Russ and I walked out of the garage and onto the parking lot. “Do you see that new BMW over there?” he asked. “It’s the manager’s car. He paid about $40,000.” Russ gave me a grave look. “If you want to be rich,” he said, “never buy a new car.”
I was 20 years old when I first met Russ. I was working at a summer job to pay for college. Russ had become a millionaire on a mechanic’s salary. He knew a lot about money and a lot about cars.
You might not agree with Russ. But his car buying strategies have saved me more than $100,000. They could do the same for you. Carfax.com suggests that new cars lose an average of 10 percent of their value as soon as they leave the lot. They lose another 10 percent over the next 12 months. That means a $15,000 car would lose $2,850 during the first year alone.
Edmunds.com is an online resource for automotive information. They recently compared the costs of buying a new car, compared to leasing one or buying used. They factored in loan costs, depreciation and resale value. In the end, they said that leasing a car is the biggest money loser. Buying a new car was better. But buying a used car was best.
They based their analysis on a mid-sized car that would cost $28,104 over a six year period. That included loan costs of 1.8 percent per year over a five year period. They then compared the cost of buying a similar 3 year old car with loan costs of 6.04 percent per year. Loan interest rates are higher for used cars. (Borrow from a credit union, however, and you’re likely to find rates below 2 percent, as Scott Burns did when he “hocked” his car a few years ago. )At the end of a six year period, they figured that the new car, after determining the resale values of each, would cost $2,847 more than the used car.
But buying used over new can save much more than that. Instead of buying a 3 year old car, consider something older. This week, I bought a 2004 Volkswagen Golf. I paid $4,512. But I didn’t tell Russ. He might have told me that I paid too much. It’s the most I have ever spent for a car in North America.
The average American gets a different car every six years. Following smart, used car buying strategies could save $10,000 or more over a 6 year period, compared to the overall costs of a brand new car. Here’s how the savings could add up. Over the past twenty years, Vanguard’s Balanced Index Fund has averaged a compound annual return of 7.2 percent per year.
If you earned such a return, $10,000 invested every 6 years would grow to $32,326 after 12 years; $106,781 after 24 years; $174,896 after 30 years; and $278,269 after 36 years.
Here’s how to find a good used car for less than $5000.
Tip #1: True Age Is In The Mileage
According to autoguide.com, drivers between 35 and 54 years of age drive an average of 15,291 miles per year. By that measurement, the typical 10 year old car has seen 152,910 miles. That’s a lot of wear and tear. But what if you could find a 10 year old car that has traveled just 75,000 miles? It could be as reliable as a five year old car. But because of its age, the asking price would be a whole lot cheaper. Those are the kinds of cars that I like to buy.
Tip #2: Check Reliability Ratings
All cars are not created equal. In fact, some of the most popular cars have the worst reliability ratings. Few people read consumer reports. They aren’t bestselling page turners. But they’re certainly worth reading.
Phil Edmonston’s Lemon-Aid Guide To Used Cars and Trucks is a great place to start. Autoguide.com also shows what cars you should avoid. Their list of the 20 least reliable used cars include BMW’s 7 Series, the popular Mini Cooper S, the Mercedes Benz GL Class and the Chrysler PT Cruiser. American models are often among the least reliable cars. That’s why Russ advised me, many years ago, to favor Japanese cars.
Tip #3 Avoid New Paint Jobs
A new paint job could be hiding something. Look for cars that are in great shape with original paint. If you live in a snow belt region, consider buying a car in a city where it doesn’t snow. Salted winter roads can corrode cars quickly. Look carefully for any small bubble spots under the paint. It’s a sign that rust is pending.
Tip #4 Check The Car With A Mechanic
If you find a car that ticks all of your boxes, take it to a mechanic. If it costs $250 to check the engine, transmission and the brakes, it’s a small price to pay. If there are problems, that $250 could keep you from a lemon.
Tip #5 Let Your Fingers Do The Walking
Write down the telephone numbers of every car dealer in your area. Wait until the last week of the month. That’s when salespeople are most keen to meet their monthly quotas. Call each dealership. Tell them exactly what you’re looking for. I often ask for a Japanese car with less than 100,000 miles. I also like $4000 price ceilings. Some of the dealers might call you crazy. But stand your ground. It’s easy to do over the phone. Only wander onto a car lot when a salesperson tells you that they have a car that meets your standards.
New car owners have better bragging rights. But used car buyers can build a lot more money.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat.