Picture this: You’ve just graduated and you’re completely used to seeing $27 as the balance in your bank account but finally, after working endless hours at your new job you have enough saved up to feel comfortable. So what do you need? A new car.
I see my friends posting on social media all the time, “I did an adult thing today” or “Officially adulting” and it is a photo of them standing in front of a shiny new car and it makes me CRINGE. Allow me to share why buying a new car when you’re just getting started is cringe-worthy.
Let’s say you purchase a new car for $25,000. You likely have to take out a loan that you pay interest on. Let’s be generous and say you get a 5-year loan with 3.0% APR (Annual percentage rate) interest. This means you’ll pay about $450 a month for 5 years for your car. That is cash going out of your pocket. You may be thinking, I can resell the car though so I do not lose all of that money…
Research says that a car loses 20-30% of its value in its first year. That means that after just 1 year, your $25,000 car is worth just $17,500 to $20,000. A minimum of a $5,000 loss in just one year and that doesn’t include any of the interest cost of your loan. That is a massive loss of money for someone who is just getting their financial footing. Can you imagine if you invested your savings in the stock market just to lose $5000 in one year, you would be so disappointed and you would know that you made a poor investment.
Instead, I recommend purchasing a used car, one that is over 3 years old but has low mileage. Consider purchasing the dealerships warranty to protect you against any mechanical problems with the used vehicle. This year my used car had issues with its struts and having the warranty saved me $2000. Alternatively, if you can stick it out a little bit longer with your crappy car, if it is safe and driveable, there are much better places you can put your money than in a new car.
Personally, I share a car with Austin. Occasionally we have to uber places because we both need a vehicle but this is rare. If you think about the $6,000+ we would lose on purchasing, insuring and buying tags for a new car, we could spend $16 on ubers every day of the year and still come out ahead.
It takes money to make money, so as you gain cash, you should start thinking about investing it in ways that can make you money. Any large purchases you make should be an investment and your investments should make you money not burn a hole in your pocket.