Transportation is important, and in many parts of the world, a car is the most convenient way to move around. However, just because you need a car, does not mean you need a luxury car, or one that is expensive relative to your income. This video discusses the rapid depreciation of cars and what we are giving up if we do not make wise decisions when purchasing cars. Do not let your next car purchase wreck your finances. Consider driving your current car a bit longer, saving up for that next purchase to buy in cash, and/or buying used – it is a much better use of your money.
The information used in this video is from a 2010 study that still rings true today. You can read the article yourself here:
Check out the calculator site to do some math on what your investments could be in the future!
If you need a financial coach to help you organize your finances, email me at: or I also do speaking engagements on personal finance.
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I am a financial coach that focuses on improving personal finance behavior. I do not sell investment
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If you’re thinking about getting a new Car you may want to check out this video [Music] First [Music] What’s up everyone thank you for Stopping by the achieve financial Coaching channel where we believe in Breaking the chains of debt And talking about all things related to Personal finance today we’re talking About something that is near and dear to A lot of our hearts And that is the purchase of our car we Love Our cars especially here in the u.s well I want to just run through a scenario That shows you what you may be trading Off If you’re buying expensive cars or if You’re buying a car too often We all know in general that cars go down In value but the scenario i want to walk Through today Will paint a clear picture and it’s not To prevent you from going out and buying A car But i do want you to understand what you May be trading off if you’re purchasing Cars Quite a bit so let’s get started According to research conducted by Edmunds.com New cars lose 11 percent of their value
The minute you drive it off the lot And 15 to 25 each of the first five Years of Ownership that is nuts so after five Years the car Is worth roughly 37 of what you paid for It At the dealership this assumes that You’re putting About 15 000 miles per year on the Average car The numbers are actually worse on luxury Vehicles To demonstrate this let’s walk through a Scenario i pulled from this Edmunds.com research about card Appreciation I’ll include a link to the article in The description of this video Okay this is you and you just completed A transaction to buy a brand new car You purchased the car for 29 873 You financed it for five years which is 60 months And you are excited you got the new car Smell you got the new technology You are feeling yourself in this new Whip and you have convinced yourself That you can handle those 498 dollar Payments Well literally one minute after you Drive it off the lot You lose two thousand five hundred and Fifty nine dollars
Not sure if you are doing the math but That two thousand five hundred and fifty Nine dollars of depreciation is almost Ten percent of the car’s value and you Lost it the moment you drove it off the Lot Let’s look at what happens as time Progresses after you’ve purchased this Car Year one the car depreciates a total of Five thousand Six hundred and eighty seven dollars That’s about nineteen percent of its Value Year two the car depreciates a total of Nine thousand two hundred and ninety Four dollars Roughly thirty one percent of its value By year three your total depreciation is Twelve Thousand four hundred and sixty seven Dollars sixty seven dollars Now the car is worth roughly like forty Two percent of the original price I will say this i think year three is a Good time to buy a car It has depreciated quite a bit um and it May still have some warranty remaining I personally buy cars that are like two To three years old I try to catch them coming off a lease So the miles are low and maybe it still Has some warranty So let’s move on to year four fifteen
Thousand two hundred eighty total Dollars of depreciation Now the car is worth half of what it was When you first bought it And you are still making payments and Probably by this time getting tired of The car By year five that new car smell is long Gone And you are still making those nearly 500 a month payments You’ve dinged up the car a bit you’ve Scratched the rims you’ve wasted coffee And the coffee holders You’ve rubbed the leather fin on the Driver’s seat from getting in and out of The car You’ve worn out the mats you’ve Exhausted the warranty And you’ve already purchased a set of New tires And brakes now you use the back seat to Hold random things like your gym bag And you have old french fries and Crevices that you can’t reach without Ripping the skin Off your knuckles and you all know that Is true french fries fall in places that You just cannot reach Safe to say that you are not nearly as Excited about this car as you were When you first bought it you have now Lost a grand total of seventeen thousand Eight hundred and four dollars of the
Car’s value It’s worth about forty percent of what It was when you purchased it Roughly five birthdays ago when you make A decision to spend money on something You are giving up the opportunity to Make that money work for you in other Ways It’s called opportunity cost opportunity Cost is the loss or benefit That could have been enjoyed if the Alternate choice was chosen So let’s run through a scenario of how Much you miss out on by buying this car Instead of investing this money Let’s say instead of putting that 498 Dollars towards a car You keep your current car and decide to Invest that 498 dollars into an s P 500 index fund for those that don’t Understand what an s p Index fund is it’s just a mutual fund or Exchange traded fund Whose underlying investments match the s P 500 index So this is where you decide to put your 498 dollars Each month we’re going to use real rates From the return of the s p 500 and in this scenario based on Information i pulled from an Investopedia Starting from 2015 when the car was Purchased and ended in 2019
We’ll look at the rate of returns and See what it would have done For your money in 2015 the s p Had a flat year point three one percent Return Your return would have netted you six Thousand and nineteen dollars In 2016 eleven point nine three percent Return gets your money to thirteen Thousand one hundred and fifty four Dollars 2017 nice year 21.94 Return means that you now have 23 095 And in 2018 we had a negative year so we Were down Negative 4.41 but you still have twenty Seven thousand nine hundred and twenty Two dollars in your index fund And in the final year of making Contributions to this fund In 2019 the market was on fire with a 31.10 percent Rate of return which puts you at forty Five thousand and forty two dollars So now instead of having a car that is Worth about twelve thousand dollars After five years And the value by the way is still Falling you now have an index fund With forty five thousand 000 in it this Doesn’t even include Um dividends that would have been paid Along the way so in reality There will be a bit more than 45 000 in
This account Now let’s say you decided to stop Contributing all together But you are going to leave that forty Five thousand dollars in the index fund For the next ten years over the next ten Years if you get an Average rate of return of eight percent You will have nearly a hundred thousand Dollars in your fund Over that 10 year period if you have a 10 return you will have 121 000 In this fund now let’s just dream for a Minute and think about the possibilities Imagine if at the end of that 10-year Period you are still 25 years from Retirement Let’s use the 8 return so now you have 100k In your s p 500 index fund and you Decide to leave that money in there and Just not touch it until you retire in 25 Years You also don’t contribute another dime To the fun You’re just going to let this money grow For another 25 years If it continues at the 8 average return In 25 years you will have 733 thousand Dollars in this fund This is what you are sacrificing to Drive a 29 000 Car that you don’t even want to wash Anymore after a few years of owning it
You contributed roughly 30k into a fund Over a five year period Many years ago never added another dime To it you just Let it grow and when you retired it was Nearly three-quarters of a million Dollars Five years of investing just bolstered Your retirement So i hope you all saw the value in the Scenario we walked through today Buying cars too often or buying too much Car is just a complete waste of money You should get what you want but you Also need to be able to afford what you Want So if i were you there were a few things I would do first of all i would never Lease I would never lease it’s just a bad deal All the way around I would consider buying used i would Also consider paying cash If you can’t pay cash for a car then if You have to finance Don’t make the payment more than or Don’t let the payment be more than eight To ten percent of your take-home pay Right and that’s if you finance for Three years or less So if a three-year term and a payment Under 10 of your take-home pay is too Steep or you can’t do that you need to Go back to the drawing board and either
Save more so you can meet those That requirement or you need to buy less Car I would much rather have 733 thousand Dollars in my retirement Than a new car any day remember this you Can achieve much greater things than Where you are today if you’re willing to Put in the work Conceive it believe it and achieve it I’ll see you next time if you enjoyed This video Please consider subscribing to the Channel liking the video Dropping a comment and sharing with your Friends check out some of my other Videos as well Thank you
