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May 6, 2010

Myth: It's Cheaper to Buy a New Car than Keep Fixing My Old One

 Where do these myths come from?  We'll answer that later, but for now, let's dispatch with this myth post haste.  We've all heard it, and maybe you've uttered words similar to that above, but the truth of the matter is that it is almost always cheaper to fix an old car than it is to buy a new one.  Here's why:

New cars cost a lot of money to buy, old cars are paid off

Now that's  post haste.  Actually, this post was inspired by a very well written article from Jamie Page Deaton at U.S. News and World Report.  In the article, a detailed look at the math of this myth is given with a cost comparison between a used versus new Honda Civic - one of the most popular cars on the road.

Click to read the article, "How to Tell When It's Time for a New Car"

Why the Myth Lives On

The math in Deaton's article shows that keeping the old Civic could save as much as $2,763 over the course of a year.  So why does this myth persist when the cost savings are so obvious?  That has everything to do with psychology.  Everyone likes newer, better stuff, and cars are no exception.  When an aging car becomes troublesome or costly to keep running, the idea of a new car sounds even more appealing.  As a result, we find ourselves rationalizing how a new car could save us time, money, and aggravation.

Cost-Benefit Analysis

Now, we're not forwarding the idea that we should all drive our cars until the wheels fall off and the transmission and engine blow up, but taking a look at the cost-benefit analysis before  major repair bills start cropping up is a good idea.  By doing the cost-benefit analysis ahead of time, you'll be less frustrated and in a better frame of mind to make a well-informed decision.  The key questions to ask are:

  1. At what point should I replace my vehicle?  Should it be at $1,000, $2,000, $3,000 in repair bills?
  2. What will my replacement vehicle be?  What size vehicle do I need?  Will it be new or used?  How much will it cost above my expected repair bills?

Answering these questions will involve some numbers crunching and some qualitative evaluations, but they should lead you to better understand when, in fact, it is time to replace your vehicle.


Transportation Policy

After going through this exercise, we also suggest that you establish a personal transportation policy.  This is a general philosophy, or policy, on how you'll handle buying, maintaining, and eventually disposing of your automobiles.  A relatively balanced, inexpensive policy (similar to what might be expected of millionaires surveyed for the book, The Millionaire Next Door ) might look something like this:

  • Buy only used cars that are three to four years old
  • Drive the car for at least five years or until annual repairs exceed $2,500
  • When it's time for a new car, donate the old one to charity

While the above is a conservative, inexpensive policy, let's compare that to a more costly one:

  • Buy only new cars because they are more reliable
  • Drive the car for three years or until a more desirable new car is available
  • Trade-in the old car for a new one

You might not believe it, but the difference in these two policies amounts to a few hundred thousand dollars over a lifetime - the equivalent of a private, four year college education.  The reason we bring this up is so you can put the costs of transportation into perspective.  When putting together your personal transportation policy, you must also consider the broader landscape of your finances.

You should have learned that buying a new car is nearly always a more expensive proposition than maintaining an old one.  In addition, figuring out your philosophy on transportation before  major repair bills start piling up will help you make better decisions.  Finally, cars cost money and as such, the costs and benefits must also be compared to other financial needs.

Critical Thinking

  • Over the rest of your life, how much would $1,000 invested annually at 8% be worth?  What if you adjusted your deposits for inflation?
  • Where do factors beyond 'getting from point A to point B' rate compared to other financial goals such as retirement, travel, or paying for college?
  • All vehicles have an owner's manual with a slew of scheduled maintenance.  Is it possible that when a string of repairs comes up, that it isn't a sign of the car falling apart, but is the result of ignored scheduled maintenance?
  • Valvoline recently offered a 300,000 mile engine-life guarantee on any vehicle that had regular oil changes performed at its 'Instant Oil Change' shops.  What does this tell you about the common belief that cars only last 100,000 miles?

Category: Forex

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