Post may contain affiliate links more information is provided in this link.
Forge Your Wealth is meant for education and entertainment and should not be used for financial advice.
Some of you may be reading the title “Avoid This Purchase Or Lose Thousands Instantly” and be thinking that it is impossible. I assure you, it is not only possible, but many people do lose thousands instantly, not only once, but multiple times in their lives. Do people not know about this? Frankly, they brag about it. They purchase a single item that causes this loss in value. In this post I will talk about how to avoid this purchase.
What Is This Purchase?
This single purchase is a new car. To be perfectly clear I do not mean they cost thousands, but literally the moment you buy a new car and drive it, it loses on average $2,000 in value. Cars lose 15-20% of their value each year and there is very little you can do about that.
What Causes Car Depreciation
The first reason for depreciation is the difference between retail and wholesale price. When cars are purchased from a retail dealer, you better expect the price to be higher than the value because of the fees, labor, taxes, and also the basic entrepreneurial desire to make money found in everyone who owns a car dealership (and every other business). All depreciation from that point on is from wear and tear and the lower value other customers put towards used cars relative to new cars. So unlike every other large purchase, such as houses, there is next to no chance of your car gaining value.
Does Depreciation Matter?
Do you like paying thousands more for something than it will be worth in a few minutes? Especially for something you will be relying on for many years? Probably not. In addition, if you are financing the car, lenders will treat the loan as higher risk due to the lowering of value, they will probably (and accurately) believe the car’s value will never exceed the debt until the car is fully paid off. The additional financing alone should make you avoid the purchase of a new car.
Can You Avoid Depreciation?
The only way to avoid depreciation from buying a new car is to avoid the purchase of a new car at a dealership. To avoid this purchase you should use different car purchasing methods.
- Buy A Used Car. – I have brought up used cars in a previous post. A used car is a car that was previously owned and/or leased and is usually more than one year old. Since the car is a few years old it has already gone through most of the depreciation (check chart above) and the price is considerably closer to the value. You will pay far less, usually half or less than half the price for the car if it was new.
- Lease. – Leasing is when you make a payment monthly to drive a car. You do not own the vehicle but you must still maintain it like it is. I usually do not recommend leasing a car because the monthly cost of a leased car adds up to an overall higher cost compared to owning the car for more than 3 or 4 years. In addition, you do not own the car, but you will pay for the loss of value like it was. If the depreciation is so large that they offset the monthly payments, the dealership can charge you for it. In other words, if you lease a vehicle and something goes wrong it can cost you greatly. But if everything goes perfectly it will cost you more than ownership anyways. Either way this is not a good way to avoid depreciation.
- Collectible. – Some say that you can buy a very particular car which either is manufactured in limited numbers or has some historical or personal importance. They keep the cars and can later sell them at higher prices. While this is a car, it is not a vehicle, but a collectible. Do not expect to take cars like these to the grocery store.
Why Do People Not Want Used Cars?
The most common reason (and most legit reason) people do not purchase used cars is because of the unknown history. While you should always maintain your car, as brought up in a previous post, there are many who try to cut corners. Last thing anyone wants to do is spend thousands on something that will not last long.
Usually car history reports including CarFax and Autocheck can provide good histories of cars. However, I have heard that details of these reports are now more… relaxed, in recent years. This is not their fault though, this information is only as good as the reports sent to them. Either way, information with a few missing details is far better than no details at all.
I understand the lack of trust, but then you should take the vehicle to a mechanic to get checked. This is probably the most ignored advice on buying a car and it will only set you back by $100-$200. Dealerships will typically allow buyers to do this, but there are exceptions including auctions which sell the car as is.
I have heard people say that used cars require maintenance. And new cars do not? While used cars may require more maintenance, especially for the more essential components like the engine, new cars still require brake pads, tires, alignments, oil changes, and everything else a car typically needs. I get that. I have just bought four new tires, got the wheels aligned, and the lug nuts pried off (that’s a new one for me) for just less than $700. Tough, this happens. New cars may save you on maintenance at first, but not as much as you would think.
Furthermore, used cars rarely have issues which require recalls or even discontinuations. When I was in high school, it was a good year in the auto industry if I had only heard that 20 people in a school of barely 1000 had at least one of their family’s cars recalled. Now sure, the companies will have to reimburse the issues, but used cars almost never have these issues. Although it will not (or at least should not) cost you a dime, it will cost you time.
Although people love the feeling and smell of a new car, both are superficial, and the smell is actually from harmful volatile gases. While the feeling and smell may make you feel rich, neither will last. My parents are very well off people, and they have NEVER bought a new car. They have told me to never buy new. In America that may sound like weird or even bad advice. Let’s think about this logically. Do you think my parents never bought a new car because they are well off? Or do you think my parents are well off because they never bought a new car? Well ok, they are not well off exclusively because they never bought a new car, but I think the few thousand they saved just by avoiding this purchase helped. In my next post I will explain where they have frequently purchased their cars, and other great places you can buy used cars you may never think of otherwise.
I know driving a used car does not make you feel rich, but think of what the billionaires drive. In real life, not on TV. There are many billionaires who drive average and even “cheap” cars, such as Jeff Bezos driving a Honda Accord. Granted, practically all of them have better cars, but at least some of these cars fit more in the collectibles category than vehicles as these cars are rarely driven, if at all. Also, and I will be blunt, are you a billionaire? Probably not. But I’d say since you are reading my content you aspire to be one some day. Right now you want to build wealth, not waste it on something you know will lose value instantly. But once you become a billionaire, you can drive whatever you legally can. Until that time, avoid this purchase to forge your wealth.