What do cars and radioactive material have in common?
Well, besides each being a potential environmental disaster if not managed well … they both have a half-life:
– For radioactive material, it’s the period of time for a substance undergoing decay to decrease by half,
– For your car, it’s the time it takes for you to lose half your money!
This is because the largest cost of auto ownership is not the finance charges, the taxes, the gas that you put in the tank, or even the tires or repair costs … it’s a largely ‘hidden’ cost called depreciation.
You see ‘depreciation’ when you sell the car as The Amount You Paid less The Amount That You Get Back.
Even the amount that you get back helps to hide the true depreciation cost because you will often trade in the vehicle and the dealer might ‘sweeten’ his offer by giving you a higher trade-in figure than the car is really worth … but, what he is really doing is giving you a discount on the purchase price of the new car (a discount that you may well have received – or exceeded – even if you didn’t offer a trade-in).
Even if the 15% to 20% p.a. depreciation claimed by Debt Free Bible is true, what effect does that have on the value of the vehicle?
The chart shows if you paid $25k for your new car, you can only get $12,800 if you sell it after 3 years, even if you decide to hang on to the car, it has cost you $25,000 – $12,800 = $12,200 …
… or, $4,067 a year!
[ AJC: And, don’t forget all of those other costs that we mentioned: “the finance charges, the taxes, the gas that you put in the tank, or even the tires or repair costs” 😉 ]
So, how accurate is that “15% to 20% p.a. depreciation claimed by Debt Free Bible”?
Well, a paper published by the IAES, which evaluated the depreciation rate of 15 automobile brands available in the USA for the years 2000-2004, yielded 5 tiers of depreciation rates:
Tier One: Honda and Lexus with an average annual depreciation rate of 13.4-14.1%.
Tier Two: Volkswagen and Toyota with an average annual depreciation rate of 16.5-16.8%.
Tier Three: Nissan, Mercedes, BMW, Hyundai, and Mercury with an average depreciation rate of 18.9-21.2%.
Tier Four: Chevrolet, Chrysler, and Saturn with average annual depreciation rates of 25.4-27.5%.
Tier Five: Dodge, Ford, and Buick with an average annual depreciation rate of 31.1-32.6%.
Now, using these rates, I have calculated the Half-Life of each brand for you, simply by using the Rule of 72 [AJC: divide the depreciation rate into 72; the answer is the number of years it will take to halve the purchase price] ….
Use this table to find 7 Million 7 Years Patented Half-Life For Your Next Car:
Honda / Lexus: 5 Years 3 Months.
Volkswagen / Toyota: 4 Years 4 months
Nissan / Mercedes / BMW / Hyundai / Mercury: 3 years 7 Months.
Chevrolet / Chrysler / Saturn: 2 Years 9 Months.
Dodge / Ford / Buick: 2 Years 3 Months.
Using this information, you could do some very fancy tables about the break-even point of spending more to buy a new (say) Lexus instead of a new (say) Nissan – factoring all the other costs of ownership, if you want to get real fancy – given that you have a couple of years worth of depreciation to play with …
… rather, I would like you to see that you are far better off buying a second-hand vehicle of the type that you are after, so that you can pay half-price 😉
You do this, simply by buying a 4 year, 4 month old Volkswagen, or a 3 year, 3 month old Buick, etc.
And, even if you were determined to buy new, you are still probably better off buying a slightly ‘better’ brand used – even if it means going up a tier or two – than you are in buying a new ‘standard’ brand auto.
Sorry GM and Ford, but you are in DEEP trouble, because you simply aren’t competitive!
Well this makes me feel good about my purchase! I decided to buy a used luxury car instead of a new car for the same price. It was well maintained, low miles, etc. Beyond just driving a nicer car all of the time, my justification was in the numbers. My car was a 3 year old Acura. I looked at 6 and 7 year old Acura’s and they still sold for over $10k. I paid $17k and will keep it for 3-4 years. Much lower cost of ownership!
Interesting. At first it seems easy enough to compare car dollar value worth to a radioactive decay curve. Except there are other factors. For example, rad decay will progress at a constant rate until the last isotopic atom has decayed to its next transition state, but the decline in the value of a car is expedited by the increase in maintenance costs associated, until the car isn’t driven anymore, at which point the value fluctuates with the raw commodity prices of the manufactured components, or the chick appeal of having a rusting camero on your front lawn. Thus there is a sweet spot where both the purchase price and the maintenance costs are minimized. The confounding factor becomes the non-uniformity of vehicle manufacture and driver practice, which make the best economic purchase point more difficult to calculate. E.g. an old, old woman driven car is probably the best purchase. But… it’s hard to get the old lady pee smell out of a car (trust me), and oldsmobiles aren’t as cool as they once were. An old mid 20’s male driven car civic or subaru will be associated with high maintenance. And a new car means high cost depreciation. So how old / how new? And do track tires really make a difference? These questions and more!
@ Brandon – exactly why I usually purchase used … although, I may occasionally purchase new …. at least I KNOW that I’m throwing money that I can easily afford out of the window 😉
@ Ill Liquidity – I see an idea for a web-site in there somewhere … yet another way to may that $7m7y that you are after 🙂
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I think the sweetspot is when the car is OLD. Cars get to a point where, as long as they are operable, don’t really depreciate anymore. And if you get a beater car, then you don’t have much maintenance because you just drive it into the ground. For example, I bought a 1992 Saturn SL2 for $1000 in August or 2009. I spent about $150 in maintenance (including new turn signal flasher, battery and oil changes). The thing finally gave up the ghost in October. Insurance was about $350 a year. So, the car cost $107 a month to operate, exclusive of gasoline. I defy you to find a cheaper alternative. Even if the car died in 10 weeks, it still wouldn’t have been too much of a loss.
One other thing… I don’t agree with the old lady car thing. Old lady cars often spend a lot of time sitting in their garages. When I car sits, the oil all falls into the pan, condensation seems into the piston rings and the car slowly eats itself. A car is happiest when it is driving regularly (but not too much), and primarily on the freeway.
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Im a multimillionaire myself and this is one that I try to teach people just getting started about… don’t buy a shiny new car its a huge loss, most of the time.. I try a simple rule… Target is to spend 10-12 Cents per mile for the car, including repairs and maintenance…. Not including gas. Its simple try out my simple formula… example buy a car for 20K put 100K miles on it and sell it for 10K you did great. its a good quick rule of thumb that one might consider when buying a car.. I did buy one new toyota camry that I paid 20K for put 150K miles on and sold for 5K so it worked and I purchased new, and I did not put anything into except normal wear and tear items… Personally, next car I want to buy American. then again when you have enough money you might just treat yourself to blowing some of it on a car that you always wanted… As long as you know the PLAN is to do that, not an impulse purchase but a planned purchase…. I love fast cars so I even briefly looked into high end rental car clubs, the seemed interesting to me, anyone join one?