Paying Cash For Cars

So, I once heard someone say that the second richest man in America, Warren Buffet, always bought used cars. This was a kind of guideline for the general concept that, "People who are well off tend to save for things they want and then pay cash." Although I didn't find any truth to saying above, I did find some of Warren Buffet's advice:

• Stay away from credit cards and invest in yourself.
• Money doesn’t create man it is the man who created the money.
• Live your life as simply as you can.
• Don’t do what others say, listen to them, but then do what you feel is the right thing to do.
• Don’t buy brand names; instead just wear those things in that make you feel comfortable.
• Don’t waste your money on unnecessary things; rather spend it on those who are really in need.
• It’s your life so why allow others to rule our life.

People who do well financially live within their means, pay their credit cards off each month and live modestly. In general, I feel like I can spot those who are well off, just by checking out the car they drive. The funny thing is, those with the brand new car, I consider not well off and those with an older car, I consider well off. Its almost opposite of what you see. My sister once told me, "I feel like you are a lot better off than most people, but you would never know by looking at what you have."

The only debt a person should have is their mortgage. Take a good hard look at yourself and see if this is true. That's right, pull in the student loans, car loans, credit card debt, etc. You may think everything is under control, but unfortunately you may be one event away from financial ruin. Keep in mind, this event may be completely out of your control.

FIVE YEAR COST

From this interesting article: http://www.consumerreports.org/cro/cars/used-cars/buying-advice/used-car-savings/overview/used-cars-ov.htm

• "According to the used car savings analysis, buying a 2005 Toyota Camry with a V6 engine, for example, could save you about $13,000 over five years compared with buying a new 2008 version."
• "buying a three-year-old Ford Focus can save you more than $8,000 over the first five years"
• "On average, our findings show that you can save 32 percent in the first five years by buying a three-year-old car. Similarly, with a one- or two-year-old car, you can save 19 and 27 percent, respectively."

PAYING CASH

But how much is it really costing you to decide to buy and get a loan rather than save up your money first?

National Automobile Dealers Association gives an average price of a new car sold in the United States as $28,400 and using the national average interest rate of 5.73%, that gives us $32,729.40 total, paying $4,329.40 in interest, if you are lucky enough to get that good of an interest rate.

Now, lets compare this to purchasing a car a few years old. One might get a discount of 35% since the average depreciation is 65% over the first five years (as much as 20% is lost in the first year from depreciation). This would be a purchase price of $18,460. Investing the difference of $9,940 at a rate of 5% (tax-free municipal bond with you being the bank), you would have $12,686. Since you also saved $4,329.40 in interest, you really made a decision that was worth $17,015.40!

MAINTENANCE

How does maintenance factor into all this?

From this article: http://www.consumerreports.org/cro/2012/06/what-that-car-really-costs-to-own/index.htm

• "While maintenance and repair costs increase, even over eight years they still don't average one-sixth the cost of depreciation."
• "In the end, though, it is almost always less expensive to hang on to your current car than to buy a new one. Even the most-expensive repair bills for an old car can't outweigh the cost of depreciation on a new one."

SUMMARY

By the way, I paid cash for my 93 Nissan Sentra in 2007 for $2400 with 90,000 miles and have not had to do any major repairs yet, knock on wood. My recent car insurance quote was $369 for the year, which is much less than people are paying for their new cars. My maintainence might be $1,000 per year and gas is about $300 per month. I might argue that maintainence on my vehicle is less than that on a new vehicle just because people need to pay more to maintain a liability with more value.

The funny thing is if you had $28,000 in your bank account, would you use all this money to purchase a car? Most people wouldn't. On the other hand, many people have no problem purchasing a car with money they don't own. Next time you purchase a vehicle, just remember your decision to get something nice rather than something great may be the difference between owning or not owning your home in 30 years.

This post was reposted from http://www.sizuservices.blogspot.com/2012/07/paying-cash-for-cars.html, originally written on July 31st, 2012.