Vehicles: Avoiding an Expensive Automobile

A quick Google search will reveal a startling statistic regarding car expenses: the average new car monthly payment is north of $500 per month.

We love our cars here in the United States. We have a wide variety of reasons for loving cars, from needing a truck to haul home improvement supplies, to two-door sports cars for a weekend getaway. There is a lot to like about cars, but they have their drawbacks.

In budgeting, I’ve found it important to identify and highlight high-cost items each month. Before I started budgeting, I was shelling out nearly $300 per month on the loan for my 2010 Ford Taurus SHO. You can read about that car debacle¬†here. Owning new or newer cars can be extremely expensive. But getting into a more affordable car that you still enjoy doesn’t have to be out of reach.

Transportation costs account for a large chunk of most of our monthly expenses. There are probably four main items that contribute to this total cost annually: loans, maintenance, insurance, and depreciation. That last one is an item you may not think about often, but let me explain.

Car loans are brutal, in most cases. Although there are some smoking 0% APR deals out there from time to time (we’ll soon find out that depreciation still makes these a dumb decision), most loans come with an interest rate ranging from 3 or 4 percent all the way up past 10 to even 15% sometimes. I’d consider lending at that rate to be predatory, but that is for another discussion. Interest is a killer. Say you take out a $30,000 loan at a 4% rate for 72 months, somewhat normal loan terms. During the course of you paying off that loan, you will have paid out an extra $3,794 in interest. Interestingly enough, you could buy a decent used car for that interest amount alone.

During that time that you had the loan out on this example $30k car, you drove it around an average amount, putting a standard amount of miles on it. You kept it in good shape, but when you go to check out the value of your car after those six years of ownership, you also find that your car has lost a lot of its value. Your car is now only getting offers from people willing to pay about $9,500 for your used vehicle. Your car has lost over two-thirds of its initial value, and let’s not forget that you didn’t just pay $30,000 for it, you paid $33,794 in total for it! That’s a big loss.

Loan costs and depreciation aside, new cars generally call for higher insurance rates. Since the insurance company is providing insurance on a higher value item, rates reflect that higher value. Instead of paying $50 or less per month for insurance on a car that is a few years old, your premiums could be $100-150 per month or more. That cost stretched out over a year or more really begins to add up.

The last item here, maintenance, is maybe the most interesting. There seems to be a general school of thought that says that older cars, or higher mileage cars, always have higher maintenance costs than new cars. Perhaps I’ve had incredibly good luck, but this has not been my experience. Here is a quick rundown on the cars I’ve had in the decade or so I’ve been behind the wheel:

1995 Buick LeSabre – 229,000 miles

1999 Ford Mustang V6 – 155,000 miles

1998 Buick LeSabre – 145,000 miles

2010 Ford Taurus SHO – 76,000 miles (this is the outlier, the newest car I’ve ever had)

2004 Ford Mustang Mach 1 – 82,000 miles

1993 Mazda Miata – 84,000 miles

Both Buicks were incredibly reliable. In its old age, the ’95 had a transmission that was starting to show signs of getting older, but we sold it before it was truly an issue. It was not far from a quarter of a million miles! The ’98 is still owned by one of my best friends and it is still faithfully getting him around with almost 155k on the odometer. I believe shocks and struts have been the only parts replaced there.

Two Mustangs, both of which never gave me any trouble. Ford’s aren’t even generally thought to be all that reliable in older models, yet all I ever did for either car was replace tires when needed and change the oil, as well as spark plugs.

Most recently, I drive a ’93 Miata with very low miles for the year. This is a 25-year-old car! Yikes!!! Would I trust it on a long road trip? The answer is a resounding yes. It runs like a top. I just took it on a 150-mile round trip this past weekend. When we moved to Oregon, it made the 570+ mile trip without breaking a sweat. The only maintenance on that? Had to replace the AC and serpentine belts for a little over $100. Now comes the interesting part.

The one car that was going to have an expensive repair was the 2010 Taurus. It started throwing engine codes, and from what I could tell, the catalytic converter was in the early stages of failing. I took it to a shop and they confirmed that before too long, it would need a new catalytic converter. For that car, I was quoted over $1,000 for parts and labor to replace it. I ended up selling it before the replacement was needed, but the moral of the story here is that the newest car I have ever owned would and could have cost me the most in maintenance. It’s not always the newest or lowest mileage cars that have the fewest or least expensive repairs. It can be quite the opposite in fact.

My advice is to find a vehicle that can provide for your needs, and do so reliably, without ballooning your transportation costs. Our 2008 Prius has been an excellent example of this. We paid cash for it, insurance is very reasonable, maintenance costs have been close to non-existent. Because we bought it after most of the depreciation had occurred, we won’t lose much at all once we decide to sell it.

In an ideal world, we’d all get to drive brand new cars, fresh off the lot. But for those of us working towards becoming debt free, cars can be a big hurdle in getting where we want to be. What are you driving now? Is it hurting your financial future? Maybe you drive an older car that you love. Continue enjoying it and watch the savings benefit the other aspects of your budget!

My Big Car Mistake(s)

This is more story time than anything. I have always been fond of cars. I love the way it feels to be behind the steering wheel, changing gears and working the clutch. An open road is a place of peace for me. I love it.

My love of cars has its pros and its cons. On the one hand, my interest in cars has given me a pretty decent knowledge of how they work, which makes and models are reliable, and how to do general maintenance and fix a few things here and there. But like any good thing, it can take you for a bad ride.

One thing I’ve learned about cars is that they are a depreciating asset, meaning, they lose value over time. At one point I bought a 2004 Mach 1 Mustang with my first every auto loan. I picked it up for $9,500 in great condition. It was a ton of fun! Unfortunately, the payments were a stressor. That payment comes around each month and kind of kicks your butt. I eventually realized I didn’t like the high insurance rates, poor gas mileage, and the constant stress of writing a check to the bank each month. If only I had learned.

Later, I made the mistake of having two cars at the same time as a single guy. Dumb, right?! Yeah, it was. I had a 1998 Buick LeSabre while having the Mustang. The Buick was paid for, but I had to pay extra for the insurance, gas, maintenance, you get the picture.

At this point in my infinite wisdom, I sold the Mustang for $7,000, taking a hit on that depreciation we talked about. I sold my perfectly good Buick as well to one of my best buddies and roommate at the time. Let’s just say he figured out how to steer his finances in the right direction before I did. That car is still serving him well today.

After having two cars at the same time, one on a loan, I figured I “deserved” a nice big, comfortable car. It had to be fast though. So I got a 2010 Ford Taurus SHO. Really cool car, a great sleeper (for you car folks out there). My loan for that was almost $300 a month. I was shelling out money left and right to the bank for interest on an asset that lost value every day. Buying it for almost $17,000 with an “extended warranty” (please don’t ever get one of those), I ended up parting with it a year later for $12,500. Ouch.

Why do I share all these personal details about car deals gone wrong? Well, I share them because they were mistakes that I hope others don’t make. If you don’t have the money for a car, don’t buy it! If you want it, save for it. In that time of saving, you might just find that you didn’t want that car after all, or you might realize that what you are driving now is just fine. At the end of the day, it’s not about getting there in style, it is about getting there.

As a funny wrap up to this post, I now drive a 1993 Mazda Miata. Yeah, one of those small little convertibles. Got it for $5,000. This time it is paid for. The best part is, I always thought that my Mustang and SHO were super cool cars. I’ve gotten way more compliments on the Miata as it turns out… life has a funny way of making us laugh at ourselves sometimes.

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Living Within My Means

What does that even mean? For most of my life, I didn’t know. Money came in and money left. I rarely (if ever) kept track of how much money I spent on this or that. This started to hurt me in high school. I wanted to go to college of course, and I actually had a pretty solid summer job through my high school years. I probably pocketed $7,000-8,000 each summer. I was into cars, so I spent a decent amount of my money on the occasional modification for my Mustang (yeah I was one of “those” high schoolers). I’ve always been a tech guy, so I had a smartphone in high school, an iPod, I bought a digital camera and I had an HP laptop too. Between all that stuff, buying gas, taking girls on a few dates, and just being a moron in general when it came to money, I didn’t have much to contribute to college when my senior year rolled around. Honestly, I can’t even blame my parents for this. To their credit, they taught me about credit card debt, spending less than you make, and saving. Shoot, I even took a personal finance class in high school. I knew a decent amount about finances, but like many things, if you don’t put what you know into practice, it does very little good for you.

Fast forward a few years, and I found myself with my first “big boy” job as a general manager of a hotel. I was making $45,000 a year as a 24-year-old (I also quickly got a raise to $50k). My rent with utilities was just over $500. I was only shelling out 15% of my paycheck for rent and related expenses. And at that age? I should have (and could have) been killing it. Instead, I was killing my bank account with sheer stupidity.

I thought I needed a car to fit the image I thought I needed to have. I was having success, and my ’98 Buick LeSabre didn’t scream “general manager” to me, so I sold it… to my much smarter, fiscally conscientious roommate at the time. But that is a different story. There was nothing wrong with that car. It was comfortable, pretty quiet and great on long road trips. The insurance was cheap, it was decent on gas, and I really should not have had any complaints about it. But I thought I could afford a nicer ride. So I went down to a local dealership and pulled out $17k worth of car loan to finance a 2010 Ford Taurus SHO. A quick rabbit trail: that car was awesome. 365 horsepower from a twin-turbo V6 is enough to embarrass some sports cars from a stoplight. That’s what attracted me to it, it was one of those “sleepers”. See, told you I like cars! It’s a weakness of mine.

Overnight I went from having a paid-for, reliable vehicle that I paid $400 a year to fully insure, that got 25-30 miles per gallon, and took regular (cheaper) gas, to a car that I had to pay $280 a month on, cost me $1,200 a year for insurance, and almost never cracked 20 miles per gallon. To make matters worse, it guzzled more expensive premium gas. Even all those expenses aside, my stress level regarding my car went up exponentially. With the Buick, I didn’t treat it badly, but I also didn’t freak out if I hit a pothole, got an unavoidable chip in the paint from rocks flying up on Montana highways, or if my buddies and I piled in after a hike, smelly as all get out. It was a functional car that I didn’t worry about. With the new ride, I felt like I had to keep it clean all the time, didn’t like it when people slammed the doors… you get the idea. It made ME more obnoxious.

I had that car for less than a year. It stressed me out, it was more car than I needed, and at the end of the day, it really bit me… In the end, it lost almost $5,000 of its value. And just so you know, a bank doesn’t care how much your car has depreciated when they go to collect on your outstanding loan balance. All in all, it was a really terrible financial choice.

I think I could go on here. But you get the idea. A few things I’ve learned that I am now practicing that help me “live within my means”, and may be able to help you too:

  • Nobody cares what car you drive!!! I now have a paid-for, cheap 1993 Mazda Miata. The funny part? I have gotten more compliments from people on THAT car then I got on my Mach 1 Mustang AND Taurus SHO combined. It almost makes me cry.
  • Not having a car payment frees up a bunch of cash each month that you can use to pay off debt, loans, or if you are smarter and farther along than me, you can start saving CASH for your next newer ride. Keep that no-loan thing rolling!
  • Older, less flashy cars are almost always cheaper to insure, put gas in, maintain, and operate overall. As a bonus, you won’t worry about a ding or a scratch here or there.

These are just a few things I’ve learned regarding car loans, used and new cars, and living within my means. If you haven’t made the mistakes I’ve made in buying and selling cars, please take my advice and hear it from me first: the new car’s not worth it!