Hot Wheels!

hot-wheels

Throwback time!  Remember Hot Wheels?  I sure do.  Unfortunately, getting a new car is not as easy as heading to the toy store and picking up the latest and greatest.  Which brings me to my question of the day:

Who doesn’t love the smell of a new car?

Answer: Me, apparently.

A friend of mine recently asked me to help her figure how to be able to afford a new car. After a few minutes of talking about her wants and needs, I found myself trying to discourage her from purchasing anything. She seemed confused at first.

“But my car has 80,000 miles on it!”

“But what if it dies?”

“But I never really wanted this car anyway!”

Ok, I get it. You WANT a new car. Yes, I understand that you WANT something new, fun, and maintenance free. But that bottom line is this: it is just a WANT.

There are loads of reasons I can give you not to buy a brand new car. Cars depreciate the second you drive them off the dealer’s lot, blah blah blah. But I want to approach this from a different, more enlightening angle.

Cars are never an investment. Cars will never appreciate (increase in value), so they are a utility expense. I don’t care if you’re driving a Mercedes Benz of a Geo Metro, it’s still going to get you from place to place. Granted, there are features in different cars that will increase your comfort and safety. But these features will never change the purpose for owning your car.

With this in mind, you will probably want to create a compromise between comfort and expense. A good rule of thumb is that you should never allocate more than 20% of your income to transportation. Meaning, if you make $1,000 per month, your maximum transportation budget should be $200. For drivers, this includes car payment, gas, insurance, repairs, etc. For urban girls who take public transportation, this shouldn’t be as much of a challenge.

In the case of my friend, who is about to pay off her “old” car, I can’t help but wonder if a better move would be to keep her car until it dies. Let’s assume she makes $3,000 per month. This means that her maximum transportation budget should be around $600 each month. Assuming she pays $150 each month for insurance, $100 per month on gas, and sets aside $50 per month for maintenance, she has a budget of $300 per month that she can spend on a car payment. This can certainly get her into a new and exciting car of her choice.

However, I come from the school of thought that dictates her money would better spent on an investment instead of a utility. An investment could be a savings account, retirement account, or any other asset that will accumulate value. Instead of spending that $300 a month, which will not change the utility she gets out of her car, why not set aside the money and make it work for her?

Here’s an alternate scenario: Set aside the $300 each month. If you’re a beginner, put it into savings. If not, put it into a mutual fund, Roth IRA, 401k, stock, or anything that will help your money grow, and that you can contribute to on a monthly basis. You’ll still be able to get from point A to point B in your car. You may not feel excited about your practical set of wheels, but you certainly will feel excited as the value of your investment grows.

What do you think?  Are new cars worth the money, or would you rather save the cash?  Scroll down to share below, and join the conversation!

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4 thoughts on “Hot Wheels!

  1. I have to respond.

    Growing up, our family friends always leased cars. And the few that didn’t lease cars, still seemed to have a new vehicle every few years from trading it in and buying new. I was probably 9 or 10 years old. I am a tech geek. I wanted the flashy new car with the built in car-phone, pre cell phone era. I vividly remember saying to my Dad, “please just lease a car, why does our car have 100,000 miles on it?” Now granted most of our family friends clearly had a higher level of income than my family, but I’ve since learned a little more than I knew circa 1991.
    A car is not an investment, however if you purchase a stable one (i.e. the Toyota Camrys we had for endless years) you will eventually have months without a car payment. A long line of leased cars will always need a monthly payment, and will never leave you with that extra $2-300 per month. With a paid off owned vehicle that you’ve purchased, you can put that extra $300 into savings (or a Roth IRA, or 401K, etc. etc., like you said) or just merely into an account specific for a future car. It can lead you to a larger amount of $$$ to put down on the new car when the current one dies, and in turn lessen the amount of money you have to spend each month.

    One final note, the other side of the spectrum is an Uncle of mine. He buys total jalopies at a very low cost, and then waits until they die. While this is a positive sentiment to your bank account, the safety of it all is sketchy. I do not condone this.

    I love the smell of new cars, and wish they were as a cheap as a matchbook car, or the hess truck.

    I look forward to future entries. 😉

    • Thanks for the response! I definitely agree that should never sacrifice safety for savings. As for jalopies versus brand new cars with lots of bells, whistles, and technology, I think the big idea is to prioritize your wants and needs with your budget. I like the idea of buying a car and maintaining it over the long run, allowing you to eventually eliminate your monthly payment.

      I recently traded in my (formerly) new Mini for a used Jetta because I’m trying to live the philosophy of new vs. used car. So far, I’m pretty happy with the outcome. I’m saving money monthly on the car note and as an added bonus, my insurance is cheaper too. The Jetta isn’t as much fun to drive as the Mini, but it looks good and it isn’t too shabby in terms of handling and pickup.

      Hopefully this post didn’t get you nostalgic for the Bug! Looking forward to lots more debate and dialogue with you in the future.

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