If you are going to own a vehicle, you will pay for depreciation. It is one of those unavoidable expenses which, like termites, will quietly and secretly gnaw away at your financial foundation. Depreciation expenses are especially sinister because they remain in the background (who actually writes “vehicle depreciation” into his budget?) and are therefore all too often shoved ignored. If you are ready to tackle this silent parasite, these three tips will help:
1. Buy used instead of new.
Research found at Edmonds.com indicates that new cars will lose 60% of their value in the first five years of ownership. A $30,000 car, therefore, will be worth $12,000 in five years — a depreciation of $18,000. However, by opting for a used car, a savvy buyer can allow the original owner to throw that $18,000 down the black hole. Assuming that the five year old car depreciates 40% over five years, the depreciation expense will only be $4,800 … a savings of $13,200, or $220 a month. I realize that new versus used is not comparing apples to apples, but $220 a month is worth considering.
2. Buy new, but drive it till it drops.
The more years you drive that new car, the less depreciation you will pay per year. With our example above, buying a new car every five years will continue to cost you $18,000 every five years ($300/month) forever. However, if you were to drive that same car for 15 years (and it is worth $5,000 at that point), your depreciation cost would only be $140 a month.
3. Compare before buying.
All vehicles depreciate, but not at the same rate. Therefore, if you insist on buying new, compare depreciation costs of different models before buying. If vehicle A costs less up front, but depreciates faster than vehicle B, you may be better off buying vehicle B.
Bonus tip: never buy a car you can’t pay cash for. If you are like me, that one principle will limit you to buying used cars. The good news? You will not only be saving in depreciation costs, but also interest charges. A car with no payments is the best one you can buy.
Readers: How do you minimize your vehicle depreciation? Any additional tips?
Great advice. I too only buy used cars. I also make sure that I buy quality cars that the value is going to depreciate slower. Most people just think about the upfront costs (probably because they are in debt and can only afford a certain amount of car payment), but it makes much more sense to think long term.
I bought new a very long time ago (17 & 15 years ago) and driving them into the ground. This may all change in the next year because I want to replace them and pay them off before I retire in 5.5 years.
@20s,
You sound like me (but it has been a long time since I was in my 20s :))
@krantcents,
I would say that you have done a great job of spreading that depreciation out. Are you planning to buy new again when you upgrade your cars next year?
Maintenance. We keep our cars in really good shape under the hood and physically. A wax now and then and regular oil changes, tire rotation, and car washes are not expensive to do. We have even paid our own kids to do some of these jobs instead of taking the car to be worked on.
Another plus – because we maintain our cars well (I will admit my husband can make most of the repairs and therefore saves us a LOT of money) we have never had to advertise a car for sale. People see that we take care of it and want to buy it.
A word of caution is that a 5 year old car could be coming up on some pretty expensive maintenance issues (not repairs, but routine maintenance). You may want to ask if certain things have been done before buying. All you have to do is look in the owners manual for some ideas of what may be coming your way. We recently bought a 10-year old car in mint condition, but we bought it knowing that this model needs certain repairs (repairs not maintenance – yes I know I changed thoughts midstream) at that age and we factored those into our budget. And, of course, we paid cash!!
I have bought a new car and had to pay 4 years for it (12.700 Euro). It wasn’t a ‘smart’ move, especially since we have the recession and the prices dropped, but on the other hand I have little over 14.000 miles on it, so I’ll surely drive it for at least 10 years. It’s a car I really like and has all the things I need, so I am not interested in changing it too soon. I do take care of it and it looks like new, even if it’s almost 4 years old.
This is how I plan on solving the depreciation issue. I don’t run to change cars after 2 years, like others do, so in this case buying it new allows me to use it for a long time, since I know it’s been taken care of from day one.
Buying an used car is excellent for that initial spending, but I can’t really know how the previous owner treated that car. It might look OK and then ‘break’ soon causing me to have to buy another one.