We’re all looking for ways to save money, especially on big-ticket items. Even a small discount on a major purchase like a car can add up to big money. As a result, many people (including myself) scout around for hours trying to find the best deal, either online, or by pitting dealers’ bids against each other, or by using membership deals like the Costco car-buying program. All of those are great ideas. But there’s an even better way to save money that can save you a lot more and that takes absolutely zero effort: buy less often.
The Average Car Cycle
Before the recession, the average person would buy about 13 cars by their 76th birthday, which means that between age 16 and 76, a person would replace their car approximately every 4.6 years. Granted, some of those are used cars being purchased and re-sold, but a lot of those were new cars being cycled through about every 4 to 5 years.
Since the recession, the auto-purchasing cycle has lengthened somewhat, so that now people are replacing only 9.4 cars during that period, meaning they are replacing their cars every 6.4 years. That’s better, but it’s still a lot.
Depreciation and Taxes and Insurance, Oh My!
According to Edmunds.com, a car loses 60% of its value in the first five years. About 9% of that value is lost when the car drives off the lot, and another 10% is lost over the course of the first year, making a total of 19% depreciation in just the first year. Every time you buy a new car, the first year is going to cost you about 20% of the value of the vehicle. And keep in mind that there are other elevated costs associated with the first year of vehicle ownership, including sales and use taxes (8% in Orange County, California, where I live) and vehicle registration (another 1% of the purchase price in the first year, according to the DMV).
Add it all up, and the total is shocking: the first year of car ownership (in my area) will cost you 28% of the purchase price of the car in depreciation, sales tax, and registration fees alone. This doesn’t even count the increased insurance premiums which always come with a newer car.
How to Save—Put It Off, Just a Bit Longer
The best way to avoid taking such a huge hit? Drive your old car for just one additional year before replacing it. It’s nice to get a new car, and enjoy the new car smell and that feeling that no one else has driven that car before, but considering the cost, isn’t it worth it to delay the purchase by an additional year, or two, or even three if you can swing it? For each additional year that you own your car, you lose far less to depreciation, your registration costs decrease in proportion to the decreasing value of your car, and your insurance costs decrease.
In fact, if you’ve owned your car long enough to pay it off entirely, you can switch to liability only coverage and save even more. True, you might get into an accident and lose money by not having full coverage insurance, but if you’re an average driver, you’re going to save a lot more by skipping the full coverage insurance premiums and assuming the risk of loss to your own vehicle. (That’s how the insurance companies make a profit—they charge you more than they expect to pay out.)
If you can make your car last 7.5 years before you replace it, you will only buy 8 cars between age 16 and 76, instead of the current average of 9.4. You’re saving the purchase price of about one and a half cars! Not to mention the sales tax on those 1.5 cars (about 12% of the purchase price of one car), plus the difference in registration and insurance on those cars. By buying 8 cars instead of 9.4 cars, you’re instantly saving about 15% on the purchase price of your cars. (1.4 cars divided by 9.4.)
If you can make your car last 8.5 years instead, you’ll buy only 7 cars between age 16 and 76, saving another additional car’s worth of cost (2.5 cars total over the current average), plus the additional sales tax, registration, and insurance. By buying 7 cars instead of 9.4 cars, you’re saving more than 25% on the purchase price of your cars! (2.4 cars divided by 9.4.)
Even Better, Buy Used
Of course, you can do even better than that by making your next car a used car. If you buy a car that’s about 2 or 3 years old, you can skip the worst years of depreciation, taxes, and insurance entirely. There are a lot of people who lease for short terms and then ditch their vehicles, giving us cheapskates some good buying opportunities.
My last car was a 2001 Subaru Impreza, which I bought in September of 2000, and drove until March of 2009, for a total of 8.5 years. My current car is a 2009 Toyota Venza, which I’ve had from March 2009 to date. I plan to hang on to it until at least September of 2017, to hit the 8.5 year mark.
How often do you typically buy your cars? How long do you plan to make your current car last?