Cars & Effect (part 3)

In Part 1, I detailed why I needed another car. In Part 2, I told you the car I ultimately settled on.  Now let’s talk about how this information might benefit you. Some folks will doubtless fail to understand why I spent money to buy a 17-year-old car. But consider the alternatives:

I could have leased a brand new 5-Series. It would be showroom fresh, with a comprehensive warranty. BMW is currently advertising a lease deal on the 550i at $759 per month for 36 months. Since it’s a lease, you pay over $27,000 (plus taxes and fees) to drive the car for three years, and you don’t even own it at the end of the term. I know people who prefer to always drive new cars by turning in their cars at the end of the lease and leasing another one. But that burns through an awful lot of money. If your life’s biggest dreams (like a great retirement) are not yet paid for, I wouldn’t recommend this approach.

I could also buy the new 5-Series, rather than lease it. But that requires me to put down a large chunk of money on a depreciating asset. The minute you put the plates on a new car, it is worth a great deal less than what you paid for it. That’s how fast they depreciate, and high end luxury cars depreciate even faster than basic transportation. A nicely equipped current 5-Series is north of $60K. With 25% down, the ballpark monthly payment will top $1,000 at current rates. I’d own the car after 4 years, having put in over $64K plus sales and excise tax just as the car is coming off warranty.

I have owned five BMWs. I really like them. But I know that at around 100K miles, most enter the automotive equivalent of the terrible twos. There will be a laundry list of worn out parts, and a lot of money to be spent to return the car to the condition it needs to be in to feel like the Ultimate Driving Machine.

The car I just purchased has already passed that stage. The predictable and expensive repairs have already been done by someone else. It doesn’t have far to depreciate. This is a car with a lot of life in front of it, perhaps 200K more miles of driving, with relatively low operating costs. It will look good, be fun to drive, and financially sensible too.

You may object that a brand new car, unlike mine, will have substantial trade-in value in four years, partially offsetting the price of the next new car you buy. True. But while the equity in your trade certainly reduces the monthly payments on your next car, the equity is just endlessly rolled from one depreciating asset to the next. Buying a less expensive car frees you to put this money will it can have a rate of return.

Of course, you don’t have to buy a 17-year-old car if you don’t want to. Once you make the decision to go pre-owned, it’s a matter of taste to decide what vintage car suits you best. Regardless of the brand of car you drive, making an old car work for you requires following a number of rules:

  1. Be prepared to search far and wide to find the right car at the right price from the right seller. The right seller is someone who has properly maintained the car, and can prove it by producing all the maintenance records.
  2. Pretend you have a payment. Life without car payments is great. But every month, put some money aside into a car fund that you will use to pay for repairs, and eventually for your next car. If you put, say, $300 per month into this fund, you’ll have plenty to handle out-of-warranty repair costs without wrecking your monthly budget. Remember, repair costs on a well-chosen old car should be far less than monthly payments on an equivalent new car.
  3. Know that maintaining the car well may mean ignoring manufacturer’s recommendations. For instance, BMW used to recommend changing the lubricants in the manual transmission and rear differential every 30,000 miles. Then they started selling cars with free scheduled maintenance included. Lo and behold, these fluids suddenly didn’t need changing anymore. Ever. They were “lifetime fill.” The fluids were the same chemical formulation as they had always been. The only change was that BMW was now paying for them. I’ll let you draw your own conclusions. If you intend to keep your car for the long haul, I say ignore the “lifetime fill” baloney and maintain the car the old-school way. And 15K miles between oil and filter changes? Forget it.
  4. Keep your tires properly inflated. This will not only save you money by making your tires last longer, it will help your car get better gas mileage. Buy a quality tire pressure gauge and check the pressure weekly.
  5. Keep the car clean. In the winter, be especially vigilant to wash away road salt. Faded paint and rust spots will both spoil your joy of ownership and reduce the value of the car when it is time to sell or trade it.

Car manufacturers come out with new models every year. They spend millions of advertising dollars telling you to trade your current car for the newest versions. Especially in certain industries, people put great stock in maintaining a prosperous image. You can start to feel pressured to keep up with the Joneses by buying a new car every three or four years. But driving a great old car for a long time can be even more involving and rewarding, and leave you with money in your pocket that the Joneses don’t have. That’s money you can put toward things that mean more to you than a car ever will.