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Let's say I'm considering buying a new (used) car for $15k, and could pay in cash. My current car is in working condition, so I could wait a few years before buying a replacement.

My question is: how much money am I saving by being patient and waiting two years to buy a car? Five years? Or to phrase the question differently, what premium am I paying for my impatience, if I bought a car today?

Some assumptions - holding on to my used car will cost me maybe $500/yr in additional maintenance/repairs - I could invest the 15k while I'm waiting to buy a car, let's say at ~6%

EDIT:

  • Let's also assume that the resale value of my current car is so low that it's not a factor (it's old, and in pretty rough shape)
  • "I could invest the 15k while I'm waiting to buy a car, let's say at ~6%" Tell me where I can safely (I don't want the value of that money dropping 75% in a market crash!) invest $15K at 6%, so I can put my money there, too!!! – RonJohn Jan 1 '18 at 16:56
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    Your estimated 6% is definitely too high for a low-risk investment, which is what you'll want if your investment horizon is limited to a few years. Make that more like 2% for a more reasonable estimate. Yes, the stock market might very well average around 6% per year over time, but with huge variations from one year to the next. – a CVn Jan 1 '18 at 19:59
  • I can get at least 4.5% by putting the money into my mortgage (though maybe I'm not taking tax considerations into account). My average investment return is much higher, though yes, it is higher risk. I chose 6% as a mid-point. – edan Jan 2 '18 at 19:01
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    You can't get the money back out of your mortgage, so you can't use it to buy a car. Anyways the investment gains are potentially small potatoes compared to the depreciation. – stannius Jan 2 '18 at 19:33
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    To calculate the opportunity cost of something you have to decide what the opportunity is that you are forgoing. And I think it is important here to think a bit about how that opportunity would work, mechanically: how you would get the money in now, then back out in two years. If the opportunity is stocks or anything risky, the money might not be (all) there in two years, never mind having grown; If it's mortgage paydown, you need a way to get the money back out; if it's a safe savings account, you won't earn anywhere near 6% interest. – stannius Jan 3 '18 at 20:55
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That kind of decision is best made by figuring out how much money per year you are spending on driving a car. Exclude things like fuel, insurance, taxes, tyres, that you have to pay whether the car is new or old.

Let's assume you can buy a new car for $15,000, sell a 6 year old car for $3,000, and run a 6-10 year old car for $500 extra a year. So you can spend $12,000 every 6 years, or $17,000 every 10 years. That's $2,000 vs. $1,700 per year.

Or you can buy six year old cars and drive four years for $5,000 at $1,250 per year.

Now you need to do this calculation with real numbers. And the biggest price drop in value is the first and second year.

  • Good point on resale value. – RonJohn Jan 1 '18 at 18:32
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    Insurance and taxes cost less on older cars, significantly so in some cases, so I wouldn't suggest ignoring them. Similarly, fuel efficiency trends upwards, so also worth factoring in. – Hart CO Jan 1 '18 at 18:35
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    @HartCO How much fuel efficiency actually matters depends a great deal on how much you're driving and how large a portion of your total car expenses is in fuel. Personally, by getting a car that slashes fuel consumption in half, I'd reduce my costs by maybe $30/month; $50/month tops. Sure, that's money too, but if it means I end up with a $150/month car payment (which would definitely be on the low end), higher taxes, and more expensive insurance, that's still a loss. Quite possibly even if that car also requires less maintenance, which is an unknown (better the devil you know...). – a CVn Jan 1 '18 at 19:52
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Several things are changing in the two years.

  1. The current car is getting older so the resale value is going down. It could drop to near zero, if there is a major failure. The longer you keep it the bigger the risk.

  2. The car in your price range, lets say 3 year old car, may be getting more standard features.

  3. The money in your bank. if you have been making a habit of putting money away each month to buy a car, keeping those monthly payments in place will increase your bank account. Because you can't know when the current car will fail, you want to avoid non-liquid, and non-stable investments.

The general rule of thumb is that as long as the car is meeting your needs, reliable, safe, and not costing you much money; then keep it.

when I get to this point I don't push the date out by years. I just continue to extend the life month by month.

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    The resale value of my current car is so low, that I don't think it's much of a factor. I know that keeping my current car for as long as possible is the cheapest options, but that's not my question. My question is: what premium am I paying to buy a new car sooner than absolutely necessary? – edan Jan 2 '18 at 19:04
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Here are the factors I can think of:

  1. The costs of repair (you say $500/yr, which is fine).
  2. The ever-increasing cost of cars. (Will a $15K buy you as much used car in three years as it does now? No, but I don't know by how much.)
  3. Interest earned by keeping that money in the bank. (I think that 6% is far too optimistic for an account not prone to a deep fall during a crash.)

Presuming you don't add more money to your car fund... some numbers:

  1. In 3 years, you'll have $500 * 3 = $1,500 less principal.
  2. Presuming 3% inflation, the used car will cost (1.03^3 - 1) * $15K = $1,390 more.
  3. At 2% interest (and remembering that you're withdrawing $500/yr for repairs), you'll have earned interest of $300 + $290 + $280 = $870.

Thus, by waiting three years, you'll need an extra $1,500 + $1,390 - $870 = $2,020 to buy a hypothetically equivalent car.

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    By this line of reasoning, the best course of action would be to buy a new (even new-to-you used) car every year or even more often than that, because you then cheat the "this is how much more it'll cost later". Since that is pretty clearly not a financially viable strategy (just look at the people who try it in real life!), I'd say your analysis is missing something. – a CVn Jan 1 '18 at 19:45
  • @MichaelKjörling it costs an extra $2K to wait 3 years, so I don't understand your argument. – RonJohn Jan 1 '18 at 20:04
  • @MichaelKjörling also, buying -- every two years -- a three year old car which retains it's value would cost about $1500/year. That's $125/month for a reliable car still under warranty. If you've got the cash to buy that first used car, it's not a particularly horrible strategy especially if your wife likes driving "fresh" vehicles. – RonJohn Jan 1 '18 at 20:11
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    "The ever-increasing cost of cars" Do you mean inflation? Looks like thats separately counted. The data here seem to suggest car cost has remained fairly steady, or even decreased in the last two decades, while my memory suggests car features continue to improve: energy.gov/eere/vehicles/articles/… – Matt Jan 2 '18 at 21:23
  • @Matt the way they calculate inflation takes the improved features into account. If the nominal price of a car goes up $500, but $1000 worth of new features are added as standard, then the inflation-adjusted price actually goes down. – stannius Jan 2 '18 at 23:26

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