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!