Car Math

I could have called this blog entry, “Something Old, Something New, Something Borrowed, Something ….Red?” I traded in blue in November 1999 for my wife’s 2000 Nissan Altima. Cars are one of our biggest expenses. Except for a few people living in a vibrant downtown neighborhood in a large city automotive expense including initial capital outlay, maintenance, gasoline, tires, insurance, etc. etc. is essentially unavoidable. How to keep those expenses at a minimum and still enjoy adequate transportation, and maybe even get some pleasure out of driving down the Blue Ridge Parkway early on a fall morning, that is the question.

A few weeks ago, I made a decision. It will be at least a year before I know if it was a good decision or a bad decision. My beloved 1996 Honda Prelude passed 180,000 miles. Every 90,000 miles my car requires major maintenance including replacement of the timing belt, water pump, and a whole host of expensive replacement parts and fluids. My car was in unusually good condition for a vehicle of that age, but still if something, anything, breaks on a car that old, I really couldn’t complain.

Do I buy a new Acura TSX (my desire) or do I fix the old car, or do I trade in the Honda on a late model used BMW Z-4 (my other desire). I knew that the required maintenance and any discovery of additional problems would run me between $1,000 and $3,000. I knew that a new TSX would cost over $28,000 and I knew that I could get a decent used Z-4 for $25,000 or more. Given the state of the economy and my desire to retire as soon as possible, I decided to keep the cash. Repairing and maintaining the Honda ended up costing me $1,656 and two days of aggravation. I was blessed in the timing of this work. I had a cracked radiator that was still over ½ full of fluid. If I had run it dry—well---Aluminum blocks do not tolerate heat like their cast iron cousins. If I had run it dry, my car would probably have been sent to the scrap yard. They also discovered a nail in one of my tires. I believe God was watching out for me last Friday. Larry Burkett of Crown Financial Ministries repeatedly stated that it is almost always cheaper to repair an existing car than it is to buy a different car. If I have no more major maintenance headaches for a least a year, I clearly made the correct decision. If my Honda continues to provide me with a reliable commute until I retire, I would consider myself extremely blessed.

This is a hard word and I know that sometimes it is impossible, but try and pay cash for cars and other disposable items, like clothing. Save money into an account for that purpose. Then when the day comes, write a check. Making car payments to yourself rather than the finance company is always a better plan, although I know it is not always possible. Achieving this goal is easier with the purchase of a late model used car rather than a new vehicle. I have been told that Dave Ramsey of Financial Peace Ministry would always recommend the purchase of used car. An analysis of the facts supports this recommendation. The predicted life of a car is measured in some combination of years or miles. Such a decline in value is consumed on a linear basis. However, a new car can depreciate $1,000 or more the minute you drive it off the dealer’s lot. In the first few years of its life, an automobile depreciates in cost much faster than it depreciates in value. In fact, years ago, I remember learning how to use a linear regression and scientific graphing program by developing a formula to describe the declining value of a Toyota pickup truck as a function of its age in years. If I recall correctly it was some kind of second order equation. That means the cost declines proportionally to the square of the age. Sure enough, again this is from memory, the inflection point (maximum value) on this curve was out about 2 or 3 years, just where you would expect it to be.

How much car can you afford? There is a rule of thumb. You can afford a car that costs 30% of your gross salary. That means if you earn $30,000 a year, you can afford to spend $9,000 on a car. That pretty well limits you to a used car. If you earn $100,000 a year, a new car at $30,000 would be pushing it. As you can see, many Americans are choosing to live beyond their means. If you see a late model SUV and a late model minivan in a driveway with a combined family income of $120,000, you might be looking a marriage headed for financial problems. However, as with any such advice, we would do well to remember that the definition of a rule of thumb, is a rule that works thumb of the time.

Thinking about a new car? I was surprised to learn that the cost of new cars is trending upwards, even though supply currently exceeds demand. How can that be? It turns out that the automobile manufactures have or are in the process of retooling and manning for a nationwide demand of 8 to 10 million units per year rather than 15 to 17 million new cars per year. The bankruptcies of General Motors and Chrysler have caused a dramatic decline in the number of car dealers in the United States. This is also not good for the consumer. Finally, as a nation, we are buying automobiles, such as hybrids that are more expensive to produce. Also, right now, the people who are buying new cars either really need a car or are so rich that the price doesn’t really matter all that much.

Just to keep things honest, let me state that I bought my first new car for my wife in 1988 and my first new car for me, the aforementioned Honda, in 1996. I also bought the Altima new. All the other cars my wife and I have owned were used. Some of them were pretty decrepit and perhaps some of them might have even been considered dangerous. By the way, I paid cash for all of those new cars.

Philippians 4:

19) But my God shall supply all your need according to His riches in glory by Christ Jesus.