Generally, the top three personal expenses are shelter, transportation, and food. Hence, let’s look at how to patch that transportation money leak where it begins: buying a car.

In essence, cars are money vampires. The price. The depreciation. The gas. The maintenance. The insurance. Yikes. I dare you to add up what your car has cost you in a year overall. Bloodthirsty.

It’s scary how dependent we can become on our cars. Life is simple and easy: we want to go somewhere? Then let’s grab our keys, walk outside (or maybe not even outside, just into the garage), sit down, zone out for 10 minutes, get out, and walk into our destination. Wow, we didn’t need to interact with any nature, look anyone in the eye, spend any physical or mental effort; in effect, it was as if we just disappeared from the universe for ten minutes…

OK, I won’t get into a deep, transcendental monologue here.

Forthwith, this post will focus on the topic of buying a car. Afterwards, upcoming posts will go into what to watch out for as time passes owning the car to save money.

What do the wealthy buy?

From Thomas Stanley’s book Stop Acting Rich, in 2009, the median price a millionaire in the USA paid for a car was US$31,367 (CAD$49,883 now*). Additionally, the average decamillionaire ($10,000,000+ net worth) would pay US$41,997 (CAD$66,787 now*) for a car!

The information is somewhat outdated in 2020; however, the message is crystal clear: be practical and spend within our means. There is no need to blow months of work hours or savings on a car just to get around. Unfortunately, I bet “average income” earners spend even more on cars than back in 2009. I see Audi, BMW, Benz, Lexus, etc. swarming the roads these days. In addition, many are the ridiculous tank-like money-guzzling SUV type too. As if we’re living in a war zone, or ascending mountains and fording rivers driving to work each day. The average millionaire is paying CAD$50,000 for a vehicle. Comparatively, consider your present net worth and realise how little that means you should spend on yours.

On to buying a car. Sadly, this seems to be inevitable in today’s society. We shall make wise choices and save money effectively.

Look big picture when buying a car:

How about an example where we make $50,000 after-tax in one year (never use gross income because we don’t keep all that). Buying a fancy $45,000 car means of the 365 days in a year, we would spend 328.5 of those days paying off our car ($45,000 / $50,000 = 0.9 * 365days = 328.5days). 90% of that year’s work is going towards paying for a single car. Hopefully, that $45,000 is the total after taxes and all the extra add-ons too. Otherwise, we’ve sold over a year of our life away just to get around.

Comparatively, if we were to buy a solid $10,000 used car, that would only be 20% of the year’s income. Would we rather spend 328.5 days at work to own a car, or 73 days at work?

Guess how many times we’d have to work 73 days to get to 328.5 days?

73 + 73 + 73 + 73 + 36.5 = 328.5 (4.5 times)

Try doing something for 73 days in a row (other than work), and see what you think. Then imagine doing it again (or actually do, if you found you liked the activity) for another 73 days. Then another 73 days, etc. That’s a nutty amount of time to spend solely paying something off. Remember, these are days where our entire paycheck is going to the one car. Not including food, rent/mortgage, etc. that will also be sucking our blood throughout this time. I admit, I would rather sacrifice 73 days of pay to drive around than sacrifice 329 days of pay to also drive around.

Buying a new vs used car:

If we look directly at buying new versus used cars, a new car drops in value as soon as it is purchased.

One article I read from carsdirect.com says on average, a car loses 19% of its value in the first year. Half of that is as soon we drive it away from the dealership. It continues to drop in value year after year at 15% each of the second and third years, then slowing down until around the 10 year mark, where depreciation becomes nonexistent. Thus, the $45,000 car we bought new 3 years ago is now worth just over $26,000.

Another article I read from carfax.com says that, again, a car loses around 20% of its value in the first year — 10% in the first month — and then 10% each year after that for the next 4 years. Therefore, within 5 years our car has lost 60% of its value. This is definitely not an investment.

Conversely, a quick search on kijiji and craigslist finds us an abundance of great vehicles under $10,000, and many around 10 years old. Therefore, if we keep one in good shape, or do not drive much, it could be resold around the same price we bought it at!

Whoa!

Hang on, let’s think about this. On one hand, if I buy a $45,000 fancy new car it’s worth 20% less after only one year ($36,000), and 60% less after five years ($18,000). As a result, if I sell it after five years I lose $27,000. On the other hand, if I buy a $9,000 car — the same amount I lose in my first year owning a $45,000 car — I could drive it for a few years, then sell it for roughly the same price. I could then repeat that process as long as I want, basically only paying for gas and maintenance, which I’d also pay for on the new car.

Overall, I could buy a fancy new car and in five years have lost $27,000, or I could buy a solid used car and in five years have lost maybe $1,000-2,000? That second option sounds like a wise choice…

Generally, a more expensive car will also have more expensive maintenance costs and less places able to service them. They will additionally require higher grade fuel, which really kills our bank if we’re driving a lot.

It’s your call:

Of course, this is my take on buying a car for people who are trying to reach financial freedom, maximise their wealth, recover from debt, or just young and starting on their own journey of important purchases. If an older car just doesn’t gel with your pride, at least buy one that’s 3-5 years old so that it’s relatively new but half the price. In contrast, if you are someone who already has all the money you need (and still will afterwards), go ahead and get an expensive luxury or sports car if you’d like. Vroom vroom.

Continuing from here, part 2 and 3 of this scroll will discuss the costs that come along with owning a car and how we can minimise them.

*These values are adjusted for present inflation and currency conversion