An unpopular opinion in the financial independence community is that driving a 3 to 5 year old car is good. “To spend money on a new car is a financial disaster”, they say. That’s true, because most of the cars lose 25-30% of their value in the first 3 to 5 years. After that point, their value drops down at a more slower rate. Since cars lose value that fast, why would you spend money on a car at all?
A newer car has better safety systems which is why I would spend money on a car
You’ve all heard the stories about folks who got a $3000 beater and drove it till its last breath. It’s not a bad idea to drive a beater until you feel confident enough to spend $30k on a car. However, I don’t think this is the smartest decision in terms of safety. These 15-20 year old cars often have almost no safety features. They barely have ESP and few other essentials that are offered as standard nowadays.
2 years ago I was on the market for a new car. That was the moment I did my first steps into financial independence without realizing it. I knew that I would spend money on a car that I would own for at least 3-5 years. In our country, the standard of living is fairly low, so buying a 10-year-old car is what most people do. I made the decision and bought an old BMW 3 Series xDrive from 2009. Why did I decide to buy this one instead of a Skoda, VW, Ford, etc? Because I went through all the forums I could find and read everything about the segment that I was exploring. I found out that this car was more reliable and safe than most of its competitors. It was also more fun to drive.
The safety features of that car saved our lives
Last autumn we hit a wild animal on the highway. 5 people in the car, highway speed, and an animal that shouldn’t be there. We were all fine, the car behaved extremely well and I managed to pull over on the side of the road quickly enough before somebody hit us from behind in the dark. However, the car was totaled. Yet, all of its safety features saved our lives. I knew that all of the research I did before picking the car and then maintaining it as required by the manufacturer has paid off.
After that moment, we ended up with my partner’s car, which is a very reliable Lexus IS250 from 2008. That car was in her family since it left the dealership and also maintained as required by the manufacturer. However, as it is now 2020 and that car would require 2 sets of new tires (yes, it’s mandatory to use winter tires here), we decided that it’s a good idea to sell it and buy something newer. When we made that decision, we sit down and talked about what kind of car we want to buy next.
The ideal moment to spend money on a car
We planned to part ways with my BMW, as we didn’t need a second car. Essentially, I bought this car before we got together, so it was reasonable to sell it at some point because it had higher mileage than the Lexus. However, 2 sets of new tires for the 12 years old Lexus cost about €800. If we are going to sell it, from a financial perspective it makes sense to avoid spending that money now. Most private car sellers would never sell you their car with 2 sets of new tires. Then, why would we do it?
At the beginning of the year, we started to talk about swapping the Lexus with something newer and with more safety features. Thеn the pandemic hit and we essentially didn’t need a car at all because of the lockdown. However, we decided that it’s more reasonable to raise our income before parting ways with the car. My partner got a few new certificates, I got a new job, and am expecting a pay raise beginning of next year. This is the milestone we told ourselves that we need to achieve because it makes sense from a financial perspective. Rising our income will allow us to plan for a slightly newer car or do a bigger down payment.
Investments before spending money on a car
Another discussion point we had is that we first want to buy a rental property if we’re lucky enough to find one. We identified a property size, budget, neighborhood, and decided to wait for the real estate market to slow down a bit as prices are unreasonably high now. Yes, you can’t time the market, but you can avoid paying more than an asset’s worth. That approach is also valid for the car market at this point in time. During the pandemic, far fewer people buy cars and the industry is struggling, which drives the prices down.
In the future posts from the series, I’ll share with you all of the decisions we made before selecting the car we did, how I did my car research, and more. Stay tuned!