When it comes to making smart money moves, our family has never been a big fan of buying a new car. In fact, the last new car that we bought was back in 1993 when we really did the math on how much smarter it is to buy a used car that is somewhere between two to four years old versus getting a new one. While getting a new car should be a well thought out planned purchase, it often falls into the camp of a spur of the moment purchase depending on when you get in the mood. In a sound financial plan, you should begin to save for the (new) used car purchase the moment that you pay off the old purchase. If you are like me and pay for your cars in cash, you should begin to immediately build a side fund so you can pay for that next automobile purchase in cash as well. So the real question is when is the right time to replace your old car for a new one, especially if you are going to make monthly payments?
The short answer in my mind is when the cost of upkeep and maintenance on the car is becomes more expensive than cost of a payment on a new automobile purchase. Let's breakdown the analysis a little bit further so you can do some analysis on your own. There are more details to look at than you might imagine, so make sure you compare all of these side by side before you make the plunge.
The first thing to consider is what will happen to the cost of your automobile insurance. With the purchase of a (new) used car, your car insurance is likely to go up relative to the price where it is today on your current automobile. You should call your property and casualty agent or shop around to get a rough idea on what the new cost of your auto insurance will be. Then, you can compare the difference in price between the old car and new car and put the difference in the (new) used car column.
The second thing to analyze is the cost of gasoline for the new purchase. Since your new model may get better or worse mileage depending on choice of automobile, you should make a comparison to see whether gas will cost you more or less money once the new purchase is made. If the style of car will remain the same, then this category may be a push in the overall decision.
The third thing to compare is the cost of overall maintenance. If you are driving a used car into its 6th or 7th year, you may be approaching or already have it the 100,000 mile mark on the odometer of the car. Depending on the make of the car, it is typically at this level where you could start to see more major repairs. You'll likely have to replace tires, brake pads, or other key parts to the car which can cost you quite a few bucks. You may want to look back at your credit cards to see how much you actually spent in overall major maintenance costs is the past few years. Even if the new car purchase is bought with some sort of extended warranty, you may still have some out of pocket cost for upkeep and maintenance, but you'll need to factor this is for the side by side comparison. Items like oil changes should stay relatively the same if you change your oil every 3,000 to 5,000 miles.
The fourth thing to compare is overall safety of the automobile. This part of the equation may be very difficult to measure when it comes to dollars and sense, but could factor into the decision when it comes to your automobile insurance rates or your overall peace of mind. Safety can be even more important to your decision if you have added a new addition to the family since the last time you purchased a new car.
The last part of the analysis is to determine what the monthly payment will be on the (new) used car. You should always make sure you negotiate with the car dealer on the price of the car and never start your negotiation with amount of payment you can afford each month. After you determine what you can afford for a down payment, you should be able to determine the cost of your payment at different borrowing rates. Often you can get great rates from places like your local credit union if the dealer does not offer you a good interest rate on the loan.
Making a new car purchase can often be a very emotional process for most households. Considering the size of this purchase and what it will mean to your overall budget, you should absolutely make a smart money move and do a detailed T-chart side by side analysis so you can make the best decision for your family.
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Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc - The Leaders in Gen X & Y Financial Advice and Services
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