Driving a well-used car can sometimes be a pain. When looking over the costs of maintenance, the effort of repairs, and the inconvenience of arranging for the issues that can come with used cars, it can be tempting to think that it would possibly be cheaper just to buy a new car and not worry about maintenance or repairs.
However, driving a newer car comes with a requirement for comprehensive insurance if the car is financed, and if one chooses to drive with only liability insurance, exposes a more significant fraction of one's net worth than one might like to damage when driving around town, so even if owned outright comprehensive coverage is a good idea if the idea of replacing the car is unpalatable.
In my case, the purchase prices of used cars can be very low, but maintenance and repair expenses are higher, and the purchase price of a new car is much higher, and the cost of insurance is much greater as well.
I decided that, in the interests of personal finance, I would run the numbers with a few basic assumptions:
1. I will buy a used car and save money to repair or replace it on a monthly basis, which will be sufficient to repair or replace it.
2. If I were to buy a new car, I would get a $20,000 Honda Civic and either pay cash or finance it over 36 months
3. I am willing to invest the difference in price between the new car and the used car
4. Investments earn me 5% year over year, and I am able to invest the returns as well
5. If financed, I can pay 3,000 down and pay a rate of 3% compounded monthly
This last one isn't really an assumption, but it's important to note that I am not considering taxes or fuel efficiency
I looked at the costs to me over the course of 15 years of driving, and it was pretty clear that after 15 years or so I would have spent nearly the same amount buying, repairing, insuring and replacing used cars as I would have buying and insuring a new car, whether or not I financed it. The cumulative difference between buying used and new, regardless of financing, came out to be less than 2000 dollars after 15 years. However, the key in this case comes down to the opportunity costs of buying a new car. If invested, the difference in value of the new vs used cars would provide about 800 dollars of income (in the case of the cash purchase) or 696 dollars of income (in the case of the financed purchase) on average through all of this time. This means that the opportunity cost of buying a new car vs a used car is actually about $12,000 over the course of 15 years if one buys in cash, and $10,000 over 15 years if one financed.
Let me know if you guys are interested in seeing the actual charts and calculations, but I find that this is really compelling for me. Running the numbers really helps make things clear.
Every year that I keep on driving used cars and avoiding a new car, while sticking to my repair/replace budget, I can earn myself 690-800 dollars with the difference in price. In fact, my actual investing returns on about that much money were spot on in that range since this March, so I am really excited about this plan.
Used cars for the win!
The best part is, I can actually keep the majority of this amount in my IRA, and let the money grow tax free instead of paying taxes on the growth.
The only downside to this is that the concept doesn't work if you didn't have the ability to buy a new car in the first place. If the only money you have is enough to buy a used car, and you can't qualify for a loan for a new one, then you are going to be stuck with the higher maintenance and repair without the comfort of the income from the difference in new vs used.
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