New Cars Do You Need Them

How often do you upgrade your car? Yesterday while waiting for a train, I got talking to someone who buys a new car every two years on the dot. In fact he has done this for 16 years. This strikes me as mad. He is obviously a car lover, but the cost is extreme. For the purpose of this article let's call this man, Jamie.

I came home and tried to put down some figures to see what Jamie had spent. Well unfortunately we didn't have time to get into how much he spent or what sort of cars he purchased. For all I know, Jamie could have been extremely rich and been purchasing Ferrari's.

But let's go with something a bit more practical. Let's say he purchased a normal Ford every two years for the past 16 years. Plus these Fords have all been exactly $35,000 each time.

Then we assume he sells them at the two-year mark and uses the money to purchase his next vehicle. Just from very basic figures, the average car will lose around 25% of its value in the first two years.

From my calculations, in 16 years he has purchased 8 cars. The first one he paid in full for $35,000. Then each subsequent one he traded in his old one at $26,250 and made up the difference with $8750 cash.

So how much money has he spent over this time? He has a grand total of $96,250. Plus this is before insurance, petrol, rego and services. Not to mention the time and money he has had to use to sell his old car and purchase his new one.

Imagine if our friend, Jamie purchased a new car 16 years ago and held onto it for the whole time. Now how much would he have spent. Well, only $35,000! This is a far cry from $96,250; in fact, the saving is $61,250. Or put it another way, it was $11.99 a day. Just for the privilege of driving a late model car, our friend Jamie, has spent nearly $12 a day.

But what about if Jamie had put this extra money in a bank account. Just by adding this $12 a day to a bank account at 5 percent interest, Jamie would have saved over his 16 years, around $88,340!

Or let's pretend Jamie had a $300,000 mortgage over 25 years at 8%. Had he just paid minimum payments, he would still owe $202,995 at the end of the 14-year mark. However, had he paid this additional $12 a day to his mortgage instead of spending it on new cars, he would only owe $91,946. A massive difference of $111,049!

Had he put it into a super account at 10%, he would have saved over 16 years around $171,817.

The bottom line is, new cars are depreciations which move.

To grow your bank balance and to survive middle class, you need to do away with the notion of a new car. Or even the notion of updating your car every few years. The biggest way to put a dent into your savings is to become a car lover.

The book The Millionaire Next Door examines millionaires in the USA. It studies a huge group of millionaires with a net worth of between $1 million and $10 million. The surprising conclusion as to how these millionaires became rich was one word "thrifty".

The authors were shocked, as time after time their studies concluded most millionaires are misers with money. Sure there was your odd sports star or TV actor, but most just lived well below their means.

As to the subject of car ownership, would you believe most millionaires never purchased a new car? And out of all these people they surveyed, the average they spent on their current car was $24,000 (new or second-hand). This compares with the average non-American millionaire who spent $21,000 or only $3000 less. The bottom line was millionaires became millionaires by watching every dollar, rather than spending money to look good.

Now back to our train friend, Jamie. He has spent $12 a day just on his car habit. To help you visualise this waste of money better, imagine every day you wind down the window while driving, reach for your money, and drop $12. Each and every day for 16 years. Doesn't sound like fun to me.

What are your car purchasing habits? Are you like a Jamie? Or do you act like a millionaire?

The thing that struck me later about Jamie was with all his new cars and being a car person, why was he catching the train? Maybe he needed to save some money?