I don’t know anyone who isn’t counting down the days to their senior license, and the ability to drive – by themselves! It’s a huge milestone and sets you on the transition from teen to young adult. However, to drive, you need a car.
Some are very fortunate because their parents buy them a car for a holiday or birthday. Other parents say that they’ll match their kids – say you save up $4,000. Your parents will contribute another $4,000, matching what you pay. The third option (and probably the reason you are reading this post) is that you need to buy the car for yourself.
First, let’s see if a car is even a good use of your money.
I think that it really depends on your personal situation. Think about these two questions: Do I Want A Car? or Do I Need A Car?
If you fall into the first category, then you probably should not buy a car. Many people that I know want, but do not need a car. Some live in the city, where they can walk or bike to any destination that they want to. They do not need a car. Some kids parents offer them the use of a family car. You do not need a car if you already have access to one. You need to be honest with yourself – do you really need a car, or can you live without one for a few years?
Many high schools do not allow anyone but seniors to drive to school. It is similar in college – many don’t allow freshmen to have cars on campus.
Let’s look at the math. Say you were going to spend $6,000 on a car but realized you did not need one, and instead invested the money. Hypothetically, you invest that money into an aggressive growth mutual fund, that returns an average of 12% every year. In 10 years, you’d have almost $19,000. You could then apply (and get) a FHA loan for about $530,000, buy a multifamily dwelling and make a couple thousand dollars a month.
[Keep in mind, from an investors point of view, a car is a worse investment than cow s**t. On average new cars depreciate by 11% the second they leave the lot. After 5 years, a car is worth 37% of what you paid for it at a dealership. (At least you can sell cow manure to fertilizer companies.)]
Let’s say that you feel that you need a car. Many do. Say your parents don’t have a car that you can drive, and you do not have access to public transportation. Say you needed to go to a commitment that requires a commute, and you don’t have a ride. While some colleges are in the city, where you don’t need a car, some are rural, where walking or biking is not an option. Then you need a car.
If you need a car, what do you buy? What’s the budget?
Buy a beater or a car just above a beater. Whatever you do, do not buy a new (or used) car from a dealership.
As stated above, they are a depreciating asset. But, even worse, you could get stuck with a monthly payment for a car that is depreciating. These payments can last for as much as ten years.
Here’s a personal story. One of my ex-coworkers had bought a two-year-old Chevy Sudan from a dealer, on a loan, when he graduated from high school. He was all excited to show it off to his friends and did. But after a few months, it got old and was just another car. The coworker used the car every day, and because of this, it had a lot of wear and tear. 5 years after he bought the car, it began falling apart, and the service bill cost more than the actual value of the car (because it had depreciated). Even worse, because he bought it on loan, he was still paying a monthly payment for a car that corresponded with its original value and had 3 more years of monthly payments to go.
In summary, he was stuck paying $300 a month for a car that was worth basically nothing and was literally falling apart underneath him. This is why you should never buy your first car from a dealer.
I think that the best way to buy your first car is in full cash, direct from the owner. This way, you own the car in full and do not have to worry about monthly payments.
You shouldn’t spend over 6k for your first car because there is no need to spend more. There are tons of reliable cars at this price point, like late 90’s jeeps, fairly new Toyotas, and great Subarus. Make sure that the car will last, and don’t buy something that is falling apart. Take a look and listen to the engine, and check the frame of the car for rust.
Remember, do not let your ego get the best of you. Remember the math that we did above. By saving a mere six grand, you can have a house in 10 years. Buy something cheap, and don’t go over $6k. Don’t worry about what others will think of you, instead feel the relief of not being stuck in a monthly payment (and an unending circle of debt).
Remember, don’t buy a car unless you absolutely need it. Be honest with yourself. If you do need a car, be frugal in your spending, and whatever you do, don’t opt for a monthly payment. Thomas Jefferson says it best :
Never spend your money before you have it.
A reader recently recommended a book to me about used car buying, and flipping them for more cash then your initial investment. I haven’t read it yet, but it relates to this post, and the reader loved the read. For me, if you are going to make more money selling a used car then what you bought it for, I like it. Take a look: