Should I Buy A New Car?

For several years, I’ve been thinking about buying a car. This is a big deal for me, because I have owned exactly one vehicle in my life, a 2004 Ford Ranger. He’s my buddy. I feel bad about looking for a new one, but it’s time (or so I thought). One consequence of my vehicle loyalty is that I haven’t given any thought to buying a car since long before I was interested in financial planning.

It’s pretty confusing! So I want to share my thought process here to illustrate 1) a way to think about buying cars, and 2) how the economics of car ownership can be an example of how we can use a financial modeling approach to simplify other complicated decisions.

This post was originally published on June 11, 2019 and updated on November 4, 2021.

Most people understand the basic factors that go into the car-buying decision.

• New cars have less maintenance costs, but they also lose a lot of their value every year
• Older cars hold their value better from year to year, but have much higher annual maintenance costs
• Leased cars are expensive but there’s a certain amount of fun in always having a new car

How do we weigh one factor against another? It’s not immediately obvious. For example, when you’re shopping for a jacket, you might browse stores, sites, and read some reviews. You build a mental picture of the value of each jacket, and then you compare prices to see which jacket has the most value for the lowest price. That’s the one you pick. You probably don’t think through all those steps. But, something like that process is informing your decision.

On the other hand, you can’t use that simple process for a car. You are trying to compare spending money now, versus spending it later. There’s also a lot of uncertainty and risk to consider. The mental model we used to buy a jacket isn’t useful here. If we want to make a rational decision, we have to use a slightly more complex model.

Monthly Cost Of Ownership

Let’s create a single metric we can use to compare all the different ways to own a car. We want something that accounts for:

• Direct expenses, like maintenance
• Indirect expenses, like the car’s loss in market value as it gets older (depreciation)

If we can create such a metric, our job is complete. Once we have it, we can use it to see which ownership option costs the least, and use that to guide our buying decision.

So let’s build this metric. I’m going to call it Monthly Cost of Ownership. I’m going to assume that once you own a car, you’re going to, on average, spend a little money on maintenance each month, and your car is going to lose a little market value to depreciation each month. If I can put some numbers behind these cost categories, I can add them together and get my metric.

But based on this analysis, the actual best move is to buy an older car, drive it ’till the wheels fall off, and then pay to put the wheels back on and drive it some more!

To start, I went to Consumer Reports to find out what typical maintenance costs are for various vehicles. I adapted their information slightly to come up with the following average cost schedule for a random car, given the car’s age:

Vehicle Age	Maintenance & Repair Costs as a % of New Price
1	0.00%
2	0.25%
3	0.40%
4	0.60%
5	0.80%
6	1.00%
7	1.20%
8	1.40%
9	1.45%
10	1.50%

One initial reaction– maintenance costs are pretty low, right? We’re talking about a median maintenance expense for 10-year old cars in the $500 per year range. Seemed low to me, but when I sat and thought about it, it made sense. My truck is 15 years old and this is the first year I’ve spent (slightly) more than $500 on repairs.

Depreciation

How about depreciation? I went to CARFAX, and based on their comments on typical vehicle depreciation, I came up with the following schedule, similar to my maintenance table above. Note that I have separated the immediate depreciation upon buying the car from the depreciation during the first year of ownership, so that by the end of the 1st year you have lost 22% of the market value of the car, which matches the guidance from CARFAX.

Vehicle Age	Depreciation Loss as a % of New Car Price
0	10%
1	12%
2	10%
3	10%
4	10%
5	10%
6	8%
7	6%
8	4%
9	3%
10	2%

Combining The Costs

Now for the slightly tricky part. I need to do a little combining so that I can define total costs for, say, a 3 year old car. Note that for used cars, the depreciation effect works in our favor, because the high initial depreciation in Year 1 allows us to buy the car at a much lower price. So let’s look at the first component, the depreciation loss:

Vehicle Depreciation

No surprises here. Depreciation hits the hardest up front. The older car you buy, the less depreciation you experience. And the longer you own a car, the more you can spread out the total depreciation loss. The smallest average monthly depreciation cost is $179 if you buy a 3 year old used car and hold on to it until it’s 10 years old.

Vehicle Maintenance

Next piece of the puzzle– what about maintenance?

Two things jump out to me here:

1. The “shape” of this cost matrix is the opposite of the first one. Older cars, and cars held for longer, have higher average lifetime maintenance costs.
2. The overall magnitude of these costs is much lower than for the depreciation matrix.

So we’re almost there! Let’s just add the two cost sections together to see what the “all-in” cost per month is for these different vehicle ages.

Depreciation + Maintenance = Total Monthly Cost of Ownership

If I buy a 3 year old car, and sell it when it’s 10 years old, then on average, I will have “paid” $210 per month over the vehicle’s life for the benefit of owning it during that time. On the other hand, If I buy a new car and sell it at 7 years old, covering the same time frame, I will have paid $332 per month over the vehicle’s life for the same benefit. So you have to ask, is it worth $122 a month to you to have a slightly newer car for that time frame?

This result was very interesting to me! The magnitude of the depreciation effect is so much larger than the maintenance effect! Therefore, the overall cost picture looks much better for older cars.

You shouldn’t buy a new car based on some idea that a fresh car will save you money on maintenance.

A Quick Note on Insurance

I didn’t include them in the analysis, but vehicle insurance costs tilt this decision even further towards older cars. Brand new cars are expensive to insure!

Keep That Old Truck!

My expectation at the beginning was that the best move would be to buy a 3 year old car, and then sell it after 6 to 8 years, before it starts falling apart. But based on this analysis, the actual best move is to buy an older car, drive it ’till the wheels fall off, and then pay to put the wheels back on and drive it some more! It turns out there is no “sweet spot”!

To sum up, newer cars lose more value every year, but older cars cost more money in maintenance every year. With new cars, you are losing thousands a year, but with old cars, you are only spending hundreds a year. It’s generally better to just deal with the maintenance expenses directly and delay replacing your car for as long as possible.

I decided I’m going to follow my own advice on this one, and stick with my buddy the 2004 Ranger for a while longer!

A Parting Note

It’s still perfectly OK to buy new cars if you want to. Just understand that buying a new car should be considered a luxury purchase. Something you buy because it’s nice, and you want it for fun. You shouldn’t buy a new car based on some idea that a fresh car will help save you money on maintenance. The maintenance savings don’t come anywhere close to the depreciation loss on a new car.