Dave Ramsey How Much Car Can I Afford
nine Min Read | Sep 27, 2021
If yous're shopping effectually for some new wheels, it's easy to get swept off your anxiety by all the fancy bells and whistles inside the newest cars to hit the market.
After all, some of the latest models come with all these cool new features like heated steering wheels and massaging seats. That's correct, the seats requite you lot a massage. What a time to exist alive. It's almost enough to make you forget about the ane–ii-twelvemonth-old used cars that are also sitting in the dealership lot. Because those are so final year.
Just is new really better? What are the pros and cons?
New vs. Used Cars: Which Are Meliorate?
We're non going to beat effectually the bush: The very best way to buy a machine is to save upward and purchase a reliable, slightly used car (with greenbacks). Y'all're always going to be ameliorate off buying used and paying upward front instead of going for the shiny new model that some overcaffeinated automobile salesman is trying to go you to borrow money for.
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The pick between a new or used vehicle (and how you pay for it) could be the difference between riding the highway to wealth and financial independence or spinning your wheels in a heat of debt and countless payments.
But if that new car odour has given y'all a serious instance of automobile fever, the merely prescription is cold, difficult numbers. So let's get right down to it!
Reliability
"Purchase a new motorcar," they said. "You won't have to worry about repairs or maintenance," they said.
Showtime, safe is always a concern. And one of the most common arguments against buying a used car is that information technology'll wear out sooner and won't be as reliable as the new ones rolling straight off the assembly line.
The truth is that despite all the claims from your friends and neighbors to the contrary, you can find similar-new used cars that are just as safe and dependable as a new motorcar—and at a much cheaper cost.
You can find like-new used cars that are only equally prophylactic and dependable as a new car—and at a much cheaper price.
In fact, some newer cars (especially models in their first year of production) are amongst the least reliable cars you can drive.1 From faulty air conditioners to troublesome transmissions, many drivers of newer model cars end up making constant trips to the mechanic or getting industry recall notices in the post.2
So just keep in mind when you're auto shopping that new doesn't automatically equal safety. It all depends on the blazon of car you're looking at and how long the car has been on the road.
Depreciation
Now for the math. Whether y'all have a car, a boat or a lawnmower, they all go down in value over fourth dimension as they become through the habiliment and tear of everyday use. That loss in value is called "depreciation," and it's a fact of life.
But hither's the kicker when information technology comes to car depreciation: New cars lose their value at a much faster rate than used cars do. Depending on the make and model, some cars might concord their value a little better than others. But they all lose their value over fourth dimension—specially new ones.
Simply how fast do new cars lose their value? Buckle up. It's going to be a bumpy ride! Hither's a look at how chop-chop a new car loses its value:
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After 1 Minute: If you buy a shiny new $35,000 car, it loses somewhere between 9–xi% of its value the moment you drive off the lot. Y'all're basically throwing $3,500 out the automobile window equally you drive the car dwelling house for the first time!
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Later on One Twelvemonth: Fast-frontward 12 months and that automobile sitting in your driveway will accept lost around 20% or maybe fifty-fifty more of its value from the twenty-four hours you bought it.
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Later Five Years: You tin expect your new car to lose lx% of its value afterward driving it around for five years.3Most cars lose near ten% of their value every year after that steep first-yr dip.four
Initial Car Value | $35,000 |
---|---|
New Automobile Value After . . . | |
1 minute | $31,500 |
ane year | $28,000 |
two years | $24,500 |
3 years | $21,000 |
4 years | $eighteen,500 |
five years | $15,000 |
If you purchase a $35,000 shiny new machine, that car loses somewhere between nine-eleven% of its value the moment you drive off the lot. Fast forward 12 months and that motorcar will lose around 20% of its value from the 24-hour interval you bought it.
Think virtually information technology: If you just await a few years, you could let someone else take on the brunt of those first few years of depreciation and buy a adept-equally-new car for one-half the price!
And don't fifty-fifty think about financing information technology with car payments. Things with motors in them go down in value, and you lot should never borrow coin for anything that goes down in value. No exceptions!
The True Toll of Buying New vs. Used
Let's see how this plays out in real life. Let's say Jack and Tony are both looking to buy new vehicles. Jack decides to save up and buy a reliable used machine with cash while Tony goes the "normal" route and finances a new truck.
The boilerplate new automobile loan is $31,722 with a monthly payment of $545 over an average loan term of 69 months.5 That's almost six years of $545 car payments.
To put those numbers in perspective, let'due south say Tony takes out an average car loan ($31,722) with an boilerplate monthly payment ($545) for the average loan term (69 months) and keeps the truck all the way through the finish of the loan.
Like we talked near earlier, his new truck starts losing value the moment he drives it off the lot and continues to lose a huge chunk of its value in the get-go few years. After 4 years, it's worth less than half of what Tony bought it for and continues to drop x% each twelvemonth subsequently that.
That means that at the stop of the six-year loan, Tony paid $37,605 in car payments for a truck that was originally worth less than $32,000 and is now worth about $x,000 (if he'south lucky) at the end of the loan term.
Meanwhile, Jack found a four-yr-one-time sedan with low mileage and plenty of life left in the tank for $12,000, and he paid for information technology with cash. That means he owns the car gratuitous and articulate. No payments!
And then what could Jack practise with an extra $545 each month that he's non using to pay off the car?
In one scenario, he could put all those savings toward upgrading his automobile down the road. If he saves $545 every month, he could purchase a $twenty,000 car in merely three years, while Tony is still just halfway through the loan on his truck.
Better however, what if Jack swears off car payments and invests that $545 in solid-growth stock mutual funds from historic period 30 to 70? Assuming an average almanac rate of return, he could terminate upwardly with more than $5 meg saved for retirement.
And what would happen if he splits that average monthly car payment evenly between saving for his next car and retirement investing? Jack could continue ownership slightly used cars for $12,000 every four years and still have $1.five million saved for retirement by the fourth dimension he hits age 65.
We promise Tony likes the truck!
Is Information technology E'er Okay to Buy a New Car?
As a general rule of thumb, the full value of your vehicles (anything with a motor in it) should never be more than than one-half of your annual household income. Dave doesn't recommend buying a new car—ever—until your net worth is more than $one one thousand thousand. If you're a millionaire and you desire to purchase a new automobile that costs a very small percent of your internet worth, so go for it.
When nosotros recently asked everyday millionaires what kind of cars they drive, nosotros found that the average millionaire drives a four-year-old automobile with 41,000 miles on it. And eight out of 10 millionaire automobile buyers drive it away debt-free without a auto payment.
The real problem with new cars is that the vast bulk of the people who purchase them (85%) either accept out a loan or a charter to get one.vi And today, thanks in large part to our beloved matter with new cars, more than 113 million Americans take taken out car loans and owe $1.27 trillion with a T in car debt. Only mortgages and pupil loans account for more than of America'due south total debt balance.7
As a effect, most folks who buy a new car wind up feeling like their automobile owns them instead of the other way around.
Buying Used Will Save You lot Money on Car Insurance
We'll close with this one considering a lot of car buyers forget to factor this into the equation so suffer the sticker shock from the steep insurance premiums that come with a new machine.
Drivers of new cars oftentimes get stuck with higher-than-average premiums. Considering new cars are more costly to repair or supersede, they also cost more to insure. Fifty-fifty with some of the latest condom engineering, insurance companies rarely offer discounts to new-car drivers for having those features.
While new-car drivers will spend roughly $one,650 that year on car insurance premiums, you could save 12% on insurance premiums if you buy a five-year-old version of the same motorcar.eight
If you lot're purchasing a vehicle and are ready to save money on automobile insurance, our Endorsed Local Provider (ELP) insurance agents can help you find the best deals on auto coverage in your surface area.
Find an contained agent today!
Nigh the author
Ramsey Solutions
Source: https://www.ramseysolutions.com/insurance/new-car-vs-used-car
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