Buying a New Car:  Does It Make Financial Sense?

Barriers:

Unfortunately, brand-new cars drop in value as soon as you drive it off the lot.  According to industry experts, the value of a new vehicle drops by about 20% in the first year of ownership. Over the next four years, you can expect your car to lose roughly 15% of its value each year.  

 Consider that the average vehicle will be worth just 40% of its purchase price after five years.

  • A 5-year-old vehicle that sold for $40,000 when new will be worth $16,000.
  • A 5-year-old car that sold for $30,000 will be worth $12,000.

The hidden part about depreciation is that it isn’t obvious like your monthly payment. You don’t see the money going out the door. It is one of the end products when it’s time to trade in or sell your car. You would need to consider the cost of owning a vehicle and that its depreciation is a factor as it will be a large portion of the cost.

For example, if that SUV you paid $40,000 for five years ago is now worth only $16,000 as a trade-in, you’d need to add that $24,000 difference to your operating costs over the past five years to discover the actual cost of ownership.

Guidance:

When deciding to purchase a new car, you need to decide how much you can actually pay for a car. To buy one without going into debt is your best option. You will need to determine how much you can afford. As a general rule, the total value of all your vehicles combined shouldn’t be more than half your annual income. 

Rather than making payments to a loan institution, you could decide to be making payments to yourself without paying additional interest.  You will need to decide how much you need to save for your new car.   Research the price of the car you want. Decide on a time frame you want to get the car by (six months, one year?). Then divide the total cost by the number of months to get your monthly savings goal. Alternatively, you can review your budget and determine how much income you can set aside each month.  Then divide the total cost of the car by your monthly savings.  This will define how long it will take you to save for your new car purchase.  

By creating a budget, finding ways to lower your expenses, and/or increasing your income, you will be able to put money towards a car fund each month.  Keep in mind, however, that the average monthly payment data from Edmunds suggests that at the end of 2022 was $717 for new cars and $563 for used, compared with $525 and $389, respectively, five years prior.