5 Things to Consider Before Buying That New Car
Aug 31st 2013 10:16AM
Updated Aug 31st 2013 10:18AM
Call me crazy, but I've become quite attached to my old car.
To be specific, it's actually my wife's first car, a 1998 Chevy Cavalier with just under 204,000 miles on the odometer:
The author's current car. Image source: author.
And it's not that I can't afford to buy something better.
Come to think of it, there's technically nothing that would prevent me from grabbing a decent-sized auto loan, bartering with a salesperson at the nearest dealership, and driving off the lot in something like, say, Ford's new 2014 Fusion, which, thanks to a whopping $555 million investment from the world's oldest automaker, I'm proud to know is now being produced in the United States:
Of course, Ford had significant motivation to make that investment; the company recently told investors total U.S. sales increased 11% year over year for July, including retail sales which increased 19%. All told, that marked it Ford's best July performance since 2006 and best retail sales since 2005.
In fact, strong auto sales are just one of many reasons I own shares of Ford stock in my own Roth IRA.
But each time I'm tempted to join the masses and buy a brand new vehicle, the investor in me brings the idea to a screeching halt.
Why, you ask?
Here are a few reasons I've decided to hang on to my 15-year-old vehicle.
First, I like buying assets that appreciate in value, which happens to be a class to which automobiles generally don't belong.
On average, new vehicles lose around 23% of their value in their very first year and are typically worth around 60% less after only five years.
Say, for instance, you pay $30,000 for a new vehicle. After one year, the value of your ride will likely fall by $6,900 -- or $575 per month -- to $23,100. After five years, that $30,000 car will be worth roughly $12,000.
To put that into perspective, what would you do if you were considering the purchase of a $250,000 home, only to be told after five years its value would depreciate by 60% to just $100,000? You'd run for the hills, right?
Sure, most cars cost much less than a typical home, but on a percentage basis those numbers are downright sobering.
That depreciation also doesn't account for the fact that, unless you've got a wad of cash to pay in full, you'll probably be making a monthly payment on your new vehicle as well.
So let's run some numbers, shall we?
Not including sales tax, if you took out a five-year loan on that $30,000 car at a very reasonable 4% annual percentage rate, that amounts to a monthly payment of roughly $552.
Even less comforting, note that's still about $23 less than the monthly amount your car will depreciate during the first year.
By contrast, having no payment on your used vehicle frees you up to do significantly more financially productive things with your money.
3. Cost of insurance
Then there's the cost of insuring your car, which is also bound to be significantly higher on your substantially more valuable new vehicle.
As it stands, I pay less than $300 per year to keep adequate liability insurance on my older car.
However, if I were to go upgrade even to the baseline model of Ford's latest Fusion, which is slightly larger and boasts similar fuel economy as my old Cavalier, my average annual premium would rise by nearly sixfold to a whopping $1,750 per year.
4. Cost of taxes and registration
Another benefit of keeping that older car? Taxes and registration costs typically go down with each passing year.
Specifically, in my home state of Montana, it costs $217 per year to register a vehicle between zero and four years old. For vehicles aged five to 10 years, it's $87. If your car is 11 years or older, you can either pay just $28 annually or, as I did, opt for a slightly higher one-time fee to secure a permanent tag.
5. Cost of parts, maintenance
Finally, remember new vehicles come with new technology, for which replacement parts can often be prove more expensive.
Then again, I'll admit the repairs should (in theory) be required on a less frequent basis for newer vehicles, but that doesn't mean they're exempt from breaking down every now and again.
Besides, if you make sure you keep up on routine maintenance and don't let larger repairs linger until they cause significant damage to other parts of the car, even older vehicles shouldn't require significant time in the shop more than once or twice per year.
Better yet, if you can find an honest mechanic who charges fair prices, you'll realize the costs for those inevitable repairs will be far less than the costs of owning a newer vehicle.
Here's how to invest
Of course, if you're dead-set on replacing your old car with something better, at the very least consider searching for a well-maintained used vehicle. Then, before you buy, be sure to have it inspected by a reputable mechanic and you'll be well on your way to saving more money.
But now that you've saved all that money by either keeping or buying a used car, how can you put it to work?
Perhaps you might pick up some shares of Copart , a solidly profitable auto salvage specialist that has catered to dealers, dismantlers, rebuilders, exporters and, occasionally, everyday consumers since its founding in 1982.
Copart has also been on an acquisition spree over the past year in its efforts to corner the auto salvage auction market, with buys in Brazil and Germany last November, followed by the acquisition of U.S.-based Salvage Parent, in May, and most recently the purchase of Autoresiduos S.L. in Spain in June.
Or perhaps you could look at buying shares of used car-seller CarMax , which are up more than 60% so far in 2013 and at the end of last quarter stood tall as the second-largest position in Markel's impressive long-term-oriented portfolio. Incidentally, that portfolio is managed by Markel's CIO and noted value investor, Tom Gayner. In addition, the long-term quality of CarMax's business is more than evident considering Markel's single largest holding is none other than the veritable Berkshire Hathaway.
Still not convinced?
But don't get me wrong; I understand owning and maintaining an older vehicle certainly isn't for everyone.
After all, there's a certain satisfaction to be had with driving a new car caused by everything from the smell, look, and feel of the state-of-the-art machine.
And the technological advances also offer mouthwatering benefits, including smoother rides, better power and fuel economy, and more specific features such as automatic tailgates, voice control systems, blind-spot indicators, touch sensors, and a bevy of other goodies you won't find in last decade's models.
In the end, though, just be sure to use this as food for thought as you consider whether those benefits are worth the added financial outlay.
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The article 5 Things to Consider Before Buying That New Car originally appeared on Fool.com.Fool contributor Steve Symington owns shares of Ford and Markel. The Motley Fool recommends Berkshire Hathaway, CarMax, Copart, Ford, and Markel and owns shares of Berkshire Hathaway, Ford, and Markel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.