Buying my first car out of college

Question

I just graduated college this past week and have a job lined up making 63000 a year. I was looking at buying a $27000 used 2008 BMW 328i, financing at about 500/month for 60 months.

I don't have any debt of any kind and currently don't have a car of my own (the family car now goes to my little brother). So I have to buy a car of some sort. BMW has a college grad program where I can get 2.9% APR and they pay my first three payments, allowing me to build a little emergency fund at my job before I start paying for the car.

Would this be a good idea or should I just go for a cheaper car, and if so what would be a good car to buy?

On another note: I have no extra money for a car now, my dad will pay 3 payments for me as a graduation present, and I have to buy some sort of a car within the next two months (Right before I start working)

Any suggestions on whether buying this BMW would be a good/bad idea?

EDIT:

I talked it over with my parents, if I hold off until September to buy the car with a down payment of 3500 (found a beater car I can borrow until then) I can get the car at about 450/month. As well, the BMW plan plus my dad's present money, I could have 9 grand saved up in an emergency fund by the time I start making payments myself.

Second, in my budget I already have set aside 400/month (almost 5k/year) to a retirement fund/savings that I would start doing after I've saved up the 9 grand emergency day fund (3 months pay) which would be by the coming march 2012.

Third, forgot to mention this, the dealer offers an extended warranty on CPO, to 6 year/100,000 miles, so I'd get another 2 1/2 years and 55k miles out of the warranty.

This way I'll also be three months into my job and have an idea of my actual living expenses.

Last, I'll have the car paid off by 26 years old at the latest, at which time I plan to go back to grad school for an MBA, ride the car for two more years (hopefully around 30k cash saved at this point). Then hop on a new ride out of grad school.

Answer 1

You're looking at a used car, which is good, but I think you can still be much wiser with the type of car you're looking to purchase.

Maybe I'm such a fuddy-duddy because I didn't own a car until I was 25, but let's break this down with a small comparison:

• 2008 BMW 328i, $27,000 with combined fuel economy 21 MPG
• 2008 Toyota Corolla, $13,000 with combined fuel economy 31 MPG

If you drive 1,000 miles per month with gas at $4/gallon -- which is absurdly conservative, I think -- for five years, then you're looking at an extra $60/month for just gas, and probably twice the payment, compared with a perfectly reliable but more fuel-efficient car from the same year. (Disclosure: I own a 2004 Corolla and love it. I got mine in 2007 for under $10k, and I paid cash.)

$300/month or so is a good chunk of change, no? I'd do even more, and pay that loan off (which will almost certainly be less than $500/month) faster by throwing $500/month at it. You'll save hundreds of dollars in interest.

Edit based on your additions:

There's one thing that you don't see yet that I have. It's only because you're in your early 20s and I'm pushing 40.

It is far easier to sock money away when you're single and don't have a family to take care of.

(I'm assuming you're not married yet and that you don't have kids. Hopefully it's not a poor assumption.)

I would be saving like crazy now if I were in your position. You have a great job for fresh out of college. My first job started ten years ago after grad school at the same salary you're making. Man, it was so easy to save money back then. Now that I'm married with a daughter, a lot of that cushion goes away. I wouldn't trade it for the world, but that's the price of being head of household.

If you have any intentions of not being a hermit for the rest of your life (and I hope you do) then you'd be wise to save as much as you can now.

Answer 2

Generally speaking, buying a fancy new car out of college is dumb. Buying a 3 year old flashy car with a 60 month loan is going to eat up your income, and when the thing starts breaking down, you'll get sick of buying $900 mufflers and $1,000 taillights pretty quickly.

Buy a car that nobody wants for cheap and save up some money. Then buy yourself your dream car.

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Edit based on question update.

You're posting to a Q&A site about money, and you're asking if spending over $30k (don't forget taxes) on a luxury car when you're making $60k is a good idea. You have car fever, and you're trying to sell this transaction as a good deal from a financial POV. At the end of the day, there is no scenario where buying an expensive car is a good financial transaction.

For example, since you're planning on driving too many miles for a lease to make sense, the certified pre-owned warranty is a non-factor, because you'll have no warranty when the car breaks down in 4 years. The only reason CPO programs exist is to boost residual values to make leases more attractive -- luxury car makers are in the car leasing (as opposed to selling) business.

Answer 3

I've seen this approach to buying/funding cars described in a couple of different ways over the years.

1. Your Dad is giving you $1500 towards a car. Go find a $1500 car. It will be a piece of crap, but hey, it's free. The guys at work may give you a hard time, but they need something to give you a hard time about, and everyone expects a recent college grad to drive a clunker.
2. Open an account at ING Direct, Ally, or some other similar bank. When you start your job, put a $500/month direct deposit directly into this account. (If you get paid biweekly, put $250/paycheck -- you won't notice the difference and you'll accumulate more in the account.) You'll never notice it missing from your paycheck if you start right away.
3. When the clunker falls apart in 6-10 months and/or you just can't stand it any more, take the $3-5k you've got in your car account and spend it on a slightly better ride. The longer you can wait, the better the ride.
4. Sell the old clunker, don't do a dealer trade-in. If it's dead you may just have to sell it for parts. Put the proceeds into your car account.
5. A year later, you'll have $6k+ in the car account. Buy a replacement if you need it, or wait another year or two and you can buy a low-end car almost-new, or something nicer but a little older.
6. If you get yourself into a 3 or 4 year cycle you'll be in good shape for car purchases, $18-24k. (If you want nicer cars, wait longer and your fund will be bigger. However, in my experience, "nicer" cars just have bigger maintenance costs. YMMV.)

Random thoughts:

• One aspect of paying cash that's nice is there's one less angle for a dealer to screw you.
• The other aspect is that you can more easily look at private party sales.
• Not having a loan gives you flexibility in what you buy for insurance. With no payment, no bank requirements, and a fund for a new car, you may decide you don't need collision insurance and can save money there. Or buy it for the first year of a cycle and then drop it. (You can add the savings to your car fund.)
• Don't repair the first couple of clunkers. "Maintain" them minimally, but don't let them be a money pit. If something big goes wrong, get rid of it and trade up with whatever's in the fund.
• Maintain your cars outside the car fund. The car fund is your car payment, you should mentally treat it as money you're sending to the bank. You don't take gas & parts money out of the check you send to the bank.
• Every year or two, or whenever you get a raise, or buy a new car, increase the amount you're putting into the fund. At the very least you want to keep up with inflation.
• Don't raid the car fund. Don't suspend the direct deposit. You'll want to at some point (getting married, buying a house, etc). Remember that it's your car payment. Granted, you won't see the repo man if you stop making your car payment, but you won't be able to afford a new car in the future either.
• The previous point notwithstanding, you have some flexibility: you won't lose your car if you get laid off and really can't make the car payment. It just delays your new car schedule.
• It's ok to leave money in the car fund when you make a purchase. Or to add a little money from outside funds.
• I really wanted to come up with a contrarian answer that goes against the others, but couldn't do it. Something along the lines that you're young, dumb, and unencumbered and now's the best time to make a mistake with money. But you'll probably be better off making a different mistake with money.

Answer 4

DO NOT buy this car.

First, I want to say I love BMW's. There's a reason why they call them "ultimate driving machine" and why other car manufacturers compare their new models to BMWs. I own 330i and I absolutely love it. Every time you get into the car, it just begs you to push and abuse it. Everything from steering response to throttle to engine sound. Awesome car. However...

1) BMW is not known for their reliability. I've had to do numerous things to this car and if I didn't do the work myself (i like tinkering with cars), it would be a pretty big money pit (and actually still is). German parts are more expensive then regular cars. Labor will run you if you take it for service. Right now my car is on jack stands while I'm fixing an oil leak, replacing cooling system components which are known to fail and doing work with the cam timing system which uses bad seals.

2) If you buy a used car which is 3 years old, just remember all the wearable items and everything that wants to break, will break 3 years sooner on you. Someone else already pre-enjoyed your car's maintenance-free days. At 60k-80k things will start to go. Ask me how I know. So you'll start paying for maintenance way before your 5-year loan expires. Compare this 330i to the Acura Integra I used to have. Acura (aka Honda) had 194k miles when I sold it and I NEVER ONCE got stranded with the Acura.

3) Fuel economy is not that good and btw you have to use the most expensive gas.

4) If you are really set on buying a BMW because you enjoy driving and won't drive like an old lady (my apologies to those old ladies that drive at least the speed limit, but you are not the majority), then still do not by this one and check out auctions. I bought my 2003 330i in 2005 for 21k when it cost over 40k new. You could probably find one with less than 20k miles on it.

My final advice is either a) learn to at least do basic maintenance or b) stick to always buying new cars which don't have any issues in first 4-7 years, then move on before you have to schedule your life around your cars.

on the bright side I doubt you'll have to ever replace the exhaust and you can buy tail lights on e-bay for roughly $60 :)

Answer 5

Read "Stop Acting Rich" by Dr Thomas Stanley. I'm concerned that even before you've earned your first paycheck you want a flashy car. $4800/yr on $63K/yr income is just about half what I'd recommend to someone who starts working. 10% is the minimum, if and only if, the employer matches 5, for a total 15% saved. Do it in a pretax account and when you go back to grad school convert to Roth.

Answer 6

You have a job "lined up". What if it falls through? Then you have to sell your fancy car, and you are back to scare, apart from the dough you owe your dad.

For consumption items, live within your means. A cheap first car is just fine.

Spend cash where it brings you more cash.

Answer 7

I agree with the consensus as far as getting a cheaper car, paying with cash, getting a more fuel efficient car, etc. But I'd like to point out, you should make sure you really need a car at all. I ride a bike to work! If I need a car, I can use Zipcar or City Car Share or borrow a friend's car, rent a car, take the train, ride a bus, walk. But mostly, ride my bike. Burn fat not gasoline! ;)

Answer 8

I support the strategy to buy a less expensive car at the outset and then save for that more expensive car. You mentioned that you would be able to save $9000 by the time you had to start making payments. That sounds like a great budget for car shopping. For $9k you can get a dependable used car.

If you find the right high-yield savings account you can get around 2% on your $500/month direct deposit. That's a difference of about 5% when you add in the 2.9% interest that you would have been paying on the loan. (You can't find such a low risk investment that would yield 5% these days.)

Also, at that rate (2%) you would have $27k saved up in less than 52 months, or over $31k in 60 months. Then you could buy a BMW with cash! And I'm sure they would give you a cash discount. Alternatively you could be just finishing paying off the loan and might already be looking at the next car you'll take a loan out for.

The point is not that you have to completely deprive yourself for the rest of your life. But by not taking out a loan you were certainly come out ahead in 5-10 years time.

Also, one common mistake that new grads make is thinking that they are rich right out of college. Yes, you definitely have a nice salary and "could afford it" by most people's standards.

I have a coworker that graduated and started work a year ago. He first bought a brand new Subaru. Why Subaru I do not know, but that is what he thought he wanted. After driving the car for a few months he decided for a few reasons that it was not what he wanted. So he sold the car (for a loss) and bought a slightly used Nissan Z. He has since decided that he needs a more practical car for day to day driving to minimize the abuse that his Z takes. So he has bought another car. This time a low budget Honda. Had he started with a low budget car he could be driving the same car to work right now, but have a good chunk of savings for a new car instead of a loan and a car that he drives only occasionally.

Answer 9

Think about it. IF you save $15K by buying a Honda or a Mazda, you can invest those money at modest 5% average, you'll have over 60K before you retire, which allows you to retire at least a year earlier.... So it is worth working an extra year in your life to have a fancier car?

And that's a conservative investment.

Answer 10

I realize I'm drudging up a somewhat old post here (apologies), but I've found myself in a similar situation recently and thought I would chime in. I was considering buying a car where the loan amount would be right around 25k. I tried justifying this by saying it's ridiculously fast (I'm young and stupid, this is appealing), has AWD (nice for Colorado), and a hatchback with plenty of room for snowboards and whatnot in back. This is in comparison to my Civic which has high mileage, can hardly make it up hills due to the high altitude, sucks in snow, and has little room for anything. You have your reasons, I have mine. The thing is, our reasons are just us trying to rationalize an unwise purchase - just admit it, you know it's true.

Just so you can see I'm in a similar financial situation, I'm 22, just graduated, and started a job making well over 80k with salary and signing bonus, plus 20k in RSUs on the side. After budgeting I can still put away over 2k/month after I've factored in a car payment, insurance, rent, etc etc. Yes, I could "afford" this car... it's just dumb though dude. Don't do it. There are better things we can do with our money. And guess what, I've been drooling over this car since middle school too.

Answer 11

Buying this car would be a good idea because you will quickly learn why you feel you need a BMW (that you cannot afford). This is not an investment, but a financing decision, beyond your means of living. As a future MBA you will regret not investing this money now.

Answer 12

I know I came a little late to this discussion but let me give you my opinion. I think that purchasing the BMW is a terrible investment for obvious reasons. Once you drive the car off the dealer's lot the car loses anywhere from 5-10k in value immediately. Its a terrible investment and something that you will regret in the future. However, whether you buy it now or you hold off we all know you are eventually still going to get it. I graduated college and was in a similar situation as the one you are now. I started making 60k after college and leased a brand new BMW. Like I said it was a terrible investment, but I do not regret it for one day. Ive had so much fun in that car that I can't even begin to explain. We only live once and you don't want to be one of those guys that looks back and says I should've this I should've that, JUST DO IT. We all know it won't be possible when you have a wife and kids so just splurge now and be responsible later LOL.

Answer 13

I'd like to give you a real-world example from the other end of this financial decision.

I inherited a 2007 Chrysler PT Cruiser with 36k miles on it, some time in 2013 or 2014. I was a teenager at the time.

I've had liability insurance on this car ever since, and at the time of this writing, still own the car.

At the time, and even today, you could pick up similar cars with a bit more miles on them, for about $2k.

Imagine spending $2k on a car like this. Somewhat old, maybe with 50-70k or more miles on it (I got lucky with just 36k on it initially when i inherited this one).

It's been 4 years since then. In keeping this car and not replacing it with a financed car, I've avoided a monthly car payment (I'm going to use your $500/month example), as well as about $120/month extra in adjusted car insurance premiums for full-coverage insurance.

Separate note - Your financed car depreciates quite a bit over the life of the loan. It's an asset that diminishes in value, and due to your interest rate and the depreciation, you very quickly find yourself in a situation where you actually owe more on your car than it's worth.

My $2,000 PT cruiser can't really depreciate much from where it's currently at. I might lose $100 or so per year in its value as it gains a few miles, but nothing like your fairly new vehicle will.

Over 4 years/48 months, the car payment and extra insurance payment, totaling roughly $620/month, equates to a savings of $29,760 for me.

Over that 4 years, I've never had to worry about missing a car payment, scratching up my already-worthless car, etc. If I wanted to buy something, I easily had the money on hand to do so, because my budget wasn't strained by a hefty financed car payment each month.

I have a twin brother that went the financed vehicle route. He crashed a couple of them, lost thousands to insurance deductibles and un-purchased GAP coverage, and is about to declare bankruptcy as the current payment he has, at about $600 per month, made it difficult for him to pay off credit card expenses for other random expenses that came up, and he's now in a situation where he owes about $25k in credit card expenses, ~30k on a car, and he can't get rid of the car because it's worth $5k less than his loan and he doesn't have the cash to pay the difference if he sells it.

Debt is an emergency. Do everything you can to avoid it.

Buy the cheap car, insure it just for liability, take care of it, and drive like a reasonable person so you don't have to pay for another car due to a crash any time soon.

Next, MOVE to a new home as close as you can to your work. If you can get within biking distance, you no longer have to worry about the car situation. I don't know if you're living on your own yet, but when you start to do that, look to get as close to your work site as financially reasonable. Even if it costs you an extra $100-200 per month to do so. Totally worth it.