Justifying New Vehicle Purchase

[Aaron Bry]

So I am at a point where I am considering a new car. Nothing fancy, a 2016 Hyundai Accent that is on sale for $11k. I would be paying cash.

I am at a dillema as I am not sure if it's a smart financial/reliability move. That money could be used towards an investment property.

I currently drive a 1996 Honda Accord and it is showing its age, needing more repairs as time goes on. In addition, the Accord gets an average of ~25mpg, while the Accent is rated at 28 city, 38 highway. A simple estimate puts me at a savings of $382 per year on gas alone.

Do you guys put off vehicle purchases until you're "Financially Independent" - or is this something that is a reasonable purchase?

[Nicholas W.]

My vote goes to reasonable purchase. It's a simple equation of cost of ownership. The Accent you can buy it, keep for 5 years, spend nothing on repairs and sell for maybe $5k only costing you a little more than a grand per year. There is a reasonable expectation of spending probably half of that in annual repairs on your older car. Beyond the financial cost of dealing with repairs there is the annoyance and opportunity costs associated with a break down.

One thing I would consider is financing the new car though. The interest rate should be very low if not zero. Keep the cash for investments that should yield much more than zero percent.

[Aaron Bry]

The only upside to the Accord is I received it for free, and it's only at 144,000 miles. But costly maintainance is almost here (I work on my own vehicles, but parts can still be expensive). The rotors will need to be replaced before the end of this year, valves adjusted, timing belt, water pump, new tires... That being said I could sell it as it sits for roughly $2k.

Hyundai offers 10 year, 100K warranty bumper to bumper. It's likely I would keep it for about 7 years and sell for $5k roughly, so less than a grand per year.

I can't finance anything new though. Financing requires full coverage insurance, and being 21 years old, liability vs full coverage difference is huge. $70 a month for liability on my Accord vs almost $200 a month for full coverage on the Hyundai.

[Kevin Williams`]

Aaron, replacing a vehicle usually costs you. I would fix the Accord unless you are looking to get more utility (fun or cargo) out of the next vehicle. 

New cars depreciate very steeply (especially Hyundai). Additionally, full coverage insurance is a sunk cost, which will cost you an additional $1500/yr with no return. Add the new car payment ~$2500 per year and you are looking at $4,000 per year.

Timing belt/water pump (usually together) job is ~$800, Valve Adjustment ~$400, used tires ~$160. Rockauto will keep parts cheap and the Accord will run forever if you maintain it, unlike the Hyundai (I have a friend that has replaced his motor twice).

Unless you know how to flip cars, I'd save my money for investing in appreciating assets!

[Chris Martin]

Regarding "Do you guys put off vehicle purchases until you're "Financially Independent" - or is this something that is a reasonable purchase?" I can't relate. My answer is: find or create a real estate company that will pay for your vehicle expenses. My company provides fleet vehicles as part of the job. Although I am a part owner of the company, not having to deal with gas and maintenance (I have a company AMEX card for that) is a nice benefit. The only downside is if I am driving a truck with ladder racks overnight... the neighborhood frowns upon work vehicles.

I do occasionally shop at , and parts can save you a lot of budget $ if you have the patience and aptitude to pull your own. And it can save time vs. waiting on a dealer... depends on the parts;)

[Gabriel Hershberger]

A 2016 model is going to hit you hard with depreciation. If you buy a gently used older car with low miles, you can avoid most of the depreciation. The curve flattens out a lot from year 5 to 10. The biggest drops in car value come during the first 3 years. 

I just purchased a 2006 Mazda Miata in California with 58,000 miles for $6,900. It needed a few minor repairs, but if I choose to sell it in 3 years at around 90,000. I probably can sell it for $5,500 (Just a guess. haha)

If you are into classic cars, you could buy one that has hit the depreciation trough and will appreciate in value soon. There are many 1970s, 1980s vehicles that might appreciate in value in the coming years. Just throwing this idea out there, in case it's new to you. It's a different mindset than most people have.

Cheers

[Dylan Vargas]

@Aaron Bry Hello Aaron! You are investing in a depreciating asset when you buy the car. I would drive the Honda and keep saving money. Are you a home owner? Don't need to answer but if not and being young age wise, that 11k could be a downpayment on a home or 4 plex to live in. I would NOT have anything less than full coverage on a new car I just paid cash for. Good luck but remember, cash is king and the more you have at any point in life gives you more purchasing power and options on items.

[Aaron Bry]

Hey guys!

So I actually came to my senses since I posted this. I have moved within 2 miles of my work and now have the luxury of driving very little. My gas bill is now $20 a month! Now that the weather is nice I will ride a bicycle to work.

So, I'm keeping the Honda for as long as I can at this point. When I wrote this I was commuting/driving roughly 25K miles a year so a newer car would've been nice, but I do not need it.

Dylan: I am a home owner but have since rented that house out to be closer to work. I bought it in March of 2016 with 3.5% down, and now rent it for a little over what my mortgage payment is. I'm playing the appreciation game as it's risen 25K since I purchased.

[Kevin Williams`]

Glad to hear this worked out for you!

I drive over 50k miles a year, I'm jealous!