We’ve done it! We’ve reached the last of my Annual Expenses posts and we’ve gotten through them all with just a few grains of sand left in the 2019 hourglass. I plan to do an aggregated, “year in review” style post that will pull together the highlights so be on the lookout for that in the coming weeks. My last expense category is vehicle depreciation and I spent an average of $2100 on it over 2017 and 2018. I believe a “bare minimum” budget number would be about $500.
When people talk about deciding between buying a new car or keeping the old one around a while longer, you will often hear phrases like “this one is paid off” or “I don’t want to have a car payment again.” Those statements come from a cashflow oriented viewpoint. But I prefer what one of my customers, a lifetime wheeler and dealer, likes to say: “You make money when you buy, not when you sell.” In reality, that “paid off” car still costs actual money each month, cash or not.
This expense is called depreciation. For a simple example, let’s say you purchase a car for $35k, roughly the average new car price today. You drive it for five years and then sell it for $15k. Your depreciation cost was $20k over the life of the car or $4k per year, regardless of your monthly note payment or when you paid it off.
So how can you reduce this expense? Exploit the depreciation curve, which starts out very steep but flattens quickly. Almost any car is going to lose roughly half of its value in the first five years. But most cars will only have 50-75k miles on them at that point and a good, well maintained one can go 100k or more relatively trouble free miles from there. This is reflected by the fact that the average car in the US is nearly twelve years old. The secret is out and that is the only reason the depreciation curve isn’t even steeper from the outset.
But it still makes sense to follow this principle and you can do it with two simple rules. One, only buy cars that are about five years old. That way, you will always pay half price at most. Two, only buy cars that have been taken care of well. If you aren’t personally mechanically inclined, insist on having someone who is inspect any car before you buy it. It shouldn’t cost you more than a hundred bucks or so, which is nothing compared to repairing even a single major issue if you wind up buying “someone else’s problem.” By following these two rules, you can buy almost any car within reason for $20k or less and run it long enough to keep your annual depreciation expense at $3k – or less.
But what if you want or need to keep the number much lower than that? It’s going to require more shopping around and more know how, but it can be done. You’re looking for something later in the depreciation curve, likely priced around $5k or less. In that price range, you’re going to be looking for higher mileage cars (100k+), cars that start out priced lower than most, or cars that depreciate faster than most. I would avoid that last category altogether, since there tends to be a good reason cars depreciate faster than average. Chrysler products, for example, are widely known to be unreliable. You’re not looking to lower your depreciation expense by simply increasing your maintenance expenses.
Instead, I would look for quality, high mileage cars in exceptional condition. They are out there and they don’t sell for all that much since most people aren’t willing to take chances on them and they are very difficult to get financed. One trick is to look for signs of mostly highway mileage, which puts a lot less wear and tear on a car than city mileage does. There are plenty of good guides on how to do this online, like this one. In this price range, inspecting the car thoroughly is crucial. Here is an excellent place to start learning how to do it, although if you’re uncomfortable with it, it’s well worth it to bring someone who is.
The payoff? If you buy a quality used car for $5k or less, it has already depreciated close to as much as it’s going to and you have a great chance of keeping your depreciation expense at $500 a year or even less. When I was a young lad, I bought my first handful of cars on the extreme end of the depreciation curve, all for less than $1k. In most cases, I drove them for about a year and ultimately sold them for within a few hundred dollars of what I had originally paid. I don’t need to do that today and I like to have something a little fancier to drive around in, but it’s nice to know I could if I needed to.
That’s about all for now. I provided links to a couple of great videos in this post. As for this blog, I wrote about which car brands are the best and worst here and about basic maintenance here. And the nice thing about the internet is that there is a whole universe of information out there at your disposal. If you don’t know much about cars, I recommend browsing around and doing some research until that has changed. The more effort you put in and the more you know, the better a position you will be in to score a huge win on your next car. Have a great Monday and a Merry Christmas!