One of the biggest expenses for people is a car. For people who live in a big city, they might get away with not owning one and just using public transportation, a bike, or ride sharing. I’m guessing that most people who are financially independent live in a lower cost, less dense area where a car is still a must. You may not drive it a lot, but you still need it. There is no good reason, unless you are really rich, to spend a lot of money on a car especially if you don’t need it to commute to work. There is even less reason to buy a car and pay interest on a loan for it. Think about that, when you buy a car with a loan, your purchase price increases (purchase price, plus interest) while the value of your car decreases. The difference between those two numbers is what your car is really costing you. A large monthly car payment is just another expense that keeps people on the work treadmill. You can have a reliable car without the large monthly payments and possibly, less insurance costs as well.
Before you get too excited thinking that this is an article about some “secret government auction” that sells 1-year-old luxury cars for $100, let me just say that there is no such thing. The most cost-effective car to buy is still a reliable used Toyota or Honda or something similar and keep it for a decent amount of time. It is the combination of what car to buy, how old should it be, how many miles should it have, and who do I buy it from, that will give you the result of having the car cost you about $100 a month over the time that you own it.
Before I get started, let me tell you about my car mistakes over the years. You probably couldn’t tell from my bland 4 cylinder 2008 Toyota Camry that I love cars. I have had 23 cars over the years if I didn’t forget any. I have owned German, American, and Japanese cars. I have never bought a new car and every car that I bought was bought off of a private seller except for 3 of them. Those were all mistakes. I have also sold all of my cars myself as well as for friends and co-workers. My obvious mistake is that I keep cars for such a short time. That was mostly when I was younger and I have gotten much better about that. I have had my current car for 5 years. My biggest mistake was buying a 3-year-old BMW around 2000 for about $30,000. My payments (only car loan ever) were about $500 a month. When my car got stolen about 2 years later, the insurance money exactly paid for what was still owed to BMW Financial. That means that every $500 payment that I thought was going to pay off my car was actually just going to the depreciation.
Let’s start with depreciation
Most financially aware people know that a car loses about half of its value in the first 5 years. Here is a chart I made from the depreciation calculator from Chartprice.com assuming a purchase price of $25,000 and a 15 year ownership:
Here is what the yearly depreciation looks like. Notice that depreciation is the most in the first few years:
Here is the actual data:
Notice that the red cell shows that the cumulative depreciation in year 4 is more than the next 11 years of depreciation combined. That means that if you buy a 4 or 5-year-old car, it will cost you as much for the next 10 years as it did the person who owned it for the first 4 or 5 years. Obviously this does not include maintenance or repairs so you better buy something with a track record of reliability.
So what car should you buy?
Buy the car that will do the job for your needs. I am 6’2″ so I prefer a larger car like a Toyota Camry or Honda Accord rather than a Honda Civic or Toyota Corolla or similar. I’m flexible on the car if I can get a good deal on the price for the condition. I love the look and drive of German cars, but I don’t like the stress of knowing every time I turn on the ignition I may be getting a $1000 repair bill for some fancy electronics that are malfunctioning. Don’t get me wrong, I like nice cars, but not at the expense of being afraid to drive it long distances because of the worry of it leaving you stranded. As for American cars, I think they are more reliable than German cars but less reliable than Japanese cars. I would stick to Japanese cars if you could.
As for the miles, most advice people hear is that they should buy a low mile 3-year-old car and keep it for 7 to 10 years. That may be good advice for people who drive 60 miles a day to work or 15,000 miles a year, but if you are retired or financially independent you save all those commuting miles. I have only driven about 6,000 miles since I have moved to FL two years ago. If you expect, like me, that you will only be putting a few thousand miles a year on your car, it makes sense to buy a higher mile car since you can get a better price on it. By the time you are ready to get rid of it, it will have below average miles if you don’t drive a lot.
Now that we have an idea of what to buy, let’s see some data from Kelly Blue Book and Edmunds on what these types of cars cost. I will use the example of a Toyota Camry LE with a 4 cylinder engine. I want to show real world prices for this car from 1-year-old to 10 years old. I did this by getting the current values for cars from the 2016 model down to 2007 model. This is not exactly the same as being able to say what a 2016 Toyota Camry will be worth each year for the next 10 years. It is a close approximation but not exact because the 10 year span I am looking at will include 3 different model upgrades on the Camry but all the same trim level and engine size.
The chart above Shows the Kelly Blue Book (www.KBB.com) estimation of the Trade In Value and the Private Party Value of a Toyota Camry LE 4 cylinder engine from the years 2016 to 2007. These values reflect 15,000 miles a year on the cars. So the 2016 data point on the chart reflects a 1-year-old Camry with 15,000 miles. The 2015 data point on the chart reflects a 2-year-old Camry with 30,000 miles and so on all the way out to the 2007 Camry that reflects a 10-year-old car with 150,000 miles.
Below is the data table for this chart:
Notice in the table above that the difference in price between the Trade In Value and the Private Party Value is about $2000.
Here is a second set of data from Edmunds (www.Edmunds.com) using the same assumptions about car type and mileage:
And here is the data table:
The Edmunds data includes the Retail Value as well as the Trade In Value and the Private Party Value. Notice that the difference between Trade in Value and Retail Value is about $3000. In case you are not sure what these terms mean, here is a quick breakdown:
Trade In Value: What a dealer gives you for your car when you trade it in, usually when you are buying a new car. A lot of times they offer a lot less than what the Kelly Blue Book and Edmunds suggest.
Private Party Value: This is the price you would expect to get for your car if you sold it by yourself on Cars.com or Craigslist.
Retail Value: This is the price a used car dealer would sell this car on his lot for. People are willing to pay this high price because they don’t know any better and also they hardly ever have the cash to purchase the car outright so they accept the higher price because the dealer gets them a loan usually.
How to get the most for your money
The way to get the most for your money is to try to buy on the bid and sell on the offer, or in other words, buy wholesale and sell retail. Most people end up doing the opposite of this and so they are about $3000 behind right from the beginning.
Looking at the Edmunds table, let’s assume you want to buy the 2012 model Camry which would be a 5-year-old car with 75,000 miles. If you buy it retail from a used car dealer you will pay $11637. Let’s say you keep it for 5 years and trade it into the dealer for $2734 (using the 2007 Trade In Value). This car cost you ($11637 – $2734)/60 months = $148 per month. This is not terrible and if you don’t put a lot of miles on it, you might even be able to keep it a few years longer before you have to worry about mechanical problems.
Now let’s assume you want to buy the same 2012 Camry but you are able to get it at the Trade In Value (or close to it) of $8253. In five years you sell it, but instead of trading it in, you sell it yourself and get the Retail Value (or close to it) for it which is $5764 (using the 2007 Retail Value from the Edmunds table). Now your cost is ($8253-$5764)/60 months = $42 per month.
By now you may be thinking that these numbers are fantasy numbers because only car dealers actually get to buy wholesale and sell retail. Yes and no. You may not be able to buy your car at or below Trade In Value and you may not be able to sell it later at Retail Value, but you can come close.
How to buy close to Trade In Value
You can buy close to Trade In Value by buying a car off of friends or family before they trade their car into the dealer to buy a new one. Just talk to people you know who buy a car every 5 years or so. Tell them you will pay them cash before they even go to the dealer to get the car appraised. Offer them Trade in Value or a few hundred higher to give them the incentive to sell to you rather than just trade it in. Everybody wants to get more than what the dealer offers them, but most people are afraid to sell their car themselves to get closer to the retail number so this is an easy way for people to get a better price for their car.
Only ask the people you know who have a car that fits your needs. Also, this is a very good way to get a good used car without the uncertainty of the car’s previous history. Only buy off people who you know take care of their car and do not abuse it. Do not buy off of people who are messy or have messy cars because they may not maintain their cars well. Also, do not attempt to buy cars off of people who are super Type-A about their car because they will think it is worth twice the retail price. I know somebody who squeegees his whole car after it rains and does other crazy things on his 8-year-old pick up truck. What do you think he thinks his car is worth? You want to buy off an older person that just uses their car like any other appliance and gets all the scheduled work done at the dealer. If you just let people know in advance that you are interested, you will be surprised at how many offers you will get from people.
If that doesn’t work or you need a car at a time when your friends are not getting rid of theirs, then the next best thing is to buy it from a private seller on a website like cars.com. Private sellers list their cars here to try to get a better deal than they would by trading it in to a dealer. You can get a car from them somewhere between Trade In Value and Retail Value depending on the condition and how well you negotiate. One problem with buying from private parties off of websites is that the more expensive the car is, the less private sellers there are. This is because there are very few people who have $10,000 in or more to pay for a car. That’s where the dealers come in with their loans and “affordable monthly payments”.
For example, if we check cars.com across the whole country for a 2012 Toyota Camry with the 4 cylinder engine with under 80,000 miles we get 1563 listings ranging in price from $8900 to $20,995. Only 10 of these listings are from private sellers! Also notice the crazy range in prices for these cars. Some dealers are trying to sell 5-year-old cars for almost what a new one costs. Cut out the middle man and buy directly from a private owner with cash.
So how do I sell my car?
If you are selling your car after owning it 5 to 7 years, you might want to ask your friends and family if they know anyone that is looking for a car in the price range of yours. If not, list it on cars.com or Ebay or Craigslist or something similar. You can check Ebay it see what cars similar to yours actually have sold for. You can’t see that on cars.com but you can get an idea of what your car is worth in your area by looking at similar private party car listings. If you think your car is worth more than some other similar cars then you can list it a little higher. Just know that if the people don’t call about your car, then it is priced too high. A lot of people look for cars on the weekend so if the weekend went by with no one calling, then lower it by about 5% every Monday until people start calling you. That is how you can get the highest price for your car when you sell it.
Conclusion: Car dealers exist to make things easier for people. If you don’t have enough to buy a car outright, they make it easy by giving you a loan. If you don’t want to deal with listing your car and showing it to strangers, they make it easy to just trade it in to them. All this so called convenience comes at a pretty big price. On a big purchase like this, making a little more effort can save you a large amount of money. I know most people dread dealing with car dealers, and they dread even more having to negotiate with strangers buying a car off of them. Even though I like doing that, I realize that it is not for most people. That’s why people are always asking me to sell their car for them. At the very least, make it a point to let friends and family know that you are willing to buy their car. With very little effort, you might be very surprised at the deal you are able to get.