Buying cars: Was there ever a topic filled with such hype as automobile sales or leasing? You cannot turn on the television or radio without being bombarded by some clown who is whipped into a frenzy about the deal of the day, the sale of the century, for one day only, imagine yourself in a new Hoop-d-do-mobile, ad nauseum.
The automobile industry in the USA has taken a huge hit in recent years what with bailouts, stimulus plans and even government takeovers. Did you like the way GM (aka Government Motors) “paid back” with taxpayer money…the stimulus money that gave control of the carmaker to the government and labor unions? But, I digress
Still, the auto companies and retailers continue to act like carnival barkers vying for your attention.
Some of you buy into the hype and have to have a new car every two to three years and the associated continuation of car payments.
Others of you have decided that the hype regarding auto leasing is the only way to go.
Let me ask you just one simple question. If your answer is NO, then stop reading this section and proceed to next week's section about retirement planning.
Here’s the question: “Would you like to never have a car payment again as long as you live?”
Do I have your attention?
OK, here’s the drill. There are a couple of ways to do this. The first is the simplest and I think the best, but I’ll give you both of them just in case.
OPTION 1 - EASY: Here are the steps
1. Payoff the car you are presently driving.
2. Plan to drive it at least 3 or more years after paying it off and perhaps 5 more years if you can. Get over your love affair with a new car. It’s just a way to get from here to there and back.
3. Once the car is paid for, start depositing your car payment amount into your savings account or some other short-term interest bearing account.
4. At the end of the 3 or 5-year period, you will have accumulated enough to purchase another car for cash.
5. You will have eliminated the interest you paid on your old car note and all that money will be earning interest for you in the meantime.
6. Since cars depreciate, wise money is on NOT paying interest on what you spend on them.
7. You only have to do this once. After that, your savings account will mature for another car during the time you plan to drive your car and you can start the process all over again.
8. BTW, I never buy new cars anymore. It’s fine with me for someone else to take the immediate depreciation. I’m glad there are still people out there to take the hit for me, and I suspect I’ll never run out of volunteers.
OPTION 2 - Here are the steps.
1. Repeat steps 1-4 above
2. Go to your bank and tell them, I want to place my current automobile savings account into a CD in your bank. I am prepared to pledge this CD for 3-5 years to borrow money to pay for a new car.
3. Tell your banker you are prepared to pay him no more than 2% more than the rate he is willing to pay you on your CD to collateralize the loan.
4. If that works, you will then borrow the money to make your purchase and continue to make your car payment deposit in the bank…only this time it goes to repay your loan.
5. You are still not out any more than you would have been on your savings account, and while you are reducing the loan month over month, your CD will continue to grow month over month.
6. When this car is paid for you can retrieve your CD, now bigger than when you started and pay cash for your next car. You can also purchase more car if you desire.
7. Then revert back to depositing your “car payment” into an interest bearing account.
CAVEAT: In 2015 and beyond dollars (as of this writing), option 2 may not work since banks are almost charging YOU to keep money on deposit of any kind. However, with either option, you are paying yourself the interest on a depreciating asset and not a lender.
Try it once and you will see. Sadly, most of you won’t. You’ll just keep on listening to Joe Blow hype the car you just HAVE to have and your ego will cost you a lot of money. Is this a fine ride or what?!!
Edmunds, the car gurus, offers the following empirical evidence about buying cars. You need to tattoo this on your forehead when you get car fever. You can find this article at www.edmunds.com
Compare the Costs: Buying vs. Leasing vs. Buying a Used Car
By Philip Reed, Senior Consumer Advice Editor
People say you shouldn't discuss religion or politics. But there is another touchy subject that leads to heated debates: Should you lease or buy a car? A closely related question is this: Should you lease or buy a new or used car?
There are two ways to answer this sticky lease versus buy question: financially and emotionally. Some people look at the numbers and take the cheaper option. Other people are willing to pay more for something that better suits their lifestyle. When it comes right down to it, some people feel that driving a new car is important, and they're willing to shoulder the extra expense to do so.
Clearly, owning and operating a vehicle can be expensive. But there are ways to save money — lots of money. In fact, when you look at the average household budget, the biggest opportunity for savings is found in auto-related costs rather than food, clothing or utility bills. For example, everyone knows the monthly payments are higher to buy or lease a new car. But many people overlook the fact that new cars also mean higher insurance and DMV fees. Over time these extra expenses add up.
There are arguments to be made for buying a car outright, taking out a loan or leasing. If you want more information on the pros and cons of leasing versus buying, see the 10 Steps to Leasing a New Car. For the pros and cons of buying new versus used vehicles see 10 Steps to Buying a Used Car.
Conclusions
Edmunds concludes that leasing is the most expensive way to drive — in the long run. Here's how leasing compares to the two ownership scenarios:
Leasing vs. Buying New — Using the figures presented in this article, it is $6,752 more to lease a new car over a five-year period, than it is to buy the same car outright. This breaks down to $1,350 more per year to lease rather than to buy a new car.
Leasing vs. Buying Used — It is $15,750 more to lease a new car over a five-year period than it is to buy and operate a used car for the same amount of time. This is an additional yearly cost of $3,150.
Buying Used vs. Buying New — Not surprisingly, it costs a lot less to buy and drive a used car over a five-year period than a new car. In the example cited in the Edmunds article, it is $8,998 less for five years or $1,799 less per year.
The figures we've presented here indicate that buying a car — whether it is new or used — is more economical than leasing a car. However, some people might point out that, while driving a used car costs less, the pleasure of driving an older car is lower, too. To be fair, you can't put a dollar value on the fun of driving a new car. As we said before, the benefits of new/leased/used vehicles can be argued many different ways. The purpose of this article was to look at the numbers involved in typical examples and let the figures speak for themselves.
Bottom line…buy used cars, use one of the methods recommended to pay cash for it and maintain it properly and then drive it until it wears out.
The operating principal is DON’T buy what depreciates on credit…period.
