My (Surprising) Advice About Buying a Car

Oct 22, 2021

For those of us who’ve struggled with debt in the past, buying a new home or car can be nerve-racking.

After all, spending too much money on the wrong things is how many of us got into trouble in the first place. And buying a new home or car is generally among the most significant purchases most folks ever make.

It’s only natural that we’d feel a little uneasy. We worked hard to get our finances back on track and don’t want to do anything that could derail them again.

So, last week, I shared some of my own “best practices” for buying a home with as little risk (and stress) as possible. (If you missed last week’s essay, you can catch up here.)

This week I’m going to do the same for buying a new car.

Before we get into the specifics, let’s review the general guidelines that apply to any kind of major purchase.

The first is embracing the right mindset.

As I mentioned last week, it’s common for folks like us to feel guilty about spending money.

But getting out of debt and gaining control of your finances doesn’t have to be about deprivation. You don’t have to live like a monk. You just need to be intentional about your spending.

If a new car or other purchase is affordable for you and would improve your quality of life, there’s no reason to feel guilty about it.

Simply giving yourself permission can make the entire process much less stressful.

Now, when I say “affordable,” I don’t just mean you can cover the cost of a purchase with your current income. To me, affordable means you can cover the cost of the purchase in a worst-case scenario.

I’ll cover affordability in more detail in a moment. But this is where my second guideline — the idea of a rainy day fund — comes in.

Specifically, I recommend you save up at least one year’s worth of minimum expenses before making any major purchase.

As I explained last week, this is the amount of money you’d need to cover the bare essentials — your rent or mortgage, all necessary bills, and food and necessities for your family — for one full year.

Again, this may seem excessive. But it will give you tremendous peace of mind and help ensure you don’t fall back into debt due to a job loss or other financial emergency.

Ok, now that we’ve covered the basics, let’s talk about some car-buying specifics.

First, like when buying a home, you should generally not buy a car as an investment.

This is probably obvious to most readers, but it’s important to understand.

Cars are what are known as “depreciating assets.” They generally lose value over time. So you should never buy a car with the expectation that you’ll be able to sell it for more than you paid.

(Of course, there are exceptions to every rule. Some rare, vintage cars can appreciate significantly.)

This depreciation can be particularly dramatic in new cars. It’s not uncommon for a new car to lose up to 40% of its value during the first three years of ownership, including up to 25% in the first year alone.

As a result, many personal finance “gurus” say you should NEVER buy a new car. They recommend sticking only to used or pre-owned vehicles to save money.

Well, you may be surprised to hear I disagree.

In fact, I think that advice is terrible.

Now, don’t get me wrong. I’m not saying you should buy a new car. Or that buying a used car can’t be a great decision.

I just think it’s silly to base your decision solely on depreciation. There can be other important factors to consider as well.

Remember, you’re buying a car because you believe it will improve your quality of life.

Now, maybe that just means getting you from point A to point B quickly. In that case, an inexpensive, no-frills used car may be perfect. Spending more on a new car might just be a waste of cash.

But that isn’t necessarily true for everyone.

For example, I drive around 30 miles a day to work. And if you’ve been to the Baltimore, Maryland, area recently, you may know we have some of the worst, most dangerous roads imaginable.

For me, it’s all about comfort. I don’t care nearly as much about looks as I do about comfort. Driving a safe, comfortable car makes a huge difference in my day-to-day quality of life. And I’m happy to pay a little more for the privilege to do so.

I also tend to own my cars for a long time, so I’m not as worried about depreciation.

And frankly, I just like owning a new car. I’ve owned used cars in the past, and they’ve been nothing but problems for me.

While you can avoid most problems with proper due diligence, I just like the peace of mind of buying new. It’s like a fresh start, and I like the idea of fresh starts in life.

My point is, you need to take in all these factors when making a decision, and not just the potential cost of depreciation.

Don’t put yourself in a situation you don’t like just to save some money.

Of course, cost is still important. You don’t want to buy any car — new or used — if doing so could risk your financial future.

As I mentioned before, an “affordable” car is one you could own for at least a year with no income.

The simplest way to ensure you can do this is to pay cash.

Personally, I never want to take on a payment for a car. And I would urge you to avoid doing so if possible.

One potential exception to this rule is if you’re able to take advantage of the 0% financing some dealers are offering these days. But I would still only do so if I had enough cash in my rainy-day fund to pay off the loan if necessary.

Leasing a car could also be an acceptable option for some folks. You just want to be sure the lease conditions are sufficiently flexible for your circumstances.

In any case, the key is to make sure you don’t end up in a situation where you could lose your car due to a loss of income or another financial emergency.

I hope these simple guidelines are helpful. I’d love to hear what you think; do you have any car-buying suggestions of your own? You can email me directly at [email protected]. As always, I can’t personally respond to every email, but I promise to read them all.