Vehicles usually depreciate like a rock, AND you pay to own them through maintenance costs, insurance, tags, and potentially even interest payments (if purchased on debt).
Here are a few suggestions to help ensure your vehicles are not hindering your wealth-building journey.
Auto Repair Tips
When taking your vehicle to a mechanic shop, ask for the old parts back.
This may prevent upcharges for replacing unnecessary parts. You could tell them you need it for insurance purposes or that a family member who usually works on your vehicle needs it. Doing this could help prevent you from being overcharged or scammed by unethical mechanics.
This came from a story of a young woman who had to take her vehicle to a mechanic shop while she was out of town. The shop she took it to quoted her one price, but when she said she needed the old parts back to give to her dad (who typically works on her car), her price went way down.
Have Car Debt?
Dave Ramsey famously advises against taking on vehicle debt, but what happens if we made that choice before committing to better financial habits? Where do we go from here?
Dave Ramsey’s rule if you already have vehicle debt:
If your vehicle is less than half your annual income, and you can/will be debt-free in under two years (not including your house), then he says you can keep it and focus on paying it off following his Baby Steps.
In the Market for a New Vehicle?
Check out the tips below.
Pros of buying new:
You don’t need to know the condition or history of the car.
Get the latest and greatest features and technology.
Most likely get a full warranty with peace of mind.
Pros of buying used:
Cheaper and don’t have to foot the bill for the depreciation.
Car insurance and taxes tend to be less expensive.
You might be able to get a better car for the money and add features you could not afford if the car were brand new.
How much can you afford?
Used/Non-Luxury Brand Vehicles:
Dave Ramsey says to pay cash and never finance a vehicle.
Dave Ramsey’s general rule is that the total value of all your vehicles (anything with a motor in it) should never be more than half of your annual household income.
The Money Guy says to use the 20-3-8 Rule.
1. Put down 20%
2. Aim to pay it off in 3 years
3. Don’t let the car payment (principal, interest, and maybe even tags and insurance) be more than 8% of your gross income. Use net income if you want to be more conservative.
If married, this should include all vehicles added together, not just for each car.
Follow the 20-3-8 rule regardless of interest rate.
Do not let your monthly car payments be more than your monthly investments.
Budgetdog advised to use the 20/4/10 rule.
20% down payment
No longer than a 4-year loan
Spend no more than 10% of your monthly income on transportation expenses.
Brand New/Luxury Brand Vehicles: (Do NOT Fake Success!)
Dave Ramsey recommends never buying a brand-new vehicle, but if you desire one, you should wait until your net worth is more than $1 million.
Dave says most who buy a brand new car feel like their car owns them.
The Money Guy states that buying brand-new/luxury-brand vehicles is not financially smart from a depreciation standpoint, but they say it is not totally out of the question. If you have enough margin in your finances to not sacrifice your other savings and investments, then it might be okay to purchase the brand-new/luxury-brand vehicles.
However, they say these should be purchased as 12-month same-as-cash loans, meaning if you cannot pay them off in 12 months, you are faking success and should not buy the brand-new/luxury brand vehicle.
They state that buying a brand-new, luxury vehicle would fall in The Money Guy’s Order of Operations Step 8.
Note: 2020 flipped most things upside down, including the auto market. After the 2020 lockdowns, some could purchase brand-new vehicles at a cheaper price or very close to the same price as used vehicles, which included newer technologies and new car warranties. This is not typical; the point is to ensure your vehicle is not hindering your financial growth and journey. Make sure you are doing your homework before you decide to buy.
Tip: Get insurance quotes before you buy. This will help give you an idea of the cost before purchasing the vehicle, helping ensure you can afford it.
The best time to buy a vehicle depends on who is willing to pay the depreciation. Most depreciation happens in the first few years, so are you willing to take that hit? From a depreciation standpoint and per Brian Preston (The Money Guy Show), the best time to buy a vehicle would be between years 3 and 6. This means purchasing a car between 3 and 6 years old will give you the best value for your money, as it has likely already suffered most of its depreciation.
For example, buying a 5-year-old vehicle is like getting a 60% discount. (This was before 2020/2021 vehicle prices.)
Leasing (a.k.a. Fleecing)
Consumer Reports said, “The most expensive way to operate a vehicle is to lease it.”
An auto lease is a contract where you pay monthly installments to drive a vehicle for a set amount of time (usually two to three years). Dave Ramsey states that it is a glorified rental car. He also says the average interest rate on leasing is 14.2% (per 2019). However, since leasing isn't technically seen as a loan by the Federal Trade Commission, the dealer isn't required to give the breakdown of your monthly payments like a car loan. So, you will probably have no clue what your interest rate is or how much the lender added to make a profit.
Auto dealers make more money on a leasing contract than they do on the sale of the car.
Your lease payment will include:
The dealership’s profit
The cost of interest
The loss of value of the vehicle while you are driving it
You will be paying them profit while also paying interest and covering the loss of the value of the vehicle. The dealers are not losing money on these deals.
Leasing is also known as fleecing, fleeced, or fleece.
Fleece = “to obtain a great deal of money from (someone), typically by overcharging or swindling them.”
Synonyms = deceive, trick, dupe, exploit, rob, and bamboozle.
It means you got a terrible deal.
Per the Money Guy Show:
Brian Preston said he would never suggest someone lease a vehicle unless they are filthy rich and will not be financially impacted by stupid financial decisions.
Bo Hanson said if a person was going to purchase a vehicle every couple of years anyway, then leasing might be better, but it's still not a wise financial decision because buying and driving a vehicle for a long time is the best financially.
(Again, 2020 was the exception to this rule. Due to the inflationary period, some individuals could return leased vehicles and make money from the deal. This is not the standard, so be very careful if you decide to go with leasing, as you will likely lose out on the deal.)
Unpopular Opinion on Leasing?
This is another opinion that I’m noting down, but keep in mind that this is from an ex-car salesman, so take it with a grain of salt and do your own research. They say to lease things that DEPRECIATE and only buy things that APPRECIATE, and since most vehicles always depreciate, they suggest leasing vehicles.
Tips for the Buying Process:
Research is your friend. The more research you do, the better car you can get for your money.
Don’t let their scarcity games play games with your brain, like when they say they have someone else looking at this exact car. That will get you to buy on emotions.
Don’t let them start the conversation by asking, “How much do you want your monthly payments to be?” The dirty little secret is that they can fit almost any car into your monthly budget.
Buy at the end of the month or year. December usually offers the most significant MSRP discount.
Ask for extras. Last bargaining chips you can use. (ex. floor mats or other add-ons, oil changes or other services, swag, etc.)
You can pay someone to do the work for you (Sam’s, Costco, credit unions, etc.).
If you find a car you like at a dealership, search online for that vehicle at other dealerships. This can help ensure you’re getting the best price. Search other lots outside of your area. Also, some dealerships might offer vehicle delivery at a reasonable price.
Start with a low offer and negotiate up.
Don’t be afraid to walk away. Often, sellers don't want to lose a potential buyer, so your willingness to leave can shift the power in your favor. Walking away also gives you time to think, compare other options, and avoid impulsive decisions. Sometimes, you might find a better deal elsewhere, or the original seller may even contact you later with a better offer. Remain calm, confident, and polite when walking away—it's not about burning bridges but rather standing firm on your terms.
Pre-approval for financing gives you leverage.
There are 3 separate transactions happening when purchasing a vehicle:
Purchase Price, Trade-In Price, and potential Financing
Negotiate these prices separately!
#1 Know the purchase price
MSRP (Manufacturer’s Suggested Retail Price)/sticker price = the recommended selling price automakers give a new car.
Brian Preston from the Money Guy show said it stands for “Manufacturer’s Sucky Rip-off Price”. Never pay this price.
Dealer’s Invoice price = price that appears on the invoice that the manufacturer sends to the dealer; however, it may not be the effective price the dealer paid.
Make sure they are telling you the “Drive-Out” or final price that you will pay, not the price before all the fees are tacked on, as many of the fees are negotiable (Dock fees, freight fees, advertising fees, sales fees, etc.).
Also, be sure to ask for the extras (e.g., floor mats, oil changes, etc.).
Get it all in writing, so they don’t change anything on you.
*Be sure you have completely negotiated the purchasing price before you move on to the next steps.
#2 Know the value of the car you may be trading in
This is an area you might be able to use to squeeze a better deal when buying a car. If they will not knock off any more of the purchase price of the vehicle you are buying, they might agree to give you a little more in trade-in to get you where you want your purchase price to be.
*Again, be sure you negotiated this step (the trade-in value) completely before proceeding to the next step.
#3 Financing versus paying cash (This should be the last step in the process.)
Be sure to check other outside agencies or banks to see the rates they're offering before you go to the dealership to finance a vehicle.
Financing a vehicle is the dealership’s major income maker, so if you’re paying cash, never tell them until you have agreed on your purchase price.
Ten years ago, you might have gotten a better deal if you had paid in cash. However, nowadays, dealerships have pretty much turned into banks. With this, they can sometimes give you more incentives if you finance the vehicle through them, as they will get paid more per vehicle if it is financed through them. This is because they get paid more through financing than just selling the car to you.
Brian Preston (The Money Guy Show) said that when he bought his wife’s vehicle that he was planning on paying cash for, the dealer gave him a cheaper price IF he financed the vehicle through them and promised to keep the loan open for two months before paying it off so the dealer could get his incentive or money for opening the loan.
Videos on Purchasing Vehicles
Also, search for videos on YouTube about vehicle negotiating. Some will record their negotiation process and post it to help others know what to expect.