Happy Monday, folks! As I mentioned on Friday, I bought a car last week. So for the next few weeks, I’m going to be peppering in some posts about that process – both my general philosophy/methodology and how this latest purchase played out. Today I’m going to talk about why I like to buy used cars. The biggest reason to buy a used car versus a new one is obviously cost. But if you do it right, you can go beyond that and follow my core financial philosophy of keeping costs down WITHOUT sacrificing quality. When you think about cars, you want to think about the total cost per year. That includes, and typically in this order from largest to smallest, depreciation, gas, insurance, and maintenance/repairs.
Depreciation is your largest, most important cost. And the larger your acquisition cost, the more you’re going to pay in depreciation in most cases. But the depreciation curve almost always behaves in a fairly predictable way. For example, a typical $40k car will lose about $20k of its value in five years. But in the next five years, it will probably only lose another $10k. And in the next five, probably only $5k. Obviously different years, makes, models, etc depreciate differently. But that is the general pattern.
My favorite way to exploit this is to buy cars at about the five year mark, drive them another five to ten years, and take good care of them. You can usually still find one that age with 50k miles or less on it and with today’s cars, assuming the previous owner has taken care of a car reasonably well, that is basically the same as new. Just about any car, besides the crappy brands I simply don’t advise you to buy at all (I posted about the best and worst brands here), is going to go around 200k miles if it’s maintained decently and not driven excessively hard. And furthermore, I’ve done very little besides regular maintenance on vehicles with 50-150k miles on them. So to me, that is the range I want to own a vehicle for. By buying and selling when I do, instead of paying roughly $30k over 100k relatively trouble free miles for that $40k car, I pay half that for the same.
So by taking advantage of the differences between the depreciation cost curve and the maintenance/repair cost curve, I save a ton of money and get to drive essentially the same cars I otherwise would. But in order for that to work, I have to be very confident I’m starting with a good car. That requires first doing the proper research and then knowing and identifying the signs of a car that has been taken care of versus a car that hasn’t been. I’ll get into that plenty more before my series of car posts is complete. But that’s enough for today. Stay tuned for more of these posts and I’ll work my way through the entire process. And get your week off to a great start!