A lot of people ask me about how to pay for a car. And it makes me wish that more people knew that buying a new car is one of the worst things you can do to your net worth. I don't mind if car companies make a lot of money. In fact, I know of one that makes most of its money by selling and leasing cars. It just doesn't always have to be your money.
When it comes to owning a car, you can go either way on a scale. You can buy or lease brand-new cars for only a few years, or you can keep each one for more than 5 years (and maybe buy them used in the first place). You probably already know which one is better off financially, but it will help to know why.
From what I've seen, owning a brand-new car for less than 4 years is the best way to lose a lot of money. If this is how you want to buy a car, I have a lesson plan for you. Every year, you should have to take out the amount of money that your car lost in value over the last year. Then, you take that wad of cash and, in front of your parents, spouse, kids, and financial planner, feed it all into an industrial paper shredder that turns it into dust. I'm just giving you a little hint to show you what you're doing to yourself.
When Warren Buffett was young and had the money to buy a new car, he kept driving his old Volkswagen for many years instead. Why? Because he knew that if he put $20,000 in the stock market and left it there for decades, it would grow into millions of dollars for him.
Car owners shouldn't keep them forever either, because there's a point where the longer you keep a car, the better it would have been to get a new one. How is this possible? It happens when the cost of fixing the car each year is more than the drop in value of a newer car. Let me explain: Let's say you drive a 25-year-old junker that costs you $4,000 a year to fix up and keep running. Now, if you had replaced it with a newer car (which might still be under warranty) and it only lost $3,000 in value, you'd be $1,000 ahead, happier with a newer car, and relieved that you wouldn't have to make as many trips to the dealer for repairs.
It would be silly for me to even try to figure out how bad it would be for my finances to rent a car or get an auto loan for more than three years and end up upside down (when you owe more on the car than what it is worth). Just stay away from leasing and loan payment plans that last more than four years. This is how the other company makes money.
Taking all of this into account, I think the best way to own a car from a financial standpoint is as follows: Buy a car that is about two years old and has less than 20,000 miles on it. Keep it for at least five years, or until it starts costing more than $2,500 a year to fix. As a general rule, this will keep you from losing a lot of money in the first two years and give you a car with a warranty for a while. When the costs start to get out of hand, you can get out of the deal.
