The road to riches may best be traveled driving a used car.
Money gurus from 50-something radio talk-show host Dave Ramsey to Gen Y author Zac Bissonnette rail against going into debt for that new-car smell.
“If you spend $479 per month on car payments from the age of 21 to the age of 65, you will end up having shelled out $252,912,” Bissonnette writes in "How to be Richer, Smarter and Better Looking Than Your Parents."
“But if you had invested that $479 per month at an average annual return of 10%, you would end up with $4,126,517. If that new-car smell is worth $4.1 million to you, I don’t know what to say,” continues Bissonnette, a New York Times’ bestselling author who drives an old Honda Civic.
Driving a used car saves you thousands of dollars, mostly in the form of depreciation – the difference between what you paid for the car and what you could sell for it. New cars have an average depreciation of 21.8% after the first year of driving, says Joe Spina, senior manager of remarketing for Edmunds.com.
The average transaction price on a new car in 2011 was $29,509 and the average down payment was just 11%, according to Edmunds.com, a leading automotive information Web site. That means many owners owe more than their car is worth before the new-car smell fades.
The cost savings of driving a used car can be significant, even when buying a used car still under the three-year/36,000-mile manufacturer warranty. The five-year cost of driving a new Ford Focus – figuring in depreciation, fuel costs, insurance, maintenance, repairs and interest – adds up to $33,750, according to an analysis by Consumer Reports. The total costs for driving a one-year-old Ford Focus, $27,750, a savings of $6,000 – enough to fully fund a Roth IRA and pay for a long weekend in Las Vegas.
Buying a used car is also less of a risk these days. Cars are built better, experts say, and hitting 200,000 miles should be easy with proper maintenance.
A survey of readers by Consumer Reports in 2011 found that five-year-old vehicles had one-third fewer problems than the five-year-old vehicles in an earlier survey.
Driving a used car allows you to plow more money into your house, retirement accounts and savings accounts.
American Automobile Association's John Nielson offers some tips when buying a used car.