What Is Your Car Worth?
It never ceases to amaze me how much people spend on the purchase of a car. There is a general rule of thumb that says you should not spend more than two months income on a car. Clearly this rule is either not known widely enough or it is just being ignored.
If you follow the rule and your income is $1,000 a week you should not be looking to spend more than maybe $8,000 to $10,000 on a car.
When he was 17 we gave our son an old car that we no longer needed. Every time the registration came due for renewal he would jokingly say to me, “Dad the car is a write-off again; the registration is going to cost more than the car is worth!” We’d both have a laugh but he kept on driving that thing until it finally gave up the ghost after years of being a write-off!
Plenty of people have justified the purchase of a newer car on the premise that the old one is starting to cost a bit in repairs so it seems logical to upgrade to a newer one. However a car’s value and what it can be sold for are two entirely different things!
The justification for buying a new car usually goes something like this.
Your car just cost $1,000 in unexpected repairs and that comes on top of the $1,000 it cost a few months ago. Add to that the fact that the mechanic said the brakes will need to be done at the next service and you start to feel like it’s most likely going to start costing you more and more because it’s getting older. You come to the conclusion that you’d be better off trading it in before you start throwing good money after bad.
So the decision is made to purchase a new car and 5 years of $500 monthly payments begin.
Of course it is highly unlikely that the repairs on your current car would ever have cost you $500 a month so you are worse off financially but you justify that because you now have a car worth so much more.
Now I’m not saying for one moment you should not purchase a newer car every so many years, but I am saying that the value of a car is measured by what it does for you and not by what it will bring if you were to sell it. I’m also saying that it might not be such a bad thing to pay for repairs when your car is getting older as that may still be cheaper than the payments on a newer car.
That old car our son drove was worth a lot to him because it gave him freedom as it took him from one place to another. It also saved me from having to lend him my car and if that was not an option a taxi would have cost him a small fortune.
If you look at the value of a car as the amount it could be sold for you are totally missing the point. My son had no money for a newer car and he got great value out of the old one!
An average car will travel 200,000km in 10 years and by then it will probably need to have maintenance on a number of systems that will cost an uncomfortable amount unless you plan ahead for it. It is most likely that once all those systems are restored they will go for another 10 years.
My suggesting is to pay off your car loan if you have one and then start saving the amount you were making in repayments each week to build up a deposit/repair fund that allows you to have choice in the future and decide what your strategy will be.
You decide whether you want to be paying higher amounts to finance newer cars and therefore NOT putting that money into investments and assets or whether you would rather be driving a more modest car, allowing for higher repair bills but still be in a position to be putting more money towards smarter things.
It is very easy to get caught up in the “I need a new car” story so take a step back and look at it with a plan in mind. How much per week are you prepared to throw at owning a car?
My other recommendation is to get someone else to go shopping for your next car for you when the time comes so you don’t accidentally fall in love with something you did not need but decided you had to have!
That’s all for now…