I’ve had two friends of mine tell me that they want to buy a car after they graduate. Here’s a couple of scenarios - more real than you’d expect.
Marie is about to graduate with a degree in electrical engineering. She’s done well with recruiting and will start her tech as a software engineer soon at BookFace, Inc. in Menlo Park, CA. Her base salary is $110k per year, she’s been given an excellent benefits package, and she’ll even get a $70k signing bonus (this was not made up). She wants to pay her parents back for tuition over the college years, and could probably purchase the family’s Ford Fusion plug-in hybrid (at least a 2013) for about $10k. However, she’s a true Musk enthusiast, and has been eyeing a new Model Y. She likes black wheels, and although she doesn’t feel like she needs the performance model, she really likes the red brake calipers. Of course, the car must have the white interior (MSRP $60,990). She feels like she’ll get the car eventually, why not do it now?
Tom has been working as a security guard throughout school, and is also about to graduate. His options are open - perhaps he’ll continue working a fairly lucrative gig guarding a library; perhaps he’ll join the military. In any event, he’s managed to save up $25k in cash. He’s currently driving a 2012 Toyota Tacoma, but wishes it had 4WD. He’s heard great things about the 4Runner - it looks great, is highly capable, and is bulletproof reliable. He’s eyeing the TRD Pro model (MSRP $50,470).
Let me be clear: I’m a car guy. I like cars for a lot of reasons, especially the fact that we as humans are able to build en masse (about 100 million a year!) these major machines that weigh thousands of pounds and can safely transport multiple people and their stuff basically hundreds or thousands of miles across the country on a whim. I like fast, sleek sports cars and convertibles; I like rugged boxy SUVs; I like efficient and futuristic EVs. My desktop background is a slideshow of various cars that I find cool or interesting in some way shape or form. If I find a magic wand and can suddenly have any car I want in the world for free, you’ll see me cruising around in a Porsche Taycan Turbo S.
Nevertheless, I find it hard to justify the notion of buying a new car, and in this post, I’ll talk about the (many) reasons why that is.
my current car is more than fine
I currently drive a 2012 Ford Focus that my dad used to have. It’s got just over 127,000 miles, but Ford’s terrible tranmission aside, I really don’t see any reason why it couldn’t surpass the 200,000 mark (which seems to be the new standard for longevity). I’ve developed a weird kind of emotional bond with it that makes me want to see it go the distance, though my car is also nicer than your standard Focus. My dad had the foresight of giving me a car that could parallel park itself (something that never ceases to amaze others in the passenger seat), and I don’t really care much about Tesla’s 15” touchscreen as long as Bluetooth does its job. In a world without new cars, I’d honestly be content with my existing car; the desire to upgrade to something new is merely a function of other, newer products coming onto the market.
people suck at “affective forecasting”
I’m currently in a fantastic positive psychology class [1], and one of the most important takeaways I’ve gotten out of it so far is that people aren’t good at forecasting the emotional effects of future events (affective forecasting), in fact there’s a general bias toward overestimating the emotional impact that an event will have (the impact bias, I’d highly recommend skimming the Wikipedia article and reading this post by James Clear).
Back to cars and personal finance: a new car (let’s say a Tesla Model 3) probably wouldn’t make me as happy as I think it might. Sure, it’s fun to rocket from 0-60 in 3.2 seconds, or to use Autopilot for a long road trip, but as far as the way I actually use my car - weekly grocery trips to HEB and the various trips across town to grab food or spend time with friends - a Model 3 won’t do the job that much better or faster.
cars are really expensive
The average price of a new car sold in the United States was just under $39,000 in December of 2019. That’s absolutely insane when you consider the case of a median household income of something around $62,000 (after accounting for payroll and federal income taxes, you’re looking at 9.6 months of “disposable” income).
For me at least, it’s hard to justify spending $50,000 or so on a new Model 3 when I know what else I could do with that. My current, in-college annual cash burn is about $20k or so, plus another $12k for rent. So a $50,000 car represents over a year and a half of every single last expense for my life. If you gave me $50,000 in cash, I certainly wouldn’t buy a Tesla - I’d probably spend a month somewhere in Colorado and spend a few weeks hiking and biking with friends (and then pocket the rest of the $46k). I bet that that’d be far more memorable and happiness-inducing than having my car make farting noises everytime I tried to make a left turn.
nice cars have headaches of their own
My dad got a nice car back in 2015. Since then, he’s developed a habit of parking away from other people in parking lots, since he’s afraid of dinging the car doors. He spent a few hundreds of bucks on getting a clear bra in case anything chips the front. He’s obsessive with cleaning it, to the point that he pays $20 or so for an unlimited car wash pass. Tires are expensive, maintenance is expensive, insurance is… expensive.
I tried parallel parking my Focus one time and accidentally scraped a traffic pole. No biggie. I don’t car much about rock chips or car washing, I just vacuum the interior every now and then. I can park at the front of the HEB parking lot if I find a space - if someone hits my car when opening the door, it’s whatever. Cars are tools. Use them.
new cars have the steepest depreciation
I’m not sure why, but people that I’ve talked to have a really strong aversion to buying things used. I’ve bought my laptop and phone and watch used; they work fine. I got my car used (from my dad), and it hasn’t yet exploded in the garage or left me stranded on the side of the road. I’m not really sure why there’s such a strong pull toward a new car, to be honest.
Car depreciation (the loss in your car’s value with time and mileage) is super steep, especially at the beginning. NerdWallet’s article sums it up best:
“Your car’s value decreases around 20% to 30% by the end of the first year. From years two to six, depreciation ranges from 15% to 18% per year, according to recent data from Black Book, which tracks used-car pricing. As a rule of thumb, in five years, cars lose 60% or more of their initial value.”
What’s the value in buying a new car over a used car? Taking the example in the chart above and doubling it for my $50,000 Tesla, is it worth $24,478 to get a 3-year newer car with no miles on it? If I were to crash my car tomorrow, the jump from a Ford Focus to just about any Tesla will be larger than the jump from a MY2018 Model 3 to a MY2021 one [2].
What I’ll do when it’s time to buy a car
There’s a bunch of different ideas on how much one should spend on a used car. I’ve heard various rules of thumb tossed around like the 20/4/10 rule, but I’m not yet fully sold on that yet (at the very least, it’s probably much better than what your average car buyer is doing). It’s very likely I’ll end up buying a 3-year used Model 3 when I do eventually decide to give up the Focus - but it’ll hopefully be quite a while before that happens.
[1] There’s an absolutely marvelous talk by Dan Gilbert on some of our decisions biases that I’d highly encourage everyone to watch.
[2] This is pretty imperfect, since Teslas in particular hold their value somewhat better than other cars, and the fact that a MY2018 Model 3 would be super early as far as production goes, which makes reliability much more suspect.