Advice on Buying a New Car
Here’s a head scratcher: when does it make sense to buy a new car? I asked some family and friends for some advice and some of it’s worth discussing.
First, though, let me give you an idea of my current situation. I drive a 2009 Dodge Caliber. It’s workmanlike – a reliable point A to point B car with plenty of space, but cheaply made (a bumpy ride and lots of road noise).
My car is in great shape, but that’s because I cover the upkeep diligently. Last year that upkeep was to the tune of $4400, which is so high it may as well be a new car payment.
Then it hit me: if I’m paying new car payment money, why not just buy a new car and get some real benefit from it?
I’m at least self-aware enough to recognize what smacks of magical thinking, so I took to Facebook to have my friends and family gut-check me.
My Brother’s Bad Advice (that isn’t)
My brother is a fan of cool cars, like me, and he has some idea of what I’m thinking. Here’s what he said:
Are you bored with your current car? If so it’s time to trade. You only live once. It’s not all economics to me.
My brother may be playing the YOLO card, but he’s absolutely right. It’s not wrong to buy things for your own enjoyment. But it is economics …
A New Car as an Entertainment Expense
How do you financially justify buying the better toilet paper? Upgrading your seat on a flight? Staying in the nice hotel on vacation?
Things in your budget that exist solely to make you happy are entertainment expenses. Movie tickets, comic books, cable TV, dinners out, drinks at the bar – any non-essential cost whose value is measured in how happy it makes you.
A new car usually lasts about 5 years before you need any major upkeep. The real cost of a new car is the sticker price vs. how much you would’ve paid for 5 years of maintenance on your current car – the question isn’t how much money you spend. It’s how much money you’re going to spend in the next 5 years specifically.
Maybe it won’t be $4,400 in repairs every year. Maybe my car will only cost me $2,500 in repairs per year over the next 5 years. This, to me, seems like a reasonable number for a car with nearly 70,000 miles.
$2,500 over 5 years comes out to $12,500. If I were to buy a $25,000 car with a $5,000 trade-in, the actual differential (the literal long-term impact to my budget) would be $7,500 over 5 years.
Put another way, in a perfectly reasonable scenario, buying a new car for my own enjoyment would add a $125/month entertainment expense to my budget.
Evaluating Entertainment Expenses
Now that we’re talking about an entertainment expense, the question becomes “how do you evaluate that expense vis a vis your budget?”
First: Remember that, being an entertainment expense, it’s axiomatically unnecessary. There’s no math you can do that says this will be a financially “wise” decision. It will always be a wiser decision to save your money in a low risk municipal bond.
Second: If you can’t afford to add the entertainment cost to your budget, then you can’t add it to your budget. If you still want to add the entertainment expense, you’ll have to give something else up. End of story.
If you manage to clear those first two hurdles, then the only question remaining is this: Is this expense worth the amount of enjoyment you’ll get from it?
Some math can help you compare this entertainment cost to others: dollars per hour of enjoyment. I drive about 1.5 hours per day, every day (my daily commute and my weekend family taxi duty). That totals out to around 45 hours per month, not counting road trips.
($125 per month)/(45 hours per month) = $2.77 per hour.
You can then use that to compare the relative value with your other entertainment expenses. The per-hour rate is cheaper than a movie, but maybe more expensive than a 40-hour video game.
So, Am I Getting a New Car?
I haven’t quite figured that out yet. There’s perhaps some magical thinking still in the notion that a nicer car would make my commute any more enjoyable. I don’t hate my car, I hate the volume of traffic, but I wouldn’t mind doing that drive with a smoother ride and a quieter cabin.
Nevertheless, it’s helpful to think of the cost of a car as not being this huge lump sum of cash. If you do the math ahead of time you realize that you’re not talking about a $300+ car payment, you’re looking at $125 for car payment minus avoided maintenance costs.
That’s not such an insurmountable entertainment expense.