Wednesday, February 4, 2009

How I am going to buy a car

My wife and I are currently saving up for a car. The reason for this is that our Jeep is a '97 and although it has been a great car, it is getting old, uses up a lot of gas, and one of the windows no longer works. It still drives, but I don't think it is long for this world.

So in preparation for this sad day, my wife and I are saving up for a new car. Yes that's right, saving up, just like you did when you were a kid and you wanted that bike, or watch, or video game. At least I hope that you needed to save up for something. Your parents didn't give you everything did they?. . .

Currently we have the ability to save for a car $1000 dollars a month, that is $500 out of every paycheck. We are looking to spend around 10,000, and as an added bonus I was able to cash in some of my unused vacation days so we got a little head start. We now have 2,500, so we are 25% there!!

I always try to buy US or USed. Why we try to buy US is that we are keeping as much money in our economy as possible. It is basic economics back to the book Wealth of Nations, that you should be self sufficient as a nation first and keep as much currency in the country, and then you export to gain their currency, and that you only export currency when it is necessary. Now there are some instances when it just isn't possible or practical to buy US and I understand that, but when I can, I try to keep my money in the US.

Now with cars we are looking to buy used. The reason for this is completely economical. Within the first 4 years, a new car loses about 40%. So lets say you buy a new Mini Cooper. A good car to be sure. New for the base model is around 19,500, we'll round up to 20,000. This means that after 4 years, if you don't crash the car, you should be able to sell it for 60% of its new value, so 12,000. This means the cost of the car 2,000 a year, plus gas, insurance, fixing, etc.

If I buy a used car, we can even say the same Mini Cooper, and if it looses the same amount of value in 4 years, so 40%. I buy the used Mini for 12,000 dollars, in 4 years I can resell it at 60% so 7,200. So it has lost 4,800 in value. This translates to 1,200 a year, so you have saved 800 dollars a year, or a total of 3,200 dollars.

Now you may say, buying the new car you can be sure it wont break down. Well, a new car can still break down. And really, how much in repairs can you get for 3,200 dollars. That's a major car overhaul. You are saving money. Plus when you buy used, you aren't sending any of your hard earned money overseas, and you get to save a bunch of money on sales tax. It keeps adding up and getting better and better.

Why are we saving up you ask? This is not just an exercise in futility or to show our willpower, although it does take some. I want to be debt free. I will discuss why later, but number one reason is debt freeness. Also lets look at this logically. In my online savings account I get about 3% interest. This means that at the end of my saving up I wont have 10,000, I'll have about 10,150 ((0 + 10,000)/2 * 1.03) That means I'll have 150 extra bucks for anything, the car, gas, candy bars, backpacking equipment. Its great. Now if you buy a car on a 5 year loan, and you spend the same 10,000 and get a loan, there will be an origination fee, of about 500 dollars, then interest for 5 years. Using excel this ends up being a total spending of 12,463. That is a difference of 2,713 if you take into account my interest.

So by buying used, and saving up we are saving 2713 on interest, and 3200 on the depreciation of the car. That gives us 5813. What could you do with an extra 5813? You could buy a crappy car just with that. This doesn't take into account lower insurance because you own the car, and because the car is older, and registration costs less. You saving closer to 6,500 at that point.

If you perform this car exercise about ever 5 years for the next 40 years, that means you'll do this 8 times. 8 X 6,500 = 52,000. That is a whole years worth of wages, or if you invested it, it would make you about 5,000 dollars a year, and that is 5,000 dollars a year closer to our goal of being able to say screw you to your boss and no thanks to social insecurity.

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