RPF0538-Making_Sense_of_the_New_CarUsed_Car_Dilemma
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00:00:30.000 | - Welcome to Radical Personal Finance,
00:00:32.000 | the show dedicated to providing you with the knowledge,
00:00:34.000 | skills, insight, and encouragement you need
00:00:36.000 | to live a rich and meaningful life now
00:00:38.000 | while building a plan for financial freedom
00:00:40.000 | in 10 years or less.
00:00:42.000 | Today, we tackle the subject of new cars.
00:00:45.000 | A question came in on the Twitter a few weeks ago
00:00:48.000 | about leasing a car, and I sat down a couple of times
00:00:51.000 | and recorded a show on car leasing,
00:00:53.000 | but there always ended up being two distinct parts of it.
00:00:57.000 | See, the major problem with leasing a car
00:01:00.000 | is not the lease itself.
00:01:02.000 | The major problem is that you have to lease a new car.
00:01:06.000 | So I realized that first we need to talk about new cars
00:01:10.000 | as compared to older, used cars,
00:01:13.000 | and then separately, we can talk about leasing
00:01:17.000 | versus some other form of new car financing.
00:01:21.000 | So today, we talk about buying a new car.
00:01:24.000 | Now, new cars are one of those things that get a bad rap
00:01:27.000 | in the personal finance space for good reason,
00:01:30.000 | because frankly, they can be very expensive
00:01:33.000 | and very deleterious to your personal wealth.
00:01:37.000 | However, I want to explain to you why.
00:01:40.000 | See, I don't approach most topics in finance
00:01:43.000 | with a dogmatic approach.
00:01:47.000 | It's not that I mind dogma.
00:01:50.000 | I just want dogma to be applied in the place
00:01:52.000 | where dogma is important,
00:01:54.000 | and not to be mixed up in places where dogma is not.
00:01:58.000 | And I want to explain to you why new cars,
00:02:01.000 | for most of us, are usually not the best idea.
00:02:07.000 | But you can listen to these reasons,
00:02:09.000 | and then judge for yourself.
00:02:12.000 | So if you were going to buy a car,
00:02:14.000 | what would be some of the benefits that you could get
00:02:16.000 | from choosing to buy a brand spankin' new car?
00:02:22.000 | Well, of course it would smell great.
00:02:25.000 | It would be very clean and very beautiful.
00:02:27.000 | You could peel a lot of little plastic
00:02:29.000 | off of the things yourself.
00:02:31.000 | You could make sure that nobody else's muddy boots
00:02:33.000 | had soiled your carpet.
00:02:36.000 | Those things are simple and obvious.
00:02:39.000 | But what are some of those other benefits
00:02:41.000 | that don't wear off in a few weeks
00:02:43.000 | after the new car smell has effectively disappeared?
00:02:46.000 | In my mind, one of the biggest benefits
00:02:48.000 | of your choosing to buy a new car
00:02:51.000 | is you can get exactly what you want.
00:02:56.000 | As someone who's purchased a variety of used vehicles,
00:02:59.000 | I have learned that you can usually get
00:03:03.000 | most of what you want,
00:03:04.000 | but it's very rare for you to get exactly what you want.
00:03:08.000 | When you home in on the particular type of vehicle
00:03:10.000 | that you want, the particular make and model,
00:03:13.000 | you then start thinking about what attributes,
00:03:15.000 | what combination of features would be most helpful
00:03:20.000 | or most appropriate to your intended use case,
00:03:23.000 | and then you have to order those.
00:03:26.000 | I recently bought a pickup truck,
00:03:28.000 | and my ideal pickup truck, it had to have a crew cab,
00:03:31.000 | but I wanted to have a long bed,
00:03:33.000 | a crew cab and a long bed.
00:03:35.000 | But I was also committed, more than having the long bed,
00:03:38.000 | I was committed to having a diesel engine in it,
00:03:42.000 | a particular diesel engine in that particular vehicle.
00:03:46.000 | And so that was essential,
00:03:48.000 | was the diesel engine and the crew cab.
00:03:50.000 | The long bed I put on the list of,
00:03:52.000 | "Well, it'd be nice to have if I can,
00:03:55.000 | but I'm not going to make that the only thing I get."
00:03:57.000 | Similar thing with four-wheel drive versus two-wheel drive.
00:04:00.000 | I didn't mind either way,
00:04:01.000 | but I probably would have been happier
00:04:03.000 | to have a four-wheel drive,
00:04:04.000 | but I was happy to have a two-wheel drive.
00:04:06.000 | I didn't have to make a solid decision.
00:04:08.000 | Well, I wound up with the diesel engine,
00:04:10.000 | which was a must-have,
00:04:11.000 | and the crew cab, which was a must-have,
00:04:13.000 | but I wound up with a short bed,
00:04:14.000 | two-wheel drive pickup truck.
00:04:15.000 | Now that fit my needs,
00:04:17.000 | but it wasn't exactly what I wanted.
00:04:20.000 | But I couldn't hold out for exactly what I wanted
00:04:23.000 | because I needed to buy the car,
00:04:25.000 | and I was shopping in the used car marketplace.
00:04:27.000 | And you can't force somebody else
00:04:29.000 | to sell their vehicle just when you want,
00:04:32.000 | and you can't force them to sell it
00:04:33.000 | at the price that you want.
00:04:35.000 | If I were going to go into a new car dealership
00:04:37.000 | and buy a new pickup truck,
00:04:39.000 | then it would be very easy for me to sit down
00:04:41.000 | and have a chat and say,
00:04:42.000 | "Listen, I want a four-wheel drive
00:04:45.000 | crew cab pickup truck with a long bed,
00:04:47.000 | and I want this engine configuration,
00:04:50.000 | and oh, by the way,
00:04:51.000 | let's go ahead and put the towing package on it.
00:04:53.000 | Let me choose the paint.
00:04:54.000 | Let me choose the interior color."
00:04:55.000 | And you can spec out everything
00:04:57.000 | to be exactly what you want.
00:05:03.000 | So here's the question.
00:05:05.000 | How important to you
00:05:08.000 | is the ability to spec out exactly what you want?
00:05:13.000 | Here you'll need to think about your use case.
00:05:16.000 | Do you intend to use this vehicle
00:05:18.000 | just for transporting your body
00:05:20.000 | from place A to place B,
00:05:22.000 | or your body and one or two
00:05:24.000 | or a handful of other people
00:05:25.000 | from place A to place B?
00:05:27.000 | In that context,
00:05:28.000 | just about anything will do the job.
00:05:30.000 | You need to have exactly the right thing
00:05:33.000 | in order for you to have your body moved.
00:05:37.000 | But if you were doing something like I was doing,
00:05:40.000 | buying a pickup truck,
00:05:41.000 | and let's say that you would spec out
00:05:43.000 | a very heavy camper,
00:05:45.000 | in your case,
00:05:46.000 | it might be very important to you
00:05:48.000 | to have the sufficient
00:05:51.000 | gross vehicle weight rating on your vehicle,
00:05:53.000 | and you need to spec it out
00:05:55.000 | exactly how you want it to be.
00:05:57.000 | Or perhaps you're going to load on
00:05:59.000 | some kind of aftermarket equipment.
00:06:01.000 | In this case,
00:06:02.000 | it's very important that your vehicle
00:06:04.000 | be manufactured according to your specifications
00:06:08.000 | so it can do the job.
00:06:10.000 | And you have to decide,
00:06:11.000 | how important is it to me
00:06:13.000 | to get exactly what I want?
00:06:16.000 | If it's very important
00:06:18.000 | to get exactly what you want,
00:06:20.000 | you will probably move in the direction
00:06:23.000 | of a new car versus a used car.
00:06:27.000 | What are the benefits, are there,
00:06:29.000 | of a new car versus a used car?
00:06:31.000 | Well, another obvious
00:06:33.000 | and very important benefit
00:06:35.000 | is a new car will have
00:06:37.000 | the maximum possible lifespan.
00:06:42.000 | When a vehicle is manufactured
00:06:44.000 | and put on the road,
00:06:45.000 | in that very first drive,
00:06:47.000 | the clock starts running.
00:06:50.000 | Its lifespan starts ticking down.
00:06:53.000 | There is, for any vehicle,
00:06:56.000 | a maximum potential lifespan.
00:07:00.000 | And the earlier the vehicle is
00:07:04.000 | in that lifespan,
00:07:05.000 | the more time you can drive it,
00:07:08.000 | the more time you'll have
00:07:10.000 | with that vehicle.
00:07:12.000 | It's a fact of life
00:07:13.000 | that cars or vehicles
00:07:15.000 | are mechanical devices,
00:07:16.000 | and mechanical devices,
00:07:17.000 | over time, wear down and wear out.
00:07:21.000 | If I offered you an unrestored car
00:07:23.000 | from 1950, you'd say no.
00:07:29.000 | You don't want it,
00:07:30.000 | because it doesn't do
00:07:31.000 | what you need to do.
00:07:32.000 | We're not driving vehicles
00:07:33.000 | from 1950 that are not restored,
00:07:35.000 | or from 1970.
00:07:38.000 | The vehicle has a lifespan,
00:07:40.000 | and the earlier you buy it,
00:07:42.000 | the better in terms of
00:07:43.000 | the maximum possible lifespan.
00:07:46.000 | This is important primarily
00:07:49.000 | for its ability to do the job
00:07:51.000 | that you're buying it to do.
00:07:55.000 | You want it to do the job
00:07:56.000 | that you're buying it to do.
00:07:58.000 | If you need a car
00:07:59.000 | to pull your camper,
00:08:00.000 | well, it needs to be able to do that.
00:08:02.000 | If you need a car
00:08:03.000 | to get you down the road,
00:08:04.000 | it needs to be able to do that.
00:08:08.000 | So it needs to be able to do the job,
00:08:09.000 | and you want it to do the job
00:08:10.000 | for the most amount of time.
00:08:13.000 | And you want it to do the job
00:08:15.000 | for the most amount of time
00:08:16.000 | with the lowest repair costs.
00:08:19.000 | So imagine for a moment a chart,
00:08:24.000 | and on the horizontal axis,
00:08:28.000 | the x-axis, you have time
00:08:32.000 | going from left to right,
00:08:33.000 | and your mind goes from
00:08:34.000 | zero units of time
00:08:37.000 | up to the maximum units of time.
00:08:39.000 | And on the up and down
00:08:40.000 | vertical axis, the y-axis,
00:08:42.000 | you have cost.
00:08:46.000 | A new car at the beginning
00:08:49.000 | will have very low repair costs.
00:08:52.000 | In fact, for a brand new car,
00:08:53.000 | that may just be factored
00:08:54.000 | into the deal that you worked out
00:08:56.000 | with the dealership.
00:08:58.000 | You may not have to pay
00:08:59.000 | for any repairs
00:09:00.000 | while the car is under warranty.
00:09:02.000 | So that line of costs
00:09:04.000 | starts at the bottom left,
00:09:06.000 | and it goes up to the top right
00:09:09.000 | in an increasing line.
00:09:11.000 | Now, it's not an exact 45-degree line.
00:09:13.000 | It's probably more of a geometric curve
00:09:15.000 | where it's very slow
00:09:16.000 | and low in the beginning,
00:09:18.000 | and then it starts to increase
00:09:19.000 | significantly at some point.
00:09:22.000 | But there's another cost,
00:09:24.000 | which is depreciation.
00:09:26.000 | And that line starts off on the left
00:09:29.000 | at very high,
00:09:30.000 | and it comes down to very low.
00:09:32.000 | That one is also not
00:09:33.000 | a direct 45-degree declining line.
00:09:36.000 | Rather, it actually comes down
00:09:38.000 | massively in the beginning,
00:09:39.000 | and then it starts to smooth out
00:09:42.000 | over time.
00:09:45.000 | These two lines
00:09:49.000 | are your costs.
00:09:52.000 | And early in the car lifespan,
00:09:56.000 | there should be very low
00:09:57.000 | maintenance costs.
00:09:58.000 | Late in the car lifespan,
00:09:59.000 | high maintenance costs.
00:10:02.000 | Early in the car lifespan,
00:10:03.000 | there's high depreciation costs.
00:10:05.000 | Later, there's low depreciation costs.
00:10:07.000 | So you're paying either way.
00:10:08.000 | You're either paying with
00:10:11.000 | repair costs,
00:10:12.000 | or you're paying in depreciation costs.
00:10:15.000 | The point is, the new car gets you
00:10:16.000 | the maximum possible lifespan,
00:10:18.000 | which if you're choosing a car
00:10:20.000 | that you can or intend to drive
00:10:22.000 | for a long period of time,
00:10:24.000 | that can be very important to you
00:10:26.000 | because it can be a real hassle
00:10:28.000 | for you to go and to get a new car
00:10:31.000 | all the time.
00:10:33.000 | In addition, one of the benefits
00:10:34.000 | of buying a new car
00:10:36.000 | is the useful lifespan
00:10:38.000 | may possibly be expanded or extended
00:10:42.000 | because of your good care
00:10:44.000 | and good maintenance practices
00:10:46.000 | practiced on the car
00:10:47.000 | from the very beginning.
00:10:49.000 | For example, you may be able to make sure
00:10:51.000 | that that vehicle has always had
00:10:53.000 | high-quality synthetic fluids.
00:10:55.000 | Well, in the short term,
00:10:56.000 | high-quality synthetic fluids
00:10:58.000 | versus conventional fluids
00:10:59.000 | may not make a big difference
00:11:01.000 | to your vehicle lifespan.
00:11:04.000 | But when you can stretch that out
00:11:05.000 | over decades,
00:11:06.000 | those fluids might make
00:11:07.000 | a very big difference
00:11:09.000 | or your simple ability to ensure
00:11:11.000 | that the maintenance on the vehicle
00:11:13.000 | is performed on the appropriate schedule.
00:11:16.000 | Cars don't just break.
00:11:19.000 | If they're maintained,
00:11:21.000 | there's really very little reason
00:11:23.000 | why a car should ever break down
00:11:26.000 | if it's maintained
00:11:27.000 | and if it's proactively maintained.
00:11:29.000 | So if you bought one
00:11:30.000 | from the very beginning
00:11:31.000 | and you made sure
00:11:32.000 | that the maintenance schedule was done
00:11:33.000 | and you knew what the lifespan is
00:11:35.000 | of the various bits of equipment,
00:11:37.000 | you know that we changed the oil
00:11:38.000 | on this schedule,
00:11:40.000 | we changed the tires on this schedule,
00:11:42.000 | we changed the belts on this schedule,
00:11:44.000 | there's no reason why
00:11:45.000 | you couldn't have a vehicle
00:11:47.000 | with proactive maintenance
00:11:48.000 | that never left you stranded
00:11:50.000 | over the course of 20 or 30 years.
00:11:54.000 | And it's a whole lot easier
00:11:56.000 | to do that if you've owned the car
00:11:58.000 | from the beginning.
00:11:59.000 | So by buying new,
00:12:00.000 | you could get the maximum
00:12:01.000 | potential lifespan
00:12:03.000 | and the maximum potential reliability
00:12:06.000 | by knowing the maintenance history.
00:12:08.000 | Now there could be
00:12:09.000 | some other benefits of a car.
00:12:11.000 | For example,
00:12:12.000 | a new car might give you access
00:12:14.000 | to the latest technology.
00:12:17.000 | Consumer Reports recently
00:12:19.000 | has gone to the position
00:12:21.000 | where they find that
00:12:23.000 | the new crash avoidance systems
00:12:25.000 | are mandatory.
00:12:27.000 | They love all of the new
00:12:28.000 | crash avoidance systems,
00:12:29.000 | the emergency braking systems
00:12:30.000 | that are available on new cars.
00:12:32.000 | You might look at something like that
00:12:33.000 | and say, "That's really important,
00:12:34.000 | and I can't get that on an old car.
00:12:36.000 | That's hard to retrofit.
00:12:38.000 | So I'll just go ahead and get a new car
00:12:39.000 | so I can do that
00:12:40.000 | because of the safety upgrade."
00:12:41.000 | Or perhaps you appreciate
00:12:43.000 | getting a newer car
00:12:44.000 | that has an excellent crash rating
00:12:46.000 | and is very, very safe
00:12:47.000 | for the occupants
00:12:48.000 | in case of a crash.
00:12:49.000 | Well, you may not be able
00:12:50.000 | to get that on an older car,
00:12:52.000 | and so you may need to buy a new car.
00:12:54.000 | So if there's a technological issue
00:12:57.000 | that really helps you,
00:12:59.000 | I alluded to pickup trucks earlier.
00:13:01.000 | A pickup truck that is new today
00:13:03.000 | has about three times the tow rating
00:13:06.000 | of a pickup truck
00:13:07.000 | that you could buy 15, 20 years ago.
00:13:09.000 | And so it might be worth it
00:13:10.000 | for you to go ahead
00:13:11.000 | and buy that newer, stronger vehicle
00:13:14.000 | because it'll do the job
00:13:15.000 | that you need it to do.
00:13:17.000 | And there may be other
00:13:18.000 | ancillary benefits.
00:13:20.000 | Example, you might need to buy
00:13:21.000 | a new car because it's clean.
00:13:23.000 | Perhaps you're going to buy one
00:13:24.000 | for your company,
00:13:25.000 | and you're going to wrap it
00:13:26.000 | with your company logos.
00:13:30.000 | A lot easier to do that
00:13:31.000 | with a new car with straight sheet metal
00:13:33.000 | and clean paint
00:13:34.000 | than an older one
00:13:35.000 | with a bunch of dents in it, perhaps.
00:13:37.000 | Or if you're going to be adding
00:13:39.000 | specialty aftermarket equipment
00:13:40.000 | to the vehicle.
00:13:41.000 | Well, now it doesn't make a lot of sense
00:13:44.000 | for you to shop around
00:13:45.000 | to save $5,000
00:13:47.000 | by buying a used vehicle
00:13:49.000 | instead of a new vehicle
00:13:50.000 | when your aftermarket equipment
00:13:52.000 | is going to be about $75,000.
00:13:56.000 | You're not getting that much
00:13:57.000 | of a savings for it.
00:13:59.000 | So you might have
00:14:00.000 | some of those other benefits
00:14:01.000 | from the new car.
00:14:02.000 | Well, what are the disadvantages
00:14:03.000 | of buying a new car?
00:14:04.000 | First obvious one is,
00:14:05.000 | do you have the money?
00:14:06.000 | Can you afford it?
00:14:07.000 | Because the new car
00:14:08.000 | is going to cost more up front.
00:14:10.000 | And here I would encourage you
00:14:12.000 | to think about the available cash
00:14:14.000 | that you have.
00:14:15.000 | Now, poor people often wind up
00:14:17.000 | in a difficult situation.
00:14:19.000 | They frequently will be driving
00:14:21.000 | an older car that's requiring
00:14:23.000 | more repair costs,
00:14:26.000 | and this older car that's requiring
00:14:28.000 | more repair costs
00:14:29.000 | is taking money out of their pocket.
00:14:31.000 | But then, in order to solve that,
00:14:33.000 | they often go and sign up
00:14:35.000 | for a new car payment,
00:14:37.000 | which does have the benefit
00:14:38.000 | of taking those older repairs
00:14:39.000 | out of the way, mostly.
00:14:42.000 | But now those older occasional repairs
00:14:45.000 | are replaced with a consistent,
00:14:47.000 | regular car payment.
00:14:49.000 | So I would just say,
00:14:50.000 | do you have the money?
00:14:51.000 | I've never borrowed money on a car.
00:14:53.000 | I don't intend to ever
00:14:54.000 | borrow money on the car.
00:14:55.000 | I don't see any value
00:14:57.000 | of borrowing money for a car.
00:15:00.000 | Just simply pay for your stuff.
00:15:02.000 | And if you do that,
00:15:03.000 | it keeps your life in a simple
00:15:05.000 | and peaceful place
00:15:07.000 | that is really healthy.
00:15:09.000 | It's good for your mind.
00:15:11.000 | It's good for your wallet.
00:15:13.000 | And it's good just for
00:15:14.000 | the peace of your life.
00:15:15.000 | And you don't wind up wondering
00:15:16.000 | if you're going to wander
00:15:17.000 | out of work one day
00:15:18.000 | and see the repo man
00:15:19.000 | driving off with your vehicle.
00:15:21.000 | So do you have the money?
00:15:22.000 | If you don't have the money,
00:15:23.000 | don't buy it.
00:15:24.000 | It's as simple as that.
00:15:25.000 | But the big cost, of course,
00:15:26.000 | is depreciation.
00:15:27.000 | Now, what is depreciation?
00:15:29.000 | Depreciation is the decrease
00:15:31.000 | in value that an asset has
00:15:35.000 | simply by virtue of it being older.
00:15:39.000 | Think about this.
00:15:41.000 | If you were going to buy
00:15:42.000 | a new car for $40,000
00:15:45.000 | and you had the choice
00:15:46.000 | between buying a brand new car
00:15:47.000 | for $40,000
00:15:49.000 | or a three-year-old car
00:15:51.000 | that somebody has put
00:15:52.000 | tons of miles on for $40,000,
00:15:55.000 | which would you choose?
00:15:59.000 | The obviousness of that answer
00:16:03.000 | is what drives the car marketplace.
00:16:06.000 | You would be a fool to pay $40,000
00:16:09.000 | for the three-year-old car
00:16:10.000 | when you could go buy the new one
00:16:11.000 | for $40,000 and enjoy
00:16:12.000 | all those other benefits
00:16:13.000 | of the new car.
00:16:15.000 | Now, as we start walking down
00:16:17.000 | those numbers,
00:16:19.000 | we're going to at some point
00:16:20.000 | come to a change.
00:16:23.000 | Let's pretend new car is $40,000
00:16:26.000 | and now that three-year-old car
00:16:28.000 | is available for $39,000.
00:16:30.000 | Now, which would you choose?
00:16:33.000 | Most people are still going
00:16:34.000 | to go to the 40.
00:16:35.000 | Well, let's compare new car for 40,
00:16:37.000 | three-year-old car for 38,
00:16:41.000 | 37,
00:16:44.000 | 36,
00:16:46.000 | 35.
00:16:49.000 | For $35,000,
00:16:50.000 | would you buy a three-year-old car
00:16:52.000 | with 40,000 miles on it
00:16:54.000 | instead of a brand new one at 40?
00:16:56.000 | I don't think I would.
00:16:58.000 | I would buy the $40,000 car.
00:16:59.000 | And the reason is
00:17:01.000 | I can run that math in my head.
00:17:03.000 | If I buy a $40,000 car
00:17:05.000 | that doesn't have those three years,
00:17:06.000 | and that means that I can enjoy
00:17:08.000 | over the next three years
00:17:09.000 | basically free use of the car.
00:17:12.000 | I'm not going to have repair costs.
00:17:13.000 | I'm not going to have
00:17:15.000 | a longer lifespan.
00:17:17.000 | If the difference were only
00:17:18.000 | 40 versus 35,
00:17:20.000 | I'm still probably going to go with 40,
00:17:23.000 | assuming I have the money, of course.
00:17:26.000 | Let's keep walking it down.
00:17:28.000 | 34,
00:17:30.000 | 33,
00:17:32.000 | 32,
00:17:34.000 | 31.
00:17:36.000 | How about 30?
00:17:37.000 | Which would you go for at 30?
00:17:39.000 | Now, we could continue this game,
00:17:41.000 | and your answer would, of course, be
00:17:42.000 | it depends.
00:17:43.000 | It depends on the actual factors.
00:17:44.000 | It depends on the market.
00:17:45.000 | It depends on the vehicle, etc.
00:17:46.000 | Of course it depends.
00:17:48.000 | But there is a number somewhere
00:17:52.000 | at which you would be willing
00:17:55.000 | to take the three-year-old car
00:17:57.000 | versus the new car.
00:17:59.000 | That number would be different
00:18:01.000 | for each person.
00:18:03.000 | But on the aggregate,
00:18:07.000 | that number
00:18:10.000 | is about 20%
00:18:12.000 | per year for the first year,
00:18:13.000 | and 15% per year
00:18:15.000 | for the year after that.
00:18:17.000 | The general industry numbers
00:18:18.000 | would reflect that that $40,000 car,
00:18:22.000 | if that car is one year old,
00:18:23.000 | it loses 20% of its value
00:18:26.000 | almost immediately.
00:18:28.000 | And so after one year,
00:18:29.000 | it would be worth about $32,000.
00:18:32.000 | 40% minus 20% equals $32,000.
00:18:36.000 | And then each year ongoing,
00:18:37.000 | it loses about 15% of its value.
00:18:41.000 | Or at least that's what most people
00:18:42.000 | on the aggregate across the whole marketplace
00:18:46.000 | feel that vehicles are worth.
00:18:49.000 | So at the end of 12 months,
00:18:50.000 | the $40,000 car is worth $32,000.
00:18:53.000 | At the end of 24 months,
00:18:55.000 | the $32,000 car is worth $27,200.
00:18:58.000 | At the end of 36 months,
00:19:00.000 | that car is worth $23,000.
00:19:03.000 | At the end of 48 months,
00:19:04.000 | it's $19,000.
00:19:06.000 | At the end of 60 months,
00:19:07.000 | it's $16,700, and on and on.
00:19:11.000 | If we continue that number each year,
00:19:13.000 | notice that the value continues to go down,
00:19:16.000 | but because it's based upon percentages,
00:19:18.000 | it goes down a little bit less
00:19:20.000 | in dollar amounts each year.
00:19:23.000 | 60 months, it's $16,700.
00:19:25.000 | End of 72 months, it's $14,199.
00:19:28.000 | End of 84 months, it's $12,069.
00:19:31.000 | End of 96 months, $10,258.
00:19:34.000 | End of 108, 108 months, $8,720.
00:19:37.000 | And at the end of 120 months, $7,412.
00:19:42.000 | So if you bought a brand new $40,000 car,
00:19:46.000 | you could expect at the end of 10 years
00:19:48.000 | or 120 months,
00:19:49.000 | it's value to be about $7,400.
00:19:53.000 | Now think for yourself
00:19:55.000 | about the current car marketplace
00:19:57.000 | and see if that matches up
00:19:59.000 | with your own experience.
00:20:02.000 | I'm recording and publishing this show
00:20:03.000 | in April of 2018.
00:20:06.000 | So think of a 2008 vehicle
00:20:09.000 | that new cost about $40,000.
00:20:12.000 | Think what you'll find
00:20:14.000 | if you were to do research on it
00:20:16.000 | or to think about it,
00:20:17.000 | you'll find that most vehicles of that vintage,
00:20:20.000 | if it cost about $40,000 new,
00:20:22.000 | would probably be worth about $7,000 to $8,000
00:20:25.000 | in today's dollars, today's market.
00:20:29.000 | So this is depreciation.
00:20:32.000 | Over the course of that 10 years,
00:20:37.000 | the original owner of the vehicle
00:20:40.000 | has lost $33,000.
00:20:45.000 | $32,000, $33,000.
00:20:47.000 | Now what have they gained
00:20:48.000 | for that $32,000 or $33,000?
00:20:53.000 | The use of the car.
00:20:55.000 | They've been able to use the car
00:20:57.000 | and get the benefit of the transportation
00:21:00.000 | for them and their goods
00:21:02.000 | for those 10 years.
00:21:05.000 | That's the trade-off they're making.
00:21:07.000 | So the value of the vehicle is being used up.
00:21:09.000 | Now at some point in time,
00:21:12.000 | the age of the vehicle starts to become
00:21:15.000 | less and less relevant.
00:21:17.000 | And it has more to do,
00:21:18.000 | the value of the car has more to do
00:21:20.000 | with the usefulness of the vehicle.
00:21:23.000 | There is a terminal value of a vehicle.
00:21:27.000 | That ultimate terminal value
00:21:28.000 | is the scrap metal price.
00:21:31.000 | Depending on scrap metal prices,
00:21:33.000 | it's probably around $500 to $1,000.
00:21:37.000 | I've taken cars and scrapped them.
00:21:39.000 | At the time, metal prices were higher,
00:21:40.000 | but one time I scrapped a car
00:21:41.000 | and it was about $600 that they gave me for it.
00:21:44.000 | That was what the recycler could take,
00:21:46.000 | crush the car, and sell the car,
00:21:48.000 | the value for in the recycled metal marketplace.
00:21:51.000 | That number will vary,
00:21:52.000 | but you should always have a guess of that number.
00:21:54.000 | I'm going to tell you right now,
00:21:55.000 | if you have $500 in your head,
00:21:57.000 | that's pretty much a good value.
00:22:00.000 | The next bit of terminal value
00:22:01.000 | is just simply does it work?
00:22:03.000 | Does it move you from point A to point B?
00:22:07.000 | And so here would be,
00:22:08.000 | that terminal value is probably about $1,000.
00:22:11.000 | In my market here in South Florida,
00:22:13.000 | any vehicle that works
00:22:15.000 | is going to be worth $1,000.
00:22:17.000 | Now, if it works and it has air conditioning,
00:22:19.000 | it might be worth double,
00:22:21.000 | but if it works, it's worth $1,000.
00:22:23.000 | And I've bought a couple of cars here and there
00:22:26.000 | for terminal value, for in that number.
00:22:29.000 | Years ago, I bought a 1998 Toyota Corolla.
00:22:32.000 | I bought it for $500,
00:22:33.000 | and it was one of these situations.
00:22:35.000 | The car was old, but it worked.
00:22:37.000 | It was in not great condition, but it worked.
00:22:40.000 | And so it was at its terminal value.
00:22:42.000 | I drove the car for a number of years,
00:22:44.000 | have kept it around,
00:22:45.000 | it's been used by other people,
00:22:46.000 | and then I sold it for $1,000.
00:22:49.000 | So it did its job.
00:22:51.000 | It worked.
00:22:52.000 | And that car will really,
00:22:54.000 | as long as it's running,
00:22:55.000 | really need never be worth less
00:22:57.000 | than that $500 to $1,000 range.
00:23:00.000 | That's important to know.
00:23:02.000 | Now, different vehicles with different attributes
00:23:05.000 | will have other terminal values.
00:23:07.000 | If you were having a big flatbed truck or a dump truck,
00:23:10.000 | the terminal value of a 30-year-old dump truck
00:23:13.000 | would be a whole lot more than $1,000.
00:23:15.000 | Why?
00:23:16.000 | Because somebody could buy it,
00:23:18.000 | and as long as it works,
00:23:19.000 | they could buy it and they could run a business with it.
00:23:22.000 | And they could move loads of dirt
00:23:24.000 | from place A to place B,
00:23:25.000 | charge people for that.
00:23:26.000 | So it's going to be worth more than $1,000.
00:23:29.000 | My little old Toyota Corolla that I owned for years
00:23:32.000 | didn't do anything except move people.
00:23:35.000 | I couldn't load dirt.
00:23:37.000 | But that's that terminal value.
00:23:39.000 | So the depreciation goes down, down, down
00:23:41.000 | towards that terminal value.
00:23:42.000 | But as you own the car,
00:23:43.000 | what's happening with the repair costs?
00:23:47.000 | Remember, those are going up.
00:23:49.000 | And those repair costs
00:23:51.000 | could range from minimal to significant.
00:23:57.000 | So if that $40,000 car owner
00:24:00.000 | paid $33,000 to own it for 10 years and use it,
00:24:05.000 | the question is,
00:24:06.000 | how much money does the next owner,
00:24:09.000 | who buys it when it's 10 years old for $7,500,
00:24:12.000 | how much money are they going to pay
00:24:14.000 | over the next 10 years in repair costs?
00:24:18.000 | This is the great unknown.
00:24:21.000 | With some vehicles, that cost can be very high.
00:24:26.000 | With some vehicles, it could be not so much.
00:24:29.000 | And this would have to do with the make and the model,
00:24:32.000 | the usage by the owner,
00:24:35.000 | and how well the maintenance was done on that vehicle.
00:24:38.000 | And here's where in used car pricing,
00:24:41.000 | you should be very, very sensitive
00:24:43.000 | to the mechanical state of the car
00:24:48.000 | and not so sensitive to the price.
00:24:53.000 | It may be well worth your interest
00:24:56.000 | to buy that 10-year-old vehicle for $10,000
00:25:00.000 | if it was owned by a single owner
00:25:03.000 | who was meticulous in their maintenance
00:25:06.000 | and was using the car every single day
00:25:09.000 | over those 10 years
00:25:10.000 | and can show you all of the maintenance records
00:25:12.000 | for the last 10 years
00:25:13.000 | and you can see that proactive maintenance was done,
00:25:15.000 | fluids were changed regularly, et cetera.
00:25:18.000 | I'd quickly be willing to pay $10,000
00:25:21.000 | for that $7,500 car
00:25:23.000 | if that owner had all of that proof and data for me
00:25:29.000 | where if I were to stumble across that $7,500 car
00:25:33.000 | and see that it had been beat up,
00:25:36.000 | I could discern that the maintenance hadn't been done,
00:25:38.000 | I might not even pay $5,000 for it
00:25:41.000 | because it would be no deal at $5,000.
00:25:45.000 | So let's get out of the weeds on depreciation,
00:25:47.000 | but you need to understand that.
00:25:48.000 | You can't escape the cost.
00:25:51.000 | You're just going to either pay the cost
00:25:52.000 | in terms of depreciation or repairs.
00:25:57.000 | So which cost will be less for your context?
00:26:01.000 | That's the question.
00:26:03.000 | If you analyze all these factors,
00:26:05.000 | I think what you'll find
00:26:07.000 | is an ability to discern
00:26:11.000 | what would be appropriate for you in your situation.
00:26:15.000 | For personal automobiles,
00:26:18.000 | frequently you don't need those new car attributes.
00:26:26.000 | For personal automobiles,
00:26:27.000 | you simply usually need something that's going to work
00:26:30.000 | most of the time.
00:26:31.000 | Most personal automobiles aren't really driven all that much.
00:26:36.000 | They might do 8,000 to 12,000 miles a year,
00:26:40.000 | but in terms of the capacity of the vehicle,
00:26:43.000 | that's not really that much.
00:26:45.000 | The car could do 10,000 miles a month
00:26:47.000 | and it would work fine.
00:26:48.000 | So we don't use them all that much.
00:26:50.000 | Most of the driving of a personal automobile
00:26:53.000 | is not extreme duty.
00:26:55.000 | It's just light driving.
00:26:57.000 | And we usually don't keep our cars for very long.
00:27:00.000 | Most people don't seem to think that far down the road
00:27:04.000 | as far as their vehicle purchase,
00:27:05.000 | they either have a change in their circumstances,
00:27:08.000 | which leads to them wanting a different type of vehicle,
00:27:12.000 | or they get bored with the vehicle
00:27:14.000 | and want to move up to something different.
00:27:16.000 | So personal automobiles aren't usually used
00:27:19.000 | to maximum capacity.
00:27:20.000 | And in personal automobiles,
00:27:23.000 | things like downtime become much less important.
00:27:27.000 | If your car breaks down and it's in the shop for a week,
00:27:30.000 | that of course could be an inconvenience.
00:27:33.000 | But it's not really costing you all that much money or time.
00:27:38.000 | If you were to compare this to a business
00:27:40.000 | that's actively making money on their vehicles,
00:27:46.000 | that difference would be significant.
00:27:49.000 | In the Southeast, there is a large grocery chain
00:27:52.000 | called Publix, and Publix uses these nice green trucks.
00:27:57.000 | My understanding, just from reading the door stickers,
00:27:59.000 | is that Publix leases all of their trucks.
00:28:02.000 | Why do they lease their trucks?
00:28:04.000 | They have worked out some kind of deal, I'm sure.
00:28:06.000 | But if you think about a grocery store like a Publix,
00:28:10.000 | or in your area maybe it's a Kroger or a Walmart
00:28:12.000 | or anything like that,
00:28:14.000 | what you'll see is their trucks have to be reliable
00:28:18.000 | because the grocery store is running
00:28:20.000 | on a just-in-time inventory management system.
00:28:23.000 | And there's a central warehouse or a regional warehouse.
00:28:27.000 | That warehouse has most of the supplies.
00:28:29.000 | And then each day, perhaps multiple times per day,
00:28:31.000 | a semi-truck is getting loaded up from that warehouse
00:28:34.000 | and is moving things to the store to be sold.
00:28:37.000 | And there's a computer system that's maintaining
00:28:40.000 | very little inventory in the back of the store
00:28:42.000 | and is consistently and quickly moving things
00:28:45.000 | from the distribution center into the store.
00:28:48.000 | Well, in that context, if a truck breaks down
00:28:51.000 | on the side of the road,
00:28:53.000 | there may be a bunch of products that run out on the store.
00:28:58.000 | And that could result in customer dissatisfaction.
00:29:01.000 | Customers annoyed and say, "That's it.
00:29:03.000 | They don't even have this. I'm going to go shop somewhere else."
00:29:05.000 | And it could result in lost sales.
00:29:07.000 | Customer comes in, wants to buy something.
00:29:09.000 | It's not there. They have to go to another store.
00:29:11.000 | That's money that's not into Publix's pocket.
00:29:14.000 | That's money that goes into Walmart's pocket, etc.
00:29:17.000 | And so for a company like Publix,
00:29:20.000 | they need their trucks to be very reliable.
00:29:24.000 | And I don't think I've ever seen a Publix truck
00:29:26.000 | broken down on the side of the road.
00:29:27.000 | I'm sure it happens, but I don't think I've ever seen it.
00:29:31.000 | And so for them, the cost of depreciation of a vehicle
00:29:35.000 | will be not so bad--
00:29:37.000 | sorry, not such a cost as the cost of downtime on a truck.
00:29:41.000 | This could be applied in your business as well.
00:29:44.000 | Perhaps you are a roofer,
00:29:46.000 | and you're running a crew of roofing guys.
00:29:49.000 | And those roofing guys are using your dump truck,
00:29:52.000 | loading up the roofing materials.
00:29:54.000 | And if you think about the labor costs of, say,
00:29:58.000 | a crew of eight guys that are going to go
00:30:00.000 | and rip a roof off a house,
00:30:02.000 | and the cost of making sure that your jobs are lined up,
00:30:06.000 | and the revenue that can come in if you can run a tight schedule
00:30:09.000 | and move your eight guys from house to house right on time,
00:30:12.000 | that cost, your consistent cost to your business,
00:30:15.000 | is very significant.
00:30:17.000 | And if your dump truck is down with mechanical problems,
00:30:21.000 | that can result in an entire week of lost productivity.
00:30:25.000 | You've got eight guys not able to work,
00:30:27.000 | and you're going to be paying them for some of their time.
00:30:30.000 | You're missing jobs. You're bouncing customers around.
00:30:34.000 | That could be a serious problem for your business.
00:30:38.000 | If you compare the cost of depreciation,
00:30:40.000 | you might find that the cost of depreciation
00:30:42.000 | is relatively low compared to the scale of your daily wages
00:30:46.000 | that you're paying for all your guys.
00:30:48.000 | So you'll see a business need that uptime with their vehicles
00:30:52.000 | far more than they need to save every last dollar.
00:30:56.000 | But that's not the case with most of our personal automobiles.
00:31:00.000 | If your car's in the shop,
00:31:01.000 | and you've got to get a ride to work a couple days,
00:31:04.000 | it's not going to make you lose $30,000
00:31:08.000 | because you didn't get this re-roofing job done on time.
00:31:12.000 | So with personal automobiles,
00:31:14.000 | we simply don't usually use them to maximum capacity.
00:31:17.000 | And so there's probably a sweet spot there
00:31:20.000 | where you can buy a vehicle that has depreciated a little bit,
00:31:26.000 | but that still has lots of maximum useful life left.
00:31:31.000 | Usually, depending on the person, depending on the car,
00:31:35.000 | this is why most personal finance advisors
00:31:39.000 | will recommend buying a car that's a few years old.
00:31:41.000 | Anywhere, two, three, four years old.
00:31:44.000 | You can get a good deal on a car
00:31:46.000 | that still has a huge amount of useful life left.
00:31:49.000 | And those cost savings can be substantial.
00:31:52.000 | Now, numbers, remember a $40,000 baseline car,
00:31:56.000 | at the end of 36 months,
00:31:57.000 | that $40,000 baseline car could be worth $23,000.
00:32:03.000 | You can buy that car for $23,000,
00:32:06.000 | and that 36-month-old car could very well last you for a decade
00:32:10.000 | with very low repair costs
00:32:12.000 | because you're using it pretty lightly
00:32:14.000 | as compared to the maximum useful lifespan of the vehicle.
00:32:18.000 | If you buy new cars, if you choose to do that,
00:32:23.000 | the best thing for you to do is to keep those
00:32:26.000 | for a long period of time.
00:32:29.000 | If you'll keep a car for a long period of time,
00:32:33.000 | your total out-of-pocket outlay will be substantially less.
00:32:38.000 | Let me use an example case here.
00:32:41.000 | Pretend that you buy, every three years,
00:32:46.000 | you buy a new car,
00:32:47.000 | and each year you buy a $40,000 car.
00:32:52.000 | So you're always buying a new $40,000 car.
00:32:55.000 | Now, how you're buying it doesn't matter,
00:32:57.000 | whether you're leasing it or buying it,
00:32:58.000 | just you're always getting a new $40,000 car.
00:33:01.000 | And then you're selling that $40,000 car after three years.
00:33:05.000 | Well, a $40,000 car, 36 months later,
00:33:08.000 | you can expect it to be worth $23,120 of value when you sell it.
00:33:16.000 | So that equals a depreciation of $16,880 in those first three years.
00:33:23.000 | What that means is if you were to buy and sell a car
00:33:27.000 | every three years for 30 years,
00:33:29.000 | your total loss of value for depreciation would be $168,800.
00:33:36.000 | Let's say that you stretch that out from three years to five years.
00:33:39.000 | Well, now, if you keep your car for five years instead of three years,
00:33:42.000 | your $40,000 car would be traded in at the end of five years for $16,704.
00:33:48.000 | So your depreciation loss every five years is $23,296.
00:33:53.000 | Take that out over the course of 30 years,
00:33:57.000 | and you wind up with $139,775 of depreciation cost.
00:34:06.000 | And final example, let's say that you only buy a new car every 10 years.
00:34:12.000 | $40,000, but you buy the new car every 10 years.
00:34:15.000 | That means that you buy it for $40,000 and you sell it for $7,412.
00:34:21.000 | Well, now your depreciation cost is $32,588.
00:34:26.000 | And here your total loss of value over 30 years is a total of $97,000.
00:34:32.000 | And so what you see is keeping your car for three years
00:34:35.000 | costs you $168,800 over 30 years.
00:34:39.000 | Keeping it for five years costs you about $140,000.
00:34:42.000 | And keeping it for 10 years costs you only about $98,000.
00:34:46.000 | That's a big savings, about $74,000 of savings
00:34:50.000 | by keeping your cars for 10 years versus three years.
00:34:54.000 | Now you, of course, will have to take that
00:34:57.000 | and figure out your maintenance costs
00:35:00.000 | because you would have more maintenance and repair costs
00:35:03.000 | keeping your cars for 10 years versus three years.
00:35:07.000 | But would you have $74,000 more total over that 30 years?
00:35:14.000 | It's hard for me to imagine it.
00:35:17.000 | Which brings me to my final point.
00:35:19.000 | The reason that this works in the United States
00:35:23.000 | is not because it's always better to buy used cars versus new cars.
00:35:29.000 | The reason that the used car marketplace is so strong in the United States
00:35:36.000 | is because so many people constantly buy new cars and trade them in.
00:35:43.000 | The good market for used cars that you can get for a deal
00:35:49.000 | exists because so many people buy new cars.
00:35:54.000 | Think about it.
00:35:55.000 | If everybody bought a new car and kept it for 10, 15, or 20 years,
00:36:05.000 | would you always want to buy a 10 or 15 or 20-year-old car?
00:36:11.000 | I think more and more people would be pointed towards the new ones.
00:36:15.000 | And this exists in some other countries.
00:36:18.000 | I've traveled in places, and you start looking at used car prices,
00:36:21.000 | and you say, "Man, this doesn't make any sense."
00:36:24.000 | It only makes sense just to go ahead and buy the new car
00:36:27.000 | and get all of those other benefits, getting exactly what you want,
00:36:31.000 | maximum possible lifespan, maximum potential reliability,
00:36:34.000 | latest technology, make it exactly how you want for the total amount of time.
00:36:39.000 | That makes more sense than buying the used car
00:36:41.000 | because there's not an abundant supply.
00:36:45.000 | Same thing happens with the size of the middle class.
00:36:49.000 | If the middle class--or if there's a big middle class
00:36:52.000 | and there are lots of people that are going out and buying new cars,
00:36:55.000 | keeping them for a few years, trading them in,
00:36:57.000 | that creates a large number of good quality used cars that you can buy.
00:37:03.000 | But if you go to a country where there is no middle class,
00:37:06.000 | where you have a very small, wealthy elite,
00:37:10.000 | and you have a massive, poor lower class,
00:37:13.000 | then that strong marketplace of used cars doesn't exist,
00:37:19.000 | and so you don't have that to draw on.
00:37:23.000 | So in thinking about this, you'll have to analyze your situation.
00:37:28.000 | And my advice, just like just about everyone else,
00:37:32.000 | is unless you have some major need for that new car,
00:37:36.000 | or you have the money and you want it,
00:37:38.000 | and you've decided this is something that's important to me,
00:37:41.000 | for your simple personal transportation,
00:37:44.000 | it usually makes more sense just to go ahead and buy a used car.
00:37:49.000 | You save a lot of money up front, and you get plenty of lifespan.
00:37:53.000 | There's a big market supply that you can probably get
00:37:57.000 | just about exactly what you want.
00:37:59.000 | The vehicle has loads of reliability left in its lifespan.
00:38:04.000 | You can get great technology, et cetera.
00:38:06.000 | So there's no reason to pay that brand new price.
00:38:10.000 | But don't get too mad at the people that you see driving new cars.
00:38:15.000 | Always remember that it's their actions that's creating the market
00:38:22.000 | that you're taking advantage of.
00:38:24.000 | By all means, help them to save their money.
00:38:27.000 | But if they don't want to listen to you, I wouldn't yell too loudly.
00:38:32.000 | I would just offer to buy their car from them when they're done.
00:38:36.000 | Thank you for listening.
00:38:37.000 | You've honored me with your time and attention,
00:38:39.000 | and I'm grateful for that.
00:38:41.000 | And I hope that I've effectively served you today
00:38:44.000 | with some ideas and strategies and tactics and techniques and tools
00:38:48.000 | that will help move you towards your goals.
00:38:51.000 | Before you go, three simple requests.
00:38:54.000 | One, if there's an idea that's been helpful to you in today's show,
00:38:58.000 | make a plan to take action on it.
00:39:01.000 | Listening does lead to learning,
00:39:04.000 | but learning in and of itself doesn't automatically lead to a life change.
00:39:09.000 | It's action that leads to a life change.
00:39:13.000 | So take action.
00:39:15.000 | Two, take something that was helpful to you in today's show
00:39:19.000 | and share it with somebody that you care about.
00:39:22.000 | I'm depending on you to be a co-laborer with me
00:39:26.000 | in helping me to propagate the message that I'm seeking to share.
00:39:31.000 | That helps the person that you are engaging with,
00:39:35.000 | and it also helps you because teaching others
00:39:38.000 | is one of the most effective ways for you to learn
00:39:41.000 | and for you to cement your learning.
00:39:44.000 | Three, if there's an idea that's been specifically helpful to you
00:39:48.000 | and if you're gaining financial benefit from Radical Personal Finance,
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00:40:27.000 | Hey parents, join the LA Kings on Saturday, November 25th
00:40:31.000 | for an unforgettable Kids Day presented by Pear Deck.
00:40:34.000 | Family fun, giveaways, and exciting Kings hockey awaits.
00:40:37.000 | Get your tickets now at lakings.com/promotions
00:40:40.000 | and create lasting memories with your little ones.