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April 10, 2008

Car Purchase Principle « The Brain Fertilizer Way »

Somewhere along the line, I developed a standard for whether a car purchase is worth it.

I'd like to build the suspense to make it seem more profound, or insightful, but what's the point?

I'm willing to pay $100/month for a car.

That's it. Flat and simple.

So it is worth it to me to purchase a car if my cost of use (excluding routine maintenance, insurance and gas) is about $100/month.

With that standard, I purchased my 1998 Toyota Corolla for $6500 (overpaid, alas!) when it had about 50k miles on it. I had the expectation of driving it into the ground, which would make up for overpaying for it. To drive it to the point where it is worth only salvage --about, say, $500-- would mean 60 months, or 5 years. That is doable for a Toyota that was 8 years old when I purchased it. 5 years at 20k miles/year would be a total of 150k miles, also doable in a Toyota. Unfortunately (or maybe fortunately, in the end), someone hit the Toyota and the costs totalled it. I was given $4400. I drove it for about 23 months without having to do any repairs.

That means that I "lost" about $2100 over 23 months. That means I did okay, and got my money's worth. And even before I did the calculations, I felt good about the worry-free use I got out of it.

Now, I purchased my Chevy Prizm for $3000 last year, and it had about 85k miles on it, now 90k. The blue book value is $4600. There's almost no way I will not make money when we sell it. I think there's a chance I could get as much as $4k. That would fill me with pride, getting to use a car virtually for free for 18 months, and even increase my bank account by about $1k for purchasing/driving it.

The same deal with my '98 Mazda 626. I purchased it for $1k with 85k miles. If it lasts 10 months without needing any repairs, we get into bonus/free use time. And if I sell it (eventually) for at least $1000, then I had a free car for however long I used it.

Now, the problem comes in with older cars about the repairs you need. The Mazda will hit 100k miles before long, and will need repairs. The electric mirrors don't work. The windshield is cracked, there's some rust on the body, and a taillight cover is cracked. I think I could take care of it all for $700. That means I need to drive it an additional 7 months to get my money's worth. And the paint is bad. So after I drive it for 17 months (moving into the bonus/free time), I can start setting aside $100/month for restoration and/or upgrades. So 10 months after I move into bonus time, I can get the car repainted to look new again. Then maybe a few months after that, I can put some performance parts on the engine, raising fuel efficiency and/or power.

The lesson is, you can do a great deal of work on a car to restore it to new condition at $1200/year.

Thus, when a car gets older, as long as there isn't a string of things ready to go wrong with the car, it probably is more cost effective to keep and continue repairing an older car instead of buying a new one.

Let's compare that to new cars. New cars lose half their value in the first 5 years, if I recall correctly (except for Hondas and a few other cars...Audis?) So that's 60 months. If a car depreciates no more than $6000, you have gotten your money's worth. That means you can purchase a $12k car, drive it for 5 years, sell it for $6k, and at least have your money's worth. Unless you can guarantee your new car depreciates slower than that, you shouldn't buy a new car.

A $14k Honda is probably worth $10k after 5 years, if you take care of it. Hondas are worthwhile to buy used. But even as good as Audis are at holding their value, their starting price is so expensive that you probably use up your $6k in depreciation within the first year. Then again, you get a much better car and much more enjoyable experience than in a 1998 Mazda 626, so you may be able to calculate on the basis of $200/month, or $300 month.

The lesson? Stop and think about how much you feel it is worth to you to drive a car. For me, I can get good used Japanese sedans that are in nice condition, (relatively) low miles, and fun to drive for very reasonable prices if I spend a little time looking. If I really look hard, I've proven I can find cars I can drive almost for free. The advantage is I waste less money while driving decent cars, and my investment is lower if something untoward happens (like someone hitting my car on a motorcycle).

Thoughts/reactions?

Posted by Nathan at 09:53 AM | Comments (2) | TrackBack (0)
Comments

Well put. It isn't worth it to buy a vehicle brand new, as it loses a good chunk of its value just leaving the lot. Better to spend money on a lease returned after two years, with a broken-in, clean, low-mile vehicle often still with a warranty. Another way I've acquired good vehicles is to buy a functional car with a blown engine dirt-cheap, and have a rebuild/used engine put in. Do it right (Japanese cars are great for this) and you got yourself a good paid-for set of wheels for at least the next five years. That's about how long my old Honda Civic lasted before it got rear-ended, and my current Pontiac Bonneville seems to be lasting about that long, so far. And with the economy going south and price of gas going north, who can afford a car payment?

One note - I never touch a vehicle with a history of transmission problems. For some reason you can swap out a motor and virtually any car will run like new, but once a tranny goes bad, the car will never run right again, even with a transplanted tranny. Just some experiences I've had, along with witnessing close friends with similar experiences.

Posted by: diamond dave at April 10, 2008 12:48 PM

Hmmm...
That's good advice about the transmission issue. I'll remember that.

Posted by: Nathan at April 10, 2008 01:13 PM