Save big money - buy a used car

By: Aaron Woell

Posted: 10/13/08

The biggest single purchase most people make is a house. Every American buys the biggest house they can so they can put as many rooms as possible between them and their mother-in-law. It's the American Way.

Overlooked in all of this is the lowly automobile. Cars aren't huge purchases compared to homes, and the IRS won't help you stash your mother-in-law in one, but they are important to your financial well-being.

A car can take you to and from work, or to an interview to get a better job should you hate your current one. However, funny accounting rules aside, cars are not assets. They don't put money in your pocket, but rather suck it out like a vacuum. Cars cost a lot to use and maintain and they never go up in value. The few rare exceptions are Ferraris, Shelby Cobras, and the Oscar Mayer Wienermobile.

The average new car transaction price is $30,000 versus $212,400 for homes. While you can live in the same house for fifty years or more, the odds that you can keep any car going that long are close to zero. After 10 Wisconsin winters, most cars start to look like blocks of cheese. After 20 years, you've got a piece of Modern Art.

Unless you move to San Francisco and walk everywhere, chances are good that you're going to purchase a lot of cars in your lifetime. Since I can't in good conscience recommend moving to San Francisco, I'll instead discuss some ways to minimize your costs while buying a car.

First and foremost, buy a used car.

I know that sounds like lousy advice, but buying a used car is the smart choice. As cars are driven and used, they lose their value. According to Consumer Reports, depreciation accounts for 45 percent of a new car's costs during the first five years of ownership. Most depreciation takes place in the first five seconds you drive a car off the dealer's lot, and leaves a buyer owing more than the car is worth. In the car business, such buyers are "upside-down" like the Titanic.

Depreciation decreases as a car gets older. If you buy a three-year-old car, depreciation will account for only 25 percent of your total costs. By buying a used car, you let some other sucker take the depreciation hit while you save your money for gas and insurance.

Now, while you could do the responsible thing and save money by buying a used car, you could do the fun thing and buy a better used car for the same amount of money as your new car purchase.

According to Consumer Reports, for the same five-year total cost of a new Ford Focus, you could instead drive a two-year-old Acura TSX luxury sports sedan. While a Focus is an okay car, a TSX is decidedly "choice" with sharp styling, a leather interior and Honda reliability.

This brings up another piece of advice: buy a reliable car. While all cars are more reliable than they were 10 years ago, some brands are more reliable than others. Consumer Reports mails surveys to subscribers every year and publishes the results. Their data goes back many years so you can compare really old used cars if you don't have the money to purchase a newer used car. Buying a reliable car can save you thousands in repair bills, especially when buying something out of warranty. Even if you buy a new car, you should consider reliability if you want to keep your car beyond the warranty period.

My last bit of advice is that you should buy only what you need. Unless you already own a boat and have six kids, you don't need a Suburban. You can save a lot of money by buying a smaller, more fuel-efficient car. Not all small cars are created equal though: despite their similar sizes, a Honda Fit gets better gas mileage than a Chevy Aveo.

So, while you might own a lot of cars in your lifetime, you can save thousands of dollars by skipping that new-car smell. And if you truly do desire the toxic odor of volatile organic compounds and phthalates in your car, you can always buy a Little Tree and hang it from your rear-view mirror.

Woell is a senior accounting major and guest columnist for The Spectator. This column appears biweekly.