Advice - College Grad & Car

To the OP, are you sure the Volvo still has a 1 yr factory warranty? I ask because I have a 2004 s60, that has a 4yr, 50K mi. warranty. But there's a catch! My 2004 was purchased in June 2003 (they always release the cars the year before). My warranty is up in June 2007 (next month), not in 2008.

All financial matters aside, I love the s60 turbo! A word of warning though, Volvo built ALOT of leniency into its different models. I have noticed a larger than average difference in the upper-end T5 (turbo) models and the lower-end 1.9L. On the lower end you may be buying little more than the brand name.

Good luck to you.

Actually, I made a mistake last time; but so did you.

The mistake is that the opportunity cost should be based on the residual value of the car, not the original purchase price. The change in value is accounted for by depreciation.

So I'll use your 15% loss per year figure, though I think that in practice cars depreciate more like linearly, and throw together a little spreadsheet. Year 0, you have $17K tied up (i.e. you could have sold the car for $17K, with the simplifying assumption that the original sales price was the purchase price). So your opportunity cost that year is $1,360, and your depreciation is $2,550, for a total of $3,910.

I get a total depreciation of $13,653.13, so I'm figuring that you rounded.

However, the total opportunity cost is only $7,281, not $21,000, so the lifetime cost average is $2,093/year, not $3,500.

I think that a car that old will lose more than 15% per year, but I'll grant it for the sake of the argument. Then by the same reason as before, I get total opportunity cost of $2,077 and depreciation of $3,894; total cost/year of $1194.

This can't be right -- why would the opportunity cost *increase* in the first three years? I will admit that I mistakenly held it constant, and think it should be considered as decreasing, but if it increases, something must be wrong.

Anyway, I don't want to drown people in detail. The main point, which I think we both missed yesterday, is that one should really reckon opportunity cost based on what you would expect to get if you sold the car, and depreciation based on what you'd get if you sold the car today as opposed to at some time in the past. When I do that, I find that holding a $17,000 car for 10 years costs about $2,100/year, and holding a $7,000 car for 5 years costs about $1,200/year. In both cases, most of the financial costs happen toward the beginning.

However, as I said before, the cost of owning the car is dominated by the cost of operating it: Fuel, insurance, and maintenance will cost substantially more than the car itself. Which means that paying more for a car at first increases your total costs much less than proportionally.

"Andrew Koenig" wrote On used car pricing:

Why on earth are you guessing? Depreciation can vary a great deal from one make, model and year to another. One may use any of several resources to determine used car pricing and so depreciation:

Consumer Reports April issue and other issues that give guidance on buying used, negotiating, etc.

The OP may make inquiries and get helpful responses on buying used Hondas at the newsgroups rec.autos.makers.honda and alt.autos.honda.

Lastly, the reliability matrices published in the April issue of Consumer Reports are, IMO, statistically significant metrics of which makes, models, and years are cheapest to maintain.

I think you just answered your own question.

I'm guessing because it's not possible to forecast the future exactly, and because, as you said, depreciation can vary a great deal from one make, model and year to another.

And all this detail was intended to make just one point, and that is that if you spend $17,000 on a car, that purchase price will be far from the largest factor in the total cost of owning and operating the car over its lifetime.

By your own assumptions, those expenses are largely alike for both cars so they don't figure into the equation unless you are comparing owning a car to not owning one. (Granted maintenance will be higher per year on average for the older car, but as you said, insurance will be lower and we are assuming it will offset the maintenance cost.)

So, avoiding the details: (a) buy a car for $17K and keep it for 10 years, at which point it will be worth $3K.

(b) buy a car for $7K, keep it for 5 years, sell it for $3K and buy another $7K car, keep it for 5 years at which point it will be worth $3K.

The first option costs $14K, the second option costs $8K. For the second

5 year increment, both options put you in a older car for 5 years, so the question becomes: is it worth it to the OP to pay an extra $6K so that he can have a newer car for those first 5 years? Thats an extra $1200 a year during the time the two options produce different status results (i.e. the first 5 years.) I suppose for the OP, who has $2K a month in disposable income, $100 per month isn't a big deal for bragging rights.

The real problem with both of our assessments is we have no idea how much cash the OP has to buy this car with.

Not counting operating expenses.

Correct. However, the OP had better have a lot more than $100/month to spend in order to be able to do anything with the car but leave it in a garage with no insurance :-)

I see $80K as being the number where you have a good shot at obtaining critical mass during your lifetime. Below that is unlikely, and above that, you can buy some toys and spend a little more freely and still make critical mass. This isn't like the old days where a $10 per hour job would allow you to earn a pension and retire in a warm climate. We are looking at a very uncertain future where we might not have social security, and the USA could very well be a 3rd world nation. You have to save for that future, not the future that your parents enjoyed.

Again, I based it on what people should be spending at a given salary level. If you spend too much, you cannot save for the future, and if you are like many Americans, you cannot even pay your bills. In the past decade, we have seen an enormous swing in wealth as Americans went from having large amounts of equity to now having large amounts of consumer debt. You cannot become independent, wealthy, or even debt free by spending more than you make.

The $40K family that needs two cars has three choices...earn more, do without, or drive some inexpensive vehicles.

-john-

Yes, but is this more than opinion?

What you think people should spend, or is there some objective reason to cap it at 1/5 income?

Please understand, I'm not saying you are wrong. I'm new at all this and I'm just wondering why you choose the numbers you choose.

Where is $60 000 a year salary a low income? 10 year old two storey maintained houses in the town I grew up in are selling for 120 000 to 150

000 where the average full time hourly wage is $12.63.

That's the town I lived in before and will return to again shortly. $60 000 a year is almost unheard of there unless you have 20+ years expierence and managment and a degree or two.

The Henchman wrote on [Tue, 29 May 2007 21:36:26 -0500]:

In many communities on the US coast, 60K is near poverty level.

Everything in financial planning is an opinion. Everyone behaves differently with money, and we have no way to see the future. All we can do is look at the past, and sort out behaviors that have worked, and those that have not.

My goal is to give people a 'kick in the assets' to show them how disastrous bad spending decisions can be over a lifetime. Yes, a person making $25K a year can easily get a 6 year loan to buy a $40K SUV or pick up truck. But is that a good wealth building strategy? Not at all. Do people do this? Yes, all the time.

A person making $25K a year might have $1000 left over at the end of the year after paying all their bills and taxes. I call that left over money your "annual profit". That means that the $40K truck represents 40 years of profit, or nearly a lifetime worth of work.

At the same time, I know people who earn $25K a year that end up with considerable profit at the end of the year. I know others who are driving very inexpensive cars. Both end up using very little of their annual profit to pay for cars. So, in the end, what you make is not the key number. You can be broke and in debt at almost any income level, and you can spend stupidly no matter how much you earn. What does count is how you manage what you have, and how much of your annual profit you are able to keep and invest.

What makes cars an especially bad purchase is that they drop in value so quickly. As a result, buying more car than one can afford is a key destroyer of personal wealth in the USA today. Far too many people have far more car than what they need or what is good for their wealth.

-john-

OK, so what past behaviors are you using to come up with the $80K/year figure? I may be sounding quite contrary here, but it's because my family only makes $40-50K per year (though we expect it to increase to $70K or so over the next couple of years.) Hearing that one needs $80K/year to "make it" is rather disheartening.

What is critical mass? What happens if they don't obtain it?

Elizabeth Richardson

Indeed. But someone making $60K/year and paying $3,600/year in rent is in a much better position to afford to spend $17K on a car than your hypothetical case.

"The sage needs nothing; not even life." --Raymond Smullyan

A key destroyer? I'm skeptical. As I've demonstrated in other postings, if you spend $17K on a car, most of that car's cost over its lifetime will

*not* be related to its purchase price.

I used to commute half an hour each way to work every day. I suspect that's less than average, but nevertheless, it meant that about 10% of the time when I was not working, eating, or sleeping, was in the car. (Figure 6 such hours each workday, 15 each weekend day, for a total of 60 available hours. Five hours a week commuting plus one hour driving elsewhere made six hours, which is 10% of 60 hours).

I do not think it is unreasonable to spend extra money to improve the quality of where you spend 10% of your free time. Of course it is also reasonable to think about how much money it is appropriate to spend, but I see no reason to assume that the right answer is "as little as possible."

I agree. We're talking about 17k here not 40. Personally I could go either way. In the past I have purchased the marjority of my Hondas high mileage (around 100k) for around $6000. In general, I must admit that I've had pretty good success with this strategy. However you cannot overlook the incidential costs especially the maintainance. If the OP expects the keep the used vehicle for 5 years, anticipate putting a few thousand into the car even if it's a Honda (timing belts, brakes, clutches, transmissions, exahust) and after all that, you'll probably have some body work to do. This is ok though because you'll "usually" still make out in overall savings vs buying a newer car. I say usually because there are cases where I've seen people spend 6-10k on a used vehicle then it become a major repair headache and may only give 3 years instead of 5 or 6. Most of these instances were with higher mileage domestic makes, not Hondas. The people that encountered these issues ended up buying a newer or brand new car subsquently anyway and most of them would have liked to have their 6k back to put towards that purchase. I think it is reasonable to consider the piece of mind associated with newer vehicles that are covered under the manufacturer's warranty.