“Should I buy a used car?” Don’t Make This Money Mistake in your 20s

Disclaimer #1: I am not a financial advisor. You are trading at your own risk and should consult a financial advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “”Should I Buy A Used Car?” Don’t Make This Money Mistake In Your 20s” serves as educational content, not investing advice.

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Cover Photo by Andrew Winkler on Unsplash.

The worst investment you can make in your 20s:

“Should I buy a used car?” I’m sure this question has arisen in our minds for some of us when seeking a new vehicle to purchase. But if you’re in your twenties, this question should be simple to answer. Yes. You should buy a used car.

Often you may see friends or family members in person or online share their experience of recently purchasing a brand new vehicle. By brand new vehicle, I mean the latest SUV model, truck, or any other make.

I think the worst financial move, or at least one of the worst financial moves you can make in your twenties, is purchasing a brand-new vehicle. You may consider to yourself, why is this? A brand-new car means that there should not be any problems with the car, a good bonus is included, and that warranty is great to have.

Yet, while these may be true, why would you want to purchase something you cannot afford? This is especially the case for recent graduates. If you are graduating from college or university, you likely have some student debt.

Maybe you can pay off the student debt. Perhaps you are pretty financially stable. If you are, I’ll speak to you in a minute. But for those who will have to tackle the student loan payments brought out from your tenure in a post-secondary school, what good does add extra debt from a car loan do for you? Give you some low credit scores, I’m sure.

You may be struggling to pay off that large student loan, and now you’re going to struggle even more by trying to pay off a brand-new vehicle. Why would you even want to put yourself through this kind of distress? If you cannot afford to purchase something, then clearly, you should not buy it.

Even if You Can Afford your student Loan:

Let’s say you have a student loan, but you’re going to be able to pay it off in full. Congratulations, that’s great. But even then, why should you purchase a brand-new vehicle? You must understand that a vehicle is a depreciating asset. And the first moment that you leave the car lot with this new model, you’re bound to lose 10 to 15% of its value.

When I say value, I mean the resale value of any car will decrease over time. The value can decrease due to depreciation, a leading contributor to a vehicle losing such a significant amount of its original value.

Allow me to put it this way. Let’s say you purchased a brand-new vehicle for $35,000. As soon as you have driven it off the lot, you automatically lose $3,500 to $5,250. That’s an amount that you cannot retrieve back, and you practically have thrown out the window. 

Then after your first year of owning, it probably will depreciate another 10%. So, who wants to ever lose 20% to 25% in value for something they paid for? I’ve never heard anyone say this.

It doesn’t matter why you’re trying to purchase a brand-new vehicle. I understand that many people do it because some of your friends or family members have done it, which pressures/influences you to purchase a new vehicle. While the desire may be strong, you have to think of it from a financial standpoint. Even if you could pay off that vehicle in total, it does not mean that you should purchase it.

What You Should do In your 20s:

Many people don’t necessarily know this, but one of the most critical moves you should be making in your twenties is building assets. Things that will help you generate more cash flow to you, so you’re better able to pay off excessive amounts of debt and significantly build for retirement—word to Robert Kiyosaki’s Rich Dad Poor Dad.

So, paying $30,000 for a new vehicle versus $10,000 for a used car, ask yourself which decision is better? Do you want to use an extra $20,000 to spend on maybe a few more years of added life and value to an already depreciating asset? Or do you want to use that amount of money to help you build more investments so that you can retire easier and even earlier?

I don’t know if these questions are asked enough. We need to take the importance of focusing on not only your mental well-being but your financial well-being and not getting caught up in all the glitz and glamour that we believe our desires can bring to us.

There’s a general rule out there that you can adapt to your liking. The rule generally goes that you cannot afford to buy something unless you can purchase 10 of those particular things. While logic would tell us that yes, we can afford to purchase that if we can purchase 10 of them, it does not mean that we particularly should.

What we need to do is question the considerable investments we are contemplating. Such as whether purchasing a new vehicle, attending college or creating a business makes sense for us.

Plus, there’s nothing wrong with finding a great valued used car. I understand that, yes, eventually, used cars will probably need more repairs than a brand-new vehicle in the long run. But it offers a lower amount of payments you need to make, and you may be able to purchase it in full. 

Purchasing a Used vehicle example:

To illustrate the point that I’m trying to get across to each of you, let’s look at a hypothetical example.

In our first example, we have our great pal Serge, who decides that he wants to purchase a used vehicle today. Whenever surge has met with a private seller, he’s informed that the car he potentially may buy is five years old, and the price the seller is looking for is $15,000.

Serge decides that this is mainly a good deal for himself and decides to purchase the car. We can see if we assume that the vehicle had an original, useful life of 10 years. The car would depreciate evenly throughout those ten years that the car has lost $3,000 annually throughout those first five years.

The exception comes from the very first year, where it has lost 25% of its value. Since the vehicle depreciates 10 to 15% whenever the car was driven off the lot, it lost its value. So, in total, if we base the lost value on the vehicle’s depreciation, the vehicle has lost $19,500 in value. But Serge got some bonuses with the deal, so therefore he paid a premium for the vehicle.

Now let’s look at three years of ownership. Across the three years, Serge has spent an annual total of $1,510 on fuel which will equal to $4,530 across that span. The Manitoba Electric Vehicle Association gave the $1,510 benchmark.

Since we already know what the depreciation is annual, it will equal $9,000 across the three years. As for the maintenance costs, the average amount a Canadian spends on maintenance costs for their vehicles is $796 annually. Since this is also a used car, we will use the total price since it does not seem totally out of proportion. That total will give us $2,388.

If we take each of these three costs to own the car and add them together, we can see Serge’s total cost of owning the used vehicle is a little over $14,000. You may say that this amount seems to be quite a bit of money, especially over the three years. I would have to agree but let’s look at the following example where Serge decides to purchase a brand-new vehicle.

Purchasing a new vehicle example:

Serge plans on buying a brand-new vehicle. He went to his local car dealership and bought a new car for $42,000. In this situation, we again assume that this vehicle has a useful life of 10 years, meaning that annually the car depreciates $4,200 using the straight-line method.

We will look at three years of owning the vehicle once again. The first thing that you’ll notice is that the depreciation is higher for this vehicle than the used one. This is because the original value of the vehicle was much higher than the previous one. The first year Serge loses 25% of the value of his vehicle again, meaning that over $10,000 is thrown out the window.

Since this is a brand-new vehicle, we will assume that it is more fuel-efficient than used. So annually, surge spends almost $1,300 on fuel, which means that in total, Serge spends $3,850.50 on fuel over the three years.

Since the depreciation has been calculated above, we know that the depreciation alone on this vehicle is $18,900. If we base the value lost on the vehicle on its annual depreciation, this vehicle has lost nearly $20,000 within its first three years of ownership.

We will say that Serge does not need to keep up with as much maintenance as a used vehicle because it will be expected that the new vehicle will need more minor repairs initially. Therefore it only costs him $398 a year for maintenance. In total, that is $1,194 on maintenance costs.

The total cost of ownership that Serge incurs is nearly $24,000. Practically an additional $10,000 then if he would have purchased a used vehicle. Now, this isn’t a perfect example; let me say that straightforwardly. The value of the vehicle does not always depend on its depreciation. For example, a vehicle’s value could be factored in by other things such as mileage, repairs, and rarity. I also didn’t include any costs associated with car insurance, which would be another added cost of ownership.

The Biggest Takeaway:

The biggest takeaway from this example is that the total cost of ownership is high, and yes, at the same time, you will not directly pay the depreciation on a vehicle. It nonetheless decreases its value, which means that you are symbolically throwing out money yearly because of the lost value.

Cars represent status. There’s no denying it. The fancier car that you have, the more affluent you may look, and of course, the better status you may hold. But why should that be a concern if you’re just a recent graduate? No one will judge you if you don’t drive the newest vehicle model, live in a very fancy apartment, or always go out with your friends and socialize. I’d drive an old car if it meant I would be able to save money. There’s nothing wrong with used vehicles, even when you find one for an unbeatable price. 

These ideas of status and wanting to fit in can end up costing you much money. What matters is that you do what you want. Focus on whatever your goals and desires are and set yourself out to accomplish them. Want to purchase a new vehicle eventually? Go ahead. Make it a lifetime goal to save enough money to be able to buy a Ferrari. 

But as a recent graduate, your only focus should be on getting a job and hopefully tackling those debt payments if you have any. But as well, at least for my philosophy, it should be all about trying to build more assets for yourself. I’m not just speaking on monetary assets, either. Try to learn new skills and attributes that will help you better in your career or life. Don’t get caught up on what the social trends are. Just keep your head down, keep grinding, and let it all work out. 

Concluding remarks:

“Why should I buy a used car and not a new one?”

Because cars are a depreciating asset and not one that will provide you money in your pocket or any extra value to you. A vehicle is to ensure that you get from point A to point b. It does not need to be fancy. It does not need to be a specific colour. Those are just desires. All we ever really need is something simple, and that will drive us the distance to get where we want.

Vehicles used to represent freedom, especially at such a young age. You could go out with friends, go on a trip, and get away from some of life’s realities, even if it was just for a short period. But by purchasing a new vehicle, you’ll be faced with those realities and the harsh consequences that can result from it. It’s our job to be logical but as well consider all impacts of any investment.

If you’re considering purchasing a new or used vehicle, please do your own research. You can use resources such as the Kelley Blue Book’s website to view a vehicle history report. Viewing a car buying guide could be beneficial as well to help settle the question over buying new or buying used, although I hope this article was an aid to answer that question quickly for you. The best way to think about a brand-new car is that it will never be considered brand new. The only way it remains new is if you are given the option to test drive a vehicle. Because as soon as you drive it off the lot with any new cars, it is considered used, and while yes it may be new to you, wait until a couple of months until the latest model of a particular vehicle comes out, then your car will no longer be fresh. Because what is new never stays that way forever. Therefore, why purchase something that will cost you less eventually?

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Disclaimer #1: I am not a financial advisor. You are trading at your own risk and should consult a financial advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “”Should I Buy A Used Car?” Don’t Make This Money Mistake In Your 20s” serves as educational content, not investing advice.

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