The Finance Superhero Rules for Car Buying

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Let me be the first to say that I enjoy cars. You won’t catch me standing in my driveway admiring our two vehicles, but I appreciate them. They are reliable, cosmetically appealing, and mechanically-sound.

Spending too much money on cars is one of the most crippling financial decisions you can make.

Car Buying and The Purpose of Cars

Making a smart choice when buying a car comes down to a good understanding of the fundamental purposes of cars. In no particular order, I believe they are as follows:

1. Function as people movers – transports people from point A to point B.

2. Support income opportunities – provide transportation to and from work.

3. Support recreational opportunities – provide transportation for recreational pursuits*

*Note: Though cars can be used for recreational fun, this is usually a luxury rather than a necessity.

In my experience, purposes beyond those listed above aren’t fundamental; they are what many people would call luxury. 

Ulterior Interior Motives for Car Spending

You’ve been there. You call out for pizza delivery on a Friday evening, and your piping hot pepperoni pie arrives 45 minutes later. In a puzzling twist, the delivery driver pulls into your driveway in a shimmering, new-ish Lexus. You pay for your pizza, instinctively tell the driver to keep the change, and then immediately find yourself wondering if he really needed the tip or even the delivery job. And then you start wondering, “Why don’t I drive a shimmering, new-ish Lexus?” Then it starts – the battle between the angel on one shoulder and the devil on the other shoulder.

The rational part of you is quick to answer.. “We don’t choose cars based upon their value as status symbols. My car is just as reliable as that Lexus. It compares well in terms of safety ratings.”

But the irrational devil fires back with an emotionally-charged response. “But think of what that car could do for your status. You’d be the talk of the block and the envy of everyone at the office. And wouldn’t a new car be more reliable and safer for the precious, fragile children? You can’t expect little Johnny and Susy to risk their lives riding around in a 2008 Honda Accord, can you?!?!”

It’s easy to laugh at the irrational devil, but there is a little part of him in you and me both. The average person really does think through these thoughts, particularly when contemplating the purchase of a new car. When emotion enters the equation, fear, pride, and a sense of duty tip the scales and allow people to make excuses for the purchase of a car.

Consider the following motives:

Status – It can be very difficult to drive one of the “worst” cars at the office. I know, because I’ve been there. In one two year period, I drove my 2000 Ford Taurus for what felt like 10 embarrassing, painful years. My younger colleagues surely wondered why I couldn’t “afford” a nicer car.

Driving my clunker Taurus was one of the smartest financial decisions I have ever made. Buying a nicer car may have improved my perception of my status among my colleagues at the time, but it wouldn’t have helped me win with money.

The Lesson: you’ll rarely win with money if others’ opinions drive your decisions.

Reliability – Blame the auto makers and their television commercials for this one. We’ve been conditioned to believe that an “old” car is a ticking time bomb, ready to implode and stop working at any given moment. Likewise, we believe that newer cars cannot possibly have this kind of problem. In reality, a well-maintained vehicle of any age will be reliable.

Safety – Blame the commercials for this one, too. You know, the commercials that guilt-trip you into believing you are The World’s Worst Parent if you don’t drive your child around in a full-armored Panzer. Never mind the fact that you’re driving with a latte in one hand, sending Snap Chats with the other, and cranking Ed Sheeran’s latest song at a dangerous decibel level. In reality, the biggest safety threat to you and your family is poor driving habits.

Children – Sometimes I think it would be fun to be a car salesman. I would sit at my desk, slowly sipping on my coffee, waiting for a family with a young child to come in. After silencing my “SUV-buyer-radar,” I would easily tap into the average parents’ desire to provide “a better life” for little baby Emma and start calculating my commission.

Harsh? Perhaps. But in all but the most extreme and unfortunate circumstances (special needs, disability), an SUV is unnecessary until you move beyond two-kiddo-territory. Kids will survive riding around in a sedan, and they’ll be OK without a drop-down Blu-ray player, Dolby Digital surround sound, and dual zoned climate control. You and I didn’t have them, and we survived.

Maintenance – I have actually heard people rationalize endless leases and perpetual new car buying under the guise that they are “bad at maintenance.” My response is usually a nicer version of the question, “So you’re bad at driving your car to a mechanic?” In 2016 and beyond, unless you’re a true “car guy,” you probably shouldn’t be doing your own maintenance beyond oil changes, brakes, and tire rotations, anyway.

Smart Methods for Car Buying

Once you’ve talked yourself out of a myriad of excuses for why you “need” a prestigious car, you can begin to examine your true needs. Ironically, this begins with revisiting the bold categories above. Then it’s time to ask some key questions

*Is there a particular reason that you truly need a specific vehicle (i.e. will you be fired if you drive a clunker?) or model year?

*Will you be driving primarily around town and racking up local miles or spend a bulk of your time on the freeway?

*What weather conditions will you face during your regular commutes?

*How many people will you transport on a regular basis?

*What are the costs of routine maintenance for the vehicle relative to the mileage you expect to drive?

Notice that there was scarcely a hint of emotion in the previous questions. When aiming to follow a smart method for car buying, there is rarely room for emotion.

Cash is King

When it comes time to buy a vehicle, it is best to buy with cash if you can do so. Many people will argue otherwise, but it’s hard to argue with the following facts.

*A cash purchase is the only one to ensure that you don’t continue to pay others for the right to drive your car after already paying others for the right to own your car.

*A 0% APR auto loan is a farce. Trust me, automakers and dealers aren’t in the business of selling you a vehicle and to make $0 profit.

*Every interest payment you make to others, no matter how small, is a red blemish on your overall net worth picture.

Big Down Payment + Small Loan = Instant Equity

If you cannot afford to buy with cash, the next best method is to scrape together the biggest down payment you can afford and take out a small loan.

In the interest of honest, full disclosure, I financed my most recent vehicle purchase, a certified 2013 Hyundai Sonata, utilizing this method. Why? I was in a position to wipe out my other debt, my student loans, in short order, but I couldn’t do it AND pay cash for the new vehicle.

This vehicle was a true need, based upon our non-emotional answers to the above questions. By taking on a small loan at a very low interest rate, we were able to eliminate higher-interest debt. By tossing in a sizable portion of cash, we created instant equity to protect against the effects of depreciation.

The Big Question – What Can I Afford?

When you’ve settled on a path for car buying, you still need to be careful to avoid the biggest mistake of all: tying up too much of your annual income in vehicles which rapidly lose their value.

In order to win with money and ensure that do not become “car poor,” I recommend finding your place on the chart below and adopting the recommendations listed by income level.

The recommendations on the chart above are fairly generous, in my opinion. If you’re conservative, feel free to bump yourself down a level or two. The important thing is to recognize that your car isn’t responsible for your happiness – you are!

If you earn beyond $200,000 per year, I recommend remaining at a maximum allowed spending figure of $45,000 until you reach a net worth of at least $1 million. Even if you are not financially independent at this stage, loosening the purse strings a bit will not be highly consequential.

Final Recommendations

The car buying process is not one to be entered into lightly. Do your research, consider the cost of insurance and ongoing routine maintenance, particularly for foreign and luxury vehicles, and above all, be sure that you find a vehicle which will meet your needs without breaking the bank.

What are your rules for car buying? Are these rules too stringent? Too relaxed? Just right?

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