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You’ve thought about it and ruled out walking, public transportation, Ubers, and even renting a car only when you must. None of that works for you.
You’re getting a car of your own and that’s that.
Your options are to (a) buy new, (b) buy used, or (c) lease new. Which makes the most sense?
According to Ben Le Fort, buying a new car is a really bad idea. He calculates that if you make the median salary, financing, depreciation, gas, maintenance, and insurance cost 25% of your after-tax income.
However, that’s only true for the first year of ownership. Here are the true costs if you’re not silly enough (or make enough millions) to replace your car each year.
To calculate the full cost of ownership, let’s first decide which cars we’ll look at.
According to US News and World Report, the best non-luxury vehicles for the money in 2019 are:
Calculating the costs for each of these is (quite a bit) beyond the scope of this story, so let’s analyze three examples. Specifically, buying a CRV, a Soul, or a Camry hybrid.
Buying new has several attractions.
One the other hand, depreciation is highest for a new car. You lose 5-10% as soon as you drive your new car off the dealer’s lot. By the end of year 1, you lose 8-25%! To reduce this hit, do what I do – keep your new cars for 10 years.
Edmunds.com has a nifty tool for estimating the full cost of owning vehicles for 5 years, accounting for region. The true cost to own includes maintenance, repairs, taxes & fees, financing, depreciation and fuel.
Edmunds only looks at the first 5 years of ownership, so we need a hack to calculate costs for 10 years. We estimate that by summing the 5-year cost of buying new to that of 5-year-old vehicles of the same model.
However, keeping the car you bought new for a second 5-year period doesn’t require buying it. Thus, we remove the financing cost and adjust the first year’s depreciation to be the average of year 5 of the new model with year 2 of the 5-year-old one.
Let’s see how this works out for the three vehicles we picked out.
The cost to buy a new 2019 Honda CRV and keep it for 5 years is $33,742.
Buying a 5-year-old CRV and keeping it for 5 years would cost $32,085. However, if we remove the financing cost and adjust the year-1 depreciation as described above, we arrive at $28,443.
Adding this to the cost for the first 5 years, we get a total of $62,185, an average of $6219/year. Based on Le Fort’s $39,129 estimate of the median after-tax US income, this works out to ~16% of income.
The cost to buy a new 2019 Kia Soul and keep it for 5 years is $30,648.
Buying a 5-year-old Soul and keeping it for 5 years would cost $28,432. Adjusting as above, we arrive at $25,578.
Adding this to the cost for the first 5 years, we get a total of $56,226, or $5623/year on average. This works out to about 14% of the median after-tax income.
The cost to buy a new 2019 Toyota Camry hybrid and keep it for 5 years is $37,697.
Buying a 5-year-old Camry hybrid and keeping it for 5 years would cost $28,982. However, again adjusting as above, we arrive at $25,641.
Adding this to the cost for the first 5 years, we get a total of $63,338, or $6334/year. This works out again to ~16% of median after-tax income.
To summarize, depending on the car you choose, buying a non-luxury car new and keeping it for 10 years costs about $6000 a year on average. Of our examples, the least expensive was the Soul at $5623/year, and the most expensive was the Camry at $6334/year.
Using the second 5-year period without adjusting the financing or depreciation costs, we get an average annual cost of $6417 for the CRV. Similarly, we get $5686 for the Soul and $5796 for the Camry.
Notice that this is more expensive than the average annual cost of buying new and keeping the car for 10 years for the CRV and Soul!
For the Camry hybrid, buying used saves about $45 a month. You may choose go for that savings; or you may prefer to drive a new car for the first 5 years of its life, especially if you make significantly more than the median salary.
In almost all cases, leasing makes little financial sense, even if you drive relatively few miles (leases usually allow only 12,000 miles a year). You can count on the dealership to make sure they end up ahead financially (at your expense, obviously). However, there may be specific situations where this doesn’t hold true, or where you wouldn’t mind the financial loss.
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The above methodology is indicative, but there are a few caveats.
Having said all that, the above method gives you a reasonable handle on how to think about the cost of buying a new vehicle and driving it for 10 years vs. the cost of buying a 5-year-old model and keeping it for 5 years until it reaches the same 10-year age.
You could of course buy a 5-year-old car and drive it for 10 years, but then you start paying significantly higher repair costs (e.g., replacing an engine, a transmission, and/or for a hybrid, replacing the batteries). You’d also have to consider the value of your time spent waiting at repair shops, and the emotional toll of the aggravation involved.
Huge amounts of digital ink have been spilled about how terrible a financial mistake you’ll make if you buy new cars. In reality, buying new and driving your car for 10 years averages about the same cost (cheaper in some cases) than buying used, and is more fun. Leasing is rarely a good idea, but as mentioned above, in some cases you may find it to be the way to go.
About the author:
My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.