Used.  Always used.  Buying a new car is one of the worst financial decisions I have ever made.

Monthly Payment

The monthly payment is the first thing that everyone looks at when they finance a car.  Why?  Because they live in a cash flow mentality.  In this economy, cash is king.  If you don’t have it, you can’t spend it.  If you can’t spend it, you can’t make it.  If you can’t make it, you won’t have it, and the circle continues.

If you’re thinking about a monthly payment, and any portion of that payment is going to be paid to anyone other than yourself (in other words, the bank), then you’ve already lost the battle, because you’re headed into debt.  There may be a reasonable explanation for why you’re seeking financing for something you don’t have enough cash to purchase up front, but my advice to you is to completely avoid Bacteria Testingit altogether.  In order to succeed at this, you will have to radically change your idea of what you should be driving.  One of the mistakes people make when they consider their monthly payment on a new or used car is how much it really is going to cost them every month.  The monthly payment every month is only the financed amount, and it hides all of the other expenses you’ll incur throughout the life of the car.

Since I’m such a nice guy, I’ll go ahead and lay out my stupidity (Dave Ramsey calls what I’m about to explain a “stupid tax”) for all to see, with no holds barred.

My Stupid New Car Buying Experience

In March of 2008, I purchased a new Honda CR-V, loaded.  The only feature I didn’t buy was the All Wheel Drive.  Big deal.  So what did my car cost?  The sticker price was $27,895.  Divide this by 72 and you have a monthly payment of $387.00, right?  Wrong.

When you buy a new car, you have to add to it the document fee, which in my case was $368.00, sales tax, which was $2259.50, and title and registration, which was another $514.71.  These are just the up front fees.  Then there’s the finance charge.  My loan was at 7.9%, which over a period of 72 months is $8162.47.

Add all of these up, and the price of the car goes up to $39139.68.  Divide that by 72 and you have a monthly payment of  $544.00.  But is that the total cost of owning the car?  No.

In the first year, the car depreciates roughly $4200.00, so for the first year, you’re paying $544 per month plus $4200.00 divided by the first year (12 months) or $350.00.  Color me stupid, but that’s $894.00/month.  Add insurance at $1200/year and that’s another $100/month.  Now we’re up to $994.00/month.  Fuel for me last year, as a REALTOR, was $2937.00.  That’s $244.00/month.

My vehicle, which appears to be costing me only $544/month (which by the way, is ridiculous and I should be stabbed through the eye with the very pen I signed with) is actually costing me $1238/month in real money!

The following is from Edmunds.com.  It shows what you can expect to be the real cost of owning a 2009 Honda CR-V.

. Year 1 Year 2 Year 3 Year 4 Year 5 5-Year Total . Depreciation $4277 $2729 $2402 $2130 $1911 $13449 . Financing $1801 $1455 $1082 $680 $247 $5265 . Insurance $1258 $1302 $1348 $1395 $1416 $6719 . Taxes & Fees $2439 $374 $313 $262 $220 $3608 . Fuel $1996 $2056 $2118 $2182 $2247 $10599 . Maintenance $93 $546 $359 $872 $1108 $2978 . Repairs $0 $0 $105 $254 $373 $732 . . Yearly Totals $11864 $8462 $7727 $7775 $7522 $43350

The Used Car Buying Experience

Let’s assume that I decided way back at the beginning, that I would be satisfied with driving the half-way okay car that I had which was completely paid off and only representive a small amount of “inconvenience” in my life.  No NAV, no fancy leather, no sun-roof…etc.  Big deal right?  Right.  Now, with a paid for car, the bank is getting nothing.

At the time, my truck was worth $8000.00.  That actually means that I could have moved from the truck into a car that was more conducive to showing property for the same price, or perhaps a bit less.  But, I would have been able to set my sights on that newer car without losing $1238/month.

Here’s how it starts Lost Car Keys story.  For 10 months, I would sock away $544.00 every month in my own savings account.  Hey, I was willing to pay it to the bank, so why not just pay myself?  After 10 months, I have $5440.00.  Now I trade my $8000.00 truck, which would still have been holding its value, in to a used car dealer for a car that costs $13,440.00 (That’s $8000.00 + $5440.00.)  Not bad.  Yet again, I save for 10 months an additional $5440.00 and I trade my most recent car in for another car at the price of $18,880.00.  20 months into the process I’m driving a fairly nice used car.  Keep in mind, I’m never buying new cars through this process and I’m always upgrading to cars that are holding their value, like a Honda or Toyota.  For another 10 months, I save an additional $5440.00 and I trade my $18,880.00 car in for a used $24,320.00 car.  30 months have gone by and I haven’t paid the bank a red cent, and every 10 months I get to upgrade to a newer car, and not only that, but the $24,000 car I’m in now, was purchased by someone else NEW just 3 years earlier for a whole lot more than $24,320.  Let the first owner take the depreciation.  Let’s do it again.  10 more months of saving $544/month for another $5440.00 and I’m now able to trade in for a $29,760.00 car, paid for, IN FULL!

If you’ll recall, the price of my new Honda CR-V was $27,895.00.  It’s been 40 months or 3.3 years, it’s 2011, and I can actually now purchase that 2008, loaded CR-V with miles on it, for much less than its original sticker price.  In fact, that car that I had to have last year, would probably cost me under $20,000 in 2011, and would have all of the same features!

This is an absolute no brainer.  When you buy a new car, you lose, no matter what.  If you’re in a financial position to be able to take that loss, in other words, if you have the money to blow, then you can buy a new car, but you lose.  It’s a mathematical fact.  Most of us do not have that money because we jump in before we look at the facts.  So here’s where I am now, as a result of my impatience.  I have a one-year-old car with 20K miles that’s worth about $22,000.  My monthly payment is $544, but as we’ve seen, the actual cost of ownership this first year has been over $1200/month.  I still owe $27,000 on the car, which is a hair under the sticker price, and the only way out is to sell it and take a note for the difference.

Instead of having a paid for Honda CR-V in 40 months, I have to get rid of it and take an $8000.00 loss, which means I’ll be paying off nothing for a while.  Are you as stupid as me?