Don’t Overspend on Assets That Depreciate in Value
April 22, 2016My middle child, who is merely days away from taking his driver’s license exam, thinks that it is a major hardship that he isn’t going to have a car on day one after he gets his license. That’s not such a bad problem to have considering all the problems in the world. I asked him about the kind of car he’d like to drive and he said he wouldn’t mind a new Mercedes or BMW…a Ferrari would do. In a perfect world, a Lamborghini or Bugatti would be his preference.
That’s when I reminded him that the world is not perfect and that it was time for a quick re-visit of our reality. I had my hiking boots in my car and told him he is going to get a car that resembles those old hiking boots, probably not a car that a high level executive would drive, but it beats walking or riding a bicycle. My rationale: a first car is far more likely to be dented, dinged and wrecked than a car that you buy after 20 years of driving experience. Inexperienced drivers pay higher insurance rates because they are a higher risk, so we are going to opt for an old ugly car that goes slow and is incredibly safe over a shiny, fast small sporty car. I’d like to see him live a long, healthy life and this car choice will help that along.
I use this theory for buying my cars:
Buy a high quality car that is 3-5 years old with 40,000–60,000 miles and coming off the first lease. I can pay pennies on the dollar based on the original price. I’ll drive it until it has 200-300k miles on it and leaseholders tend to take very good care of their cars. I’m getting a nearly new and high quality car at a low price. My current car is a luxury model that I bought for just under $10,000 2 or 3 years ago and has been a great purchase.
For my son:
If he wants a Mercedes or BMW, that’s great! But it’s not going to happen. Unless we find one that is 10+ years old, has 100k+ miles on it and can be had for a very low price. More likely, we will look for great deals on high quality cars with lots of mileage. He will be commuting a few miles to work or school and taking the occasional road trip.
I want him to have a 4 cylinder engine to be effective on gas mileage and not have much horsepower. And I want the car to have a great safety record from a car maker that has a reputation for safe cars. Looking at cars.com, I found 200+ cars for under $5,000 that my son, his mom and I can all pitch in and purchase together. Now his job is to pass his exam and come up with 1/3 of the cost of the car!
What do I hope you learn about from my son’s car? Don’t overspend on assets that depreciate in value! Americans spend far too much on cars and other things that don’t increase in value. Set some rules about how much you’re willing to spend on things like this and stick to them.
My kids all laugh when they say they’re going to “invest” in a new computer or video game. They roll their eyes when I ask how much of a profit they’ll make if they sell their new “investment” 5 years later, knowing that they’re about to hear investing means trying to earn a profit. Spending is what we do when a purchase decreases in value. The moral of this long story is to minimize the cost of purchases so that you have room to invest for your future.