Military and civilian families alike sometimes need to buy a vehicle. While the transaction might be relatively short, the impact can last a lifetime, even impacting retirement lifestyle. My friend, Gibson Armstrong, is a Financial Advisor with Merrill Lynch. We got talking about the cost of cars and decided to do a little Q&A about his thoughts on how to count the cost of buying a car.
What do our military families need to know about cars from a financial perspective?
If they’re not careful, they could spend a lot on cars! If a couple marries at 25, each owns a car and drives till age 75, they’ll own about 15 cars in their lifetime. That assumes they own each car 79 months, the averagein the US. pegs the average new car cost at least $36,113; the average used car comes in at $19,189 according to . That can be as much as $540,000—spent just buying cars! If they drive the of 13,476 miles per year, at a cost of $.50/mile, that’s another $673,800! That’s well over $1 million—a huge burden to almost any family!
That’s a lot of money. Are there ways to cut that cost?
Of course. For starters, don’t let someone talk you into buying what you don’t need—or cannot afford. This is especially true for troops. Car salesmen have one job: to get you to drive off in one of their vehicles—and since most are on a commission, usually the more expensive, the better—for them. But, at the end of the day, it’s our money and we’re responsible for how we spend it. We need to understand our financial situation enough to know what we can afford, and do our research to know what kind of vehicle is best for our situation, and most importantly, what we can afford.
With so many options, how do you decide what to buy?
Just as with financial planning, start your “vehicle planning” by “beginning with the end in mind.” Think of your next car as a tool or piece of equipment. What are you hiring it to do and for how long? If you have kids, a minivan probably makes more sense than a truck or sports car. Once you narrow down the type, compare the makes and models.
Is it better to buy new or used?
“Buying new,” the rationalization goes, saves money since repairs will cost less, and new car interest rates are lower. But that’s not the whole story. Few things depreciate, or lose value, faster than a new car. If you look at most vehicles’ depreciation curves, they drop rapidly the first few years, then level out. Why not let someone else eat most of that loss in value?
Let’s say, for example, you want a Ford Mustang. According to, a basic 2018 new Ford Mustang convertible in my area, central PA, costs over $45,000 new. But what about a used one? Without “cherry picking” to make my point, a 2015 model with 28,000 miles sells for around $21,000. A 2012 model with 52,000 miles costs about $14,000. Let’s assume I own my car the average 79 months, drive it 12,000 miles per year and sell it.
An 8-year old Mustang sells today for about $9,000. Do the math for the other two examples and you get a chart like this:
Buy (in 2018) Sell (in 2024)
Model Year Miles Price Car Age Miles Likely Price
2018 0 $45,000 7 Years 79,000 $11,000
2017 41,000 $21,000 8 Years 120,000 $9,000
2012 51,000 $14,000 11 Years 130,000 $7,000
After you sell it, the new car cost you $34,000 ($45,000 – $11,000). The 2017 cost $12,000 and the 2012 cost just $7,000. With our 3 sample cars above, the difference between the newest and oldest car on the “buy side” is $34,000. But 6 years later, the difference in the sale price is only $4,000! Before you buy your next car, use prices local to you and do your own math. The savings can be astounding!
Buying new makes even less sense if you’re deploying. Do you really want to eat several months’ depreciation and car payments while you drive your car 0 miles?
Since they save us a lot of time and some people use them in their business, should we see our cars as an investment?
No way. Cars are not an investment—investments normally go up in value; vehicles rarely do. They’re tools that suck up money and lose value each month we own them. In the investment world, we talk about “downside capture,” or what a stock loses in value when the market falls. Good money managers have strong “upside capture” but less downside capture than average. Cars are all “downside capture.” The question is whether you want that number to be big or small.
What’s the best way to pay for a car?
You have three options: cash, credit or renting.
When our grandparents bought cars, they had but one option: cash. Back then, the only thing you could only buy on credit was a home. In today’s “easy credit” world, you can buy fries with a credit card. But just because it’s easy does not mean it’s smart. As King Solomon said, the borrower serves the lender.
Why not save now rather than pay later? I remember one of my high school teachers who never had a car payment. Each time he bought a car, he started saving for the next one. Instead of paying the bank, he paid himself—and owned each car outright the day he bought it. If he could do it on a 1980’s PA teacher salary, we can to. It just takes resolve and discipline—something all military personnel should have.
Borrowing simply raises the cost. Even at just 3%, a $20,000 car financed for 5 years, for example, will take $21,562 out of your pocket, $359 each month for 60 months. You’re basically taxing yourself almost 8% ((21,562-20,000)/20,000).
Car companies call renting “leasing” to make it sound sophisticated. These rental agreements often come with mileage restrictions. One couple I know gets asked to pick up other kids from sports practice in their paid-for minivan when the families driving high-end (rented) vehicles are “out of miles.” Renting you a car is usually in the dealer’s best interest because he retains ownership. Beware.
In addition to purchase price, what other costs should someone consider?
In business terms, buying a car is like a “capital purchase.” The costs of keeping it are “operating costs.” Even if you can afford to buy it, can you afford the operating costs? The major operating costs are gas, insurance, maintenance and ownership costs, and any lending costs.
Call your insurance company. Ask what it will cost to insure the models you boil your search down to. They, or at least USAA, won’t tell you which car in each category is the cheapest to insure—I’ve tried. But if you ask specific questions, they will give you specific answers.
Find a good mechanic. In addition to online research, access to someone credible who keeps cars running for a living is invaluable. Tony Baker of Baker’s Automotive not only keeps my cars running, he doesn’t ask me to spend money on things I don’t need. Among the cars I’m considering, he lets me know their strengths and weaknesses, what repairs I can expect and about ow much they could cost. VW Beatles look cute, but a simple oil change can be a scary $70. Before you buy, find out what the car you like costs to operate, what mechanical failures they’re known for and what those could cost.
On the cars you own, consider raising your deductible higher and pocket the difference. Of course you’ll pay more when you bend your fender and file a claim, but if you’re a careful driver and file few claims, you should come out ahead in the long run.
Any final thoughts?
If you’re not careful, cars can send you on the highway to the poor house. Even if you can afford one, what’s the “opportunity cost?” Let’s say you’re 35 and need a car, and let’s say you forego a new car at $36,113 for a used one at $19,189 and invest the $16,924 difference in a mutual fund that earns on average 5%, for 35 years, till age 70. This will net you an extra $93,353 at retirement. Both cars get you there at the exact same time. Which is more important: flash now or financial security later?
Do you really want to fork over $1 million on cars? If you buy at the 4-year mark, when they’ve lost about half their value, you can find a reliable ride for around $15,000 with 50,000 miles. Maintain it till it hits around 200,000 miles. Sell it for around $2,000. Repeat—7 or 8 more times. This will cut your “capital cost” from as high as $540,000 to as low as around $120,000. What could an extra $420,000 invested in your kids’ education and your retirement mean to you? This alone could well make the difference between retiring comfortably or on the edge.
Gib and I have very similar ideas about car ownership, hence the 1997 Civic and 2007 Pilot sitting in my driveway. Making smart car choices can mean the difference between smooth sailing and a financial storm. No one wants to drive in a storm!
Full disclosure: Gibson Armstrong is a Merrill Lynch Financial Advisor. He is a graduate of the US Naval Academy and served 9 years in the Marine Corps, deploying to Somalia and Japan. As a Comptroller, he ran a $60 million logistics program for Marine units across the Pacific.
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