Car Purchases
Assuming you want to own a new (or new to you, previously owned) vehicle. Figure out how much you can afford to spend each month before you ever look at vehicles. Be very conservative in you estimate, since there are always additional, unforseen expenses.
First Scenario
You purchase a new 2004 Ford Taurus for $20,614.00 (taken from KBB.com - Kelley Blue Book - in March of 2005) for example.
You have good credit and get a finance rage of 4.89%, financed over 60 months (5 years), your monthly payment would be $387.97, and your total payments would be $23,278.42.
After driving this car for one year, it's trade in value would be about $10,400 (using KBB.com for a 2004 Taurus in excellent condition with 10,000 miles).
Your cost for driving this car for one year, is $1239.14 per month.
Initial value ($20,614) minus trade in value ($10,400) equals cost of depreciation ($10,214).
Monthly payment ($387.97) times 12 equals total payments ($4655.64).
Cost of depreciation ($10,214) plus total payments ($4655.64) equals total cost ($14,869.64).
Total cost ($14869.64) divided by 12 months equals cost per month ($1239.14).
That's an expensive car!
At the end of five years, you've paid $23,278.42 for a car that is now worth how much? According to KBB.com, a 2000 Taurus with 60,000 miles in excellent condition has a trade in value of $4,800. Even if you sell it privately, KBB.com gives it a private party value of $6,495.
Second Scenario
You drive your current car for 6 more months, and pay yourself - into a savings account specifically for your new car - $387.97 per month. At the end of 4 months you have $2327.82 to put toward a car. You can buy a 1995 or 1996 Taurus for that much, in good condition, and still have money left over - based again on KBB.com private party values.
Each time you look for a car, find one with plenty of tread on the tires (at least one years worth), where the brakes have been done recently (within the last year), and where a tune-up has been done within the last year.
Continue to pay into your car savings account $387.97 per month, and one year later you'll have $4655.64 in that account.
Now you can sell your 95 or 96 old Taurus for close to what you paid for it (cars don't depreciate much in one year after the first 4 or 5 years) - but let's say you can only get $1500 for it, and buy a Taurus that's 3 or 4 years newer for $4,150, you still have $2,100 in your car account. (Based again on current private party values in KBB).
One year later, still paying into your account, you have over $6,700, and you can sell your 4 or 5 year old Taurus for, say $3500, and buy one that's only two or three years old for $10,000.
So far, that's 2 years and 6 months from when you started to buy your "new car". After one more year, you have a car that's worth about $8,500, and another $4655.64 in the bank. Put those together and you'll get another car that's two years old.
After four and a half years, you're driving a 1 year old Taurus that's worth $10,000 or $12,000.
Comparing scenarios
From the first scenario, after five years, you have a five year old car, worth $4,800.
From the second scenario, after five years, you have a one year old car, worth $10,000, plus 6 more months of savings or $2328.
In both scenarios you've paid $23,278 for your car. In the second scenario you've traded cars every year, so you've had different colors, different options, and had a "new car" every year.
In the first scenario, you've replaced the tires several times, brakes once or twice, tune-ups every so often, changed the oil, etc.
In the second scenario, you haven't had to replace any tires, brakes or done tune-ups - as long as you've bought cars with recent brakes, tires and tune-ups. You have had to change the oil.
In order to replace the car in the first scenario, you have to go into debt again. In the second scenario, you're ready to upgrade again in another six months.
Which would you rather have? A 5 year old car worth $5,000, or a 1 year old car worth $10,000.
Oh, and one more thing... For the past 5 years you have had NO DEBT, you haven't owed anyone a penny for your car, they've all been yours! When you wanted to go on that trip to the Caymans, you had the money! Your friends? They were making sure their car was not reposessed.
Great idea, but my car is dead now!
Do the minimum neccessary to keep the car running for a few more months. Save during this time, and buy the best car - tires, brakes, tune-up are more important than paint and options. Hang on to this next car as long as you can, still paying into your account, and soon you'll be looking at a "new" car in your driveway every year.
I don't have a car yet!
Buy one for $387.97. Upgrade in five or six months. I know, it will not be the car you want. Your friends will ridicule you, you'll wish you were invisible, sure. But in just 2 or 3 years, you'll be driving a nice car, and have NO DEBT. Your friends will have fancy cars, but be in debt up to their eyeballs. You want to go to the Bahamas, go ahead, they'll have their nice cars, you'll have your discretionary money.
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