The used car market was outrageous 6-8 months ago, am I right? If you are in the market for a car, I would highly suggest talking to a few people prior to committing to financing (having financed 2 vehicles myself) or worse yet, lease (shudder). I have been hearing a lot lately about people wanting to buy new cars, so I thought it pertinent to share my thoughts. Remember: personal finance is personal.
You may recall the short supply of used cars which literally drove the pricing up to astronomical heights. We personally were in the thick of it when we needed to upgrade our family vehicle to something with a little bit more room – more on that later. It seems like things are shifting for the better nowadays.
Oftentimes I find myself telling my clients this phrase: People buy emotionally and justify intellectually. What comes to mind when you read those words?
I want to explore 3 main reasons people buy: 1) New Addition / Growth; 2) New Features / Technology; 3) Obsolescence. Let’s look at these one at a time.
New Addition / Growth. When it comes to purchasing a new car, there are a lot of factors to consider. You probably research gas mileage, size, comfort, color, make and model, among other variables. You test drive the vehicle to make sure you can see out of the windows clearly. You want to make sure you are choosing the right vehicle for you and/or your family. Most parents have safety ratings at the forefront of mind if you have children in the car. You aren’t going to be driving a Mini Cooper if you have 2-3 car seats, so you will likely be looking for something that has 3 rows of seats.
Maybe your child is now a teenager and is looking at getting a driver’s permit or license. You will need to factor in how to navigate that topic with them. They need to be clear on working hard and earning money to get a car. You may be generous enough to match what they earn, but I would caution you if your plan were to just buy one for them outright. Do your due diligence and find something that fits your family, your budget, and doesn’t stretch your wallet.
New Features / Technology. Tesla vehicles are like McDonald’s restaurants now. There’s one on every corner basically. People are finding out about the new technology and gadgets and are drawn to the “cool” factor. What is not cool is being unable to afford the car payment and feeling the stress / weight of living paycheck to paycheck while you drive around trying to impress people who don’t even know you. Your mental well-being is much more important than the new flashy car.
As soon as you drive off the lot, within 6-12 months, your “new” features are going to be obsolete anyways. Keep this in mind when exploring the “add-ons” that the salesperson tries to throw in there. You can always ask, “what’s the price without the tech package?” Besides, with GPS on your phone, there are not a lot of upgrades that are substantial enough to make a life-altering decision.
Obsolescence. This can come in several different ways: your car could be totaled in an accident; car manufacturers stop making parts for the vehicle which also means that the price for those parts increases due to supply and demand; or your car’s engine could die. If your car gets totaled, the insurance company will likely give you a check to cover the cost to replace it. This check is not a permission slip to go out and buy more vehicle than you can afford. Poor people ask, “how much down and how much per month,” Rich people ask, “how much down?” Let’s say you are driving a $14,000 car that is paid off. Your car gets totaled and insurance cuts you a check for $14k. You now have $14k to spend on a vehicle. This is not the time to go on a shopping spree and buy $35,000 worth of car, unless you have the delta saved. Make a plan for replacing an obsolete vehicle by stocking away money each month into a sinking fund for a replacement vehicle. When the time does come to buy, you will be ready with cash (check) in hand.
Driving a slightly older, reliable vehicle will free up funds that you can use for other things in your life. We recently purchased a Certified Pre-Owned (CPO), 3rd row Toyota Highlander (during March when the prices were insane). The dealer had just knocked the price down $5,000 because they were trying to make room for new inventory. We had saved our paychecks for close to 1.5 years in order to afford to purchase the car outright. We ended up spending $24k out the door and are totally in love with it because we have no car payment. Freedom.
For fun, I ran some preliminary numbers on a 2023 Chevrolet Suburban for an average, large-sized family. The range is $69,000 – $74,000. The average monthly payment would be $1,000 over 72 months. You may be paying on this vehicle for 6 years! Imagine what you could do if you had $12,000 each year for 6 years going into retirement, kid’s college fund, or savings. Now if you take a 2017 Chevrolet Suburban at roughly $35k-40k, you are looking at almost 1/2 the price for a reliable vehicle that fits your needs. It certainly makes you pause and think about your priorities, right?
You can purchase extended warranties on CPO vehicles. It does not always have to be brand new in order to capitalize on warranty; dealers will offer warranties on most cars. If you have an emergency fund in place, you likely will not need the warranty. It could come in handy if you are just starting out and don’t have much saved up.
The moral of the story is: do not purchase more vehicle than you need and be mindful of your budget. Ideally, you will have saved up enough money to buy a car cash. If you find yourself making payments, do everything you can to make double or triple the amount so you can pay it off in less time to avoid paying a ton in interest.
Agree or disagree? If you want to continue the conversation, get on my calendar!
Madsen Financial Coaching 