied up in a new car. Over the next 10 years that’s $30,000. The maintenance costs premised above amount to $5,500. And, the extra insurance cost over 10 years would be $5,000.  At the end of the 10 years, that car would be worth $10,000. Thus, the cost of buying this new car can be roughly assumed to amount to $50,000 loss on value, plus $30,000 of lost ROI, plus $5,500 of maintenance, plus $5,000 for insurance equals $90,500.

• Used car purchase for $30,000. Again, with an ROI of 5%, that’s gong to cost you $1,500 a year – or $15,000 over the 10 years. The extra maintenance as premised above amounts to $14,000. And, the extra insurance amounts to $3,000. At the end of the 10 years, that car would be worth $5,000. Thus, your cost for the used car is $25,000 loss in value, plus $15,000 lost ROI; plus $14,000 maintenance; plus $3,000 insurance, equals $57,000.

In this imperfect, but sincerely done analysis, and allowing for a whole bunch of assumptions etc., you can readily see that there is absolutely no contest in terms of the relative costs. For the next 10 years, in cumulative total as to the differential in these three options, keeping the existing car will cost you $35,000. Contrast that with buying a new car for which the differential will be about $90,500. Or, a somewhat newer used at a differential of $57,000. While this exercise can be done in a much more sophisticated fashion, and of course using specific examples and real cost numbers, I’m pretty confident that the concept here will not change – that is, if you are in the position of having a 10 year old car that’s been doing well and you have no particular fears of it falling apart, then it is a no-contest financial decision that keeping that 10 year old car for another 10 years will save you a considerable amount of money as compared to replacing it now with a new car or a somewhat newer used car. And besides, how much of that new car smell can you take?

If you have any questions contact Kal Barson at kal@barsongroup.com