Buying a car can be a stressful, time-consuming exercise. Have you experienced the kind of stress I’m talking about?
I’m going to share our recent car replacement experience and use it as a springboard for discussing the tenets we follow in this arena, which I believe have helped us be pretty darn successful. If you haven’t checked our net worth posts, you can get those here, or you can see the latest as of today:
What is Success?
It’s different for everyone. For some, it’s having just one car. Some, having none because they live in an area where public transit is legit, or biking/walking is a safe option. Still, for some folks it’s leasing (under very specific circumstances), or even having a loan payment under a certain amount. I really don’t recommend the latter because I believe so strongly in having as much free monthly cash flow as possible. All that to say: it’s up to you to define success, especially in the area of car ownership because the money implications can swing your financial posture from “O-K” to “OH-Crap Nuggets”.
For us, success is that we own two very reliable cars that meet our needs, in great condition, and with no auto loans:
- 2011 Honda Accord (65K miles)
- 2006 Honda Odyssey (130K miles)
- 2004 Honda Element (127K miles) – recently replaced (details follow)
We didn’t start out this way, especially during our debt payoff phase. Cars were the least of our worries at that time. In fact, we did what we could to downsize and get by with MUCH less. Our primary goal while paying off debt was simply to have cars that got us from point A to point B, and safely.
Perspective is Important
I want to emphasize that, especially if you are in debt-payoff mode, having two mid-sized cars with low mileage may not be your best scenario for now. Especially not Honda, since they are known to hold value pretty well and would come at a premium over other comparable brands.
In fact, if you are in debt-payoff mode, cars are an area where you can save a TON of cash to put towards your debts, if you choose.
I think any beater sedan should get the job done, and the cheaper the better. Reliability is always a concern. You don’t want to have continuous car issues, and safety is important. If you have kids, safety becomes a larger concern of course. Aside from traditional car search options, something to consider is asking around with your friends and extended family for a known-reliable car that is cheap and ugly. Utilize your social network even. You’d be surprised; it doesn’t hurt to ask.
Our best beater was my wife’s college driver. It was a 1994 Mitsubishi Mirage, and it cost her $1,100 plus an additional $900 for a working transmission. I couldn’t find a picture, but it looked exactly like this one I found on the interwebs:
This thing got 28 miles to the gallon, and hit a top speed of about 65mph before things started to get shaky. After we got married, I drove this car to and from work. My maniacal laughter could be heard for miles as I reveled in our savings.
Now, I actually think it could be helpful to compare your situation to mine. Neither of my cars are fancy. Rich people, rich habits, all that jazz. If you’ve got better wheels than me AND you’re in debt, well then you might have some cash tied up in them that you could free up and use to pay off some debt. Just sayin… I’ll show you an example of how I did that later in this article.
The following are the pillars we try to live by when it comes to buying cars:
Pillar 1: Never Pay Full Price (or asking price) For a Car
If you pay full price, you’ve paid too much. If you pay asking price, you’ve paidtoo much! Think about it. When you post something for sale, do you put your rock bottom price on the tag? Heck no. You put your target price, and you might even put a higher price (than your target) because you expect people to bargain.
So… someone comes along and pays full price for your item. Have they left money on the table? 100% yes. Because you were willing to take less money, and all they needed to do was ask (confidently).
The same is true for you as the buyer, and that’s why we don’t ever pay asking/full price for cars. Say it with me.
Pillar 2: Never Buy a Brand New Car
If you are completely new to personal finance advice, this is one of the top tips you will hear over and over. I most definitely attribute a significant portion of my success with money to the fact that I refuse to buy cars new off the lot.
Quick stats for you, according to Edmunds.com, the average car loses 11% of its value after leaving the lot. That same car loses 15%-25% of its value each year in the first 5 years. At the 5 year mark, the car is worth about 37% of its original purchase price. If that doesn’t get your goat, I don’t know what will. Seriously, does a vehicle sound like a great place to store money? I mean, some people store it in stock, some choose to store their money in real estate, but new vehicles?
Sounds like a clear loser to me. How about let someone else turn the key and eat the depreciation. Then, buy it from them a few years later. We try to buy ours at 4-5 years of age with average miles; or older if they have lower miles.
Pillar 3: Wait a Few Months Before Purchasing a Car
This one isn’t hard and fast, because killer deals can come at any time, but honestly give it a try.
We don’t make purchases in a hurry. When we decide that we want to change vehicles, we simply change modes from “not really paying attention” to “ear to the ground, looking for deals”. We check cargurus.com and other internet sites to see what’s out there. Spend a few weeks doing research on the models and features, and generally get an idea of what good and bad prices are. My brother-in-law happens to be a mechanic so I let him know that we are looking for something and ask him to let us know if he sees anything that we might like.
Then, we go into cruise control (ha!). A good deal will come around eventually. When you buy in a rush, you almost always do so at a premium. There is typically a price for convenience. In return for paying more, you don’t have to wait as long. For some people, it’s worth the extra cash. Everyone’s situation is different, but I think potential savings can be between $500 to $3,000 if you wait on the right deal to come along.
Pillar 4: Pay Cash For Cars
This is just a no-brainer, guys. If you aren’t in a position to do this, well, then you shouldn’t be buying a car right now. If you are in a situation where you have absolutely no choice (and this does happen, but you have to be honest with yourself), then so be it. But understand that tying up your monthly paycheck with a car payment is absolute. madness.
I’m not saying that your situation isn’t difficult. I realize it may be, and believe me, I’ve been there. I’m saying that you need to acknowledge that car payments are a cancerous tumor with regard to your cash flow and your peace of mind. Paying cash for your cars is key to creating stability and getting you out of a vicious cycle of debt.
If you’re interested in learning more about how to accomplish this, check out these articles where I give step-by-step guidance:
Pillar 5: Prepare for Negotiations
This is just straight forward negotiation advice. You can skip that MBA negotiations course because my company spent good money for me to be able to sum it up for you here.
If you haven’t read at least ONE book to improve your negotiation skills, you should check out Getting to Yes. This book was the cornerstone of my MBA Negotiations course.
Click here to pick up a copy of the audio or paperback, and I receive a commission.
Hope you enjoy it!
If you are like me, and you read/listen to at least two to three books on a new subject to get different perspectives, then here’s the other book we had to read during my MBA coursework:
It’s called Bargaining for Advantage. One of my favorite quotes from the book was:
“To be good, you must first learn to be yourself at the bargaining table.”
It’s so true. A critical part of a negotiation is building trust with your counter-part, and if you cannot do that, you will have a very difficult time making progress or closing the deal.
Click here to grab a copy of the audio or paperback for Bargaining for Advantage. (referral) Thanks and hope you enjoy it!
Negotiations was one of my most favorite subjects in both bachelors and masters degrees. Extremely applicable to daily life – think about it…you have probably 20-30 negotiations each day, and we did a lot of negotiating in the actual course, which was an absolute blast.
If you are already a STELLAR negotiator and don’t need no stinkin advice. Click here to skip this topic.
Prepare, prepare, prepare. Never walk into a negotiation, car or otherwise, without having done these steps:
When I say “write it down”, I mean actually sit down and get this stuff on paper. It’s good for your brain, and if you’ll be handling negotiations over the phone, you’ll have a reference when things get hot or you get frazzled.
Write this stuff down!:
1. Your BATNA (best alternative to a negotiated agreement). What is your reality if you can’t make a deal for this car?
2. The seller’s BATNA. What is their reality if they can’t sell you the car? Tip: At the very least, it’s that they can find another buyer. But look for other clues, either in the ad, or the type of car, any damage or wear and tear. Maybe they’ll have a difficult time selling it, and you know it? Maybe they are in a rush to sell it, and they don’t have time to look for other buyers?
3. Your interests. What are your top interests? Safety, price, color, body style, navigation, back-up cam, leather, power everything, etc. If you really want leather, and the car doesn’t have it, let the seller know that. These types of things help to mentally chip away at the perceived value of the car, in the seller’s mind. It doesn’t matter that the car has inherent value, regardless of your favorite color.
The point is that when you state your offer (especially if it’s lower than asking price), you need to have good reasons for that, and this is where your preferences DO matter. At the very least, it softens the blow the seller feels when they hear an offer, lower than asking price, leave your lips.
4. The seller’s interests. Does the seller list (or have they shared) their interests? Sell quickly (as in today), prefers cash, etc. For example, if you have cash, that can make a big difference to the seller. They could be willing to drop the price for a cash offer. Another thing sellers typically like is the promise of a buyer swooping in, buying the car, and being done with the whole ordeal. So use flexibility and quickness to help add value to your offer which can translate into a discount on price.
A good sounding offer (assuming a list price of $4000) which utilizes this trait would be, “I’d like to come by this evening and take it off your hands, $3500 cash in your pocket. Let me know, and I’m on my way.” This is the sound of a serious buyer, and a seller is bound to be enticed by the promise of a quick, no hassle deal.
5. Your target outcome (price). What is your ideal spend? This one is pretty self explanatory. It’s what you think would be a great deal for you. Try to be realistic here by looking at comparisons in the market.
6. Your reserve outcome (price). What is your MAX spend? ALERT! ALERT! This is a critical detail! If you write nothing else down, please write this down on your palm. This is the price that, with a calm/cool/math-based head, you have figured you will not go over. Anything over this price is mathematically a bad deal. Burn this number into your brain before starting a negotiation. Small note, do not tell the seller your reserve price.
Enough Already – Our Replacement Car
We have been toughing it out with our Honda Element (pictured below) for long enough, and it’s TOUGH to get kids in and out of that thing. The backseats are set back from the side-doors just enough that you can’t really put kids in the seats without climbing into the car yourself. Imagine doing that each and every time you want to put kids in or take them out… shoot me.
Mrs. DFG is a trooper. She put up with it for several years and even urged me “not to worry about it, it’s not that bad.” At some point, she finally broke down and agreed that she was ready to “upgrade” to a mini-van. Well, it might have had something to do with the fact that she rode in one and experienced the automatic sliding doors.
Side note – this seemingly minor detail is not insignificant. My wife is a natural saver. I cannot express how critical this has been to our success with money. Mrs. DFG always comes at our purchase discussions from a frugal perspective. Even in the case of me offering many times to find her a more appropriate car, an upgrade, she didn’t bite. Most people jump at the opportunity to change cars. It can be an exciting feeling to get a new toy.
Once we agreed that it was time to start looking, we didn’t just go buy a van. From the time we decided to get a van, it was probably 6-8 months later that we actually bought one.
I mentioned it earlier, but I want to emphasize that a key to the success of this car replacement was this: We didn’t rush to buy our new vehicle.
We began looking and waited for a good deal to present itself. And it did. My brother-in-law called me up one day to let me know that he had come across a van (at a small dealer) that was in good shape and met all of our criteria.
Here were the stats:
- 2006 Honda Odyssey
- 128,000 miles
- Very clean interior and exterior
- No mechanical issues
- Needed brakes, wiper blades, servicing, some other details
- Valued between $4,500 and $7,000 (KBB dealer pricing)
- Asking price: $6,000
The Deal in Review
We bought the Odyssey for $5,500, all-in cost of $6,275.
The dealer offered to lower the price if we’d come get it that week. We paid cash (plus $275 tax) and another $500 for some small maintenance tasks.
We sold the Element for $5,000 in 10 days.
We posted our 2004 Honda Element on Craigslist and Cargurus on Feb 1st, and it was sold (cash-in-hand) on Feb 11th. Our asking price was $5,500, and a buyer offered to come same-day and pay cash if we knocked $500 off the price.
Net Car Replacement Cost: $1,275.
[All-In Cost] – [Sale of Element] = [Net Cost]
$6,275 – $5,000 = $1,275
After all said and done, we spent just $1,275 to change from an older car to a newer, more functional car for our family.
Cost of Transportation Over 5 Years: $400 per year!
Another awesome detail is that we bought the Honda Element for $7,000 in 2012. So, selling it in 2017 for $5,000 means we only paid $400 per year (or $34 per month) to drive it for five years. Not too shabby.
Cost Avoidance: $11,000 (WHAT!?)
Ok, stick with me on this one, and you will see a concrete example of car depreciation and how it can…
Here we go:
In 2012, I sold my 2007 Audi A4 2.0T Quattro for $18,000. Since I owned the Audi free and clear, this was $18K in cash.
I used $7,000 of that cash to buy a 2004 Honda Element and took the remaining $11,000 and paid down our mortgage.
In 2017 (present day), I sold the 2004 Honda Element for $5,000.
Here’s the kicker:
In 2017 (present day), a 2007 Audi A4 2.0T Quattro has a private party value of $5,300.
If I had kept the Audi all the way through to present day, I would have missed out on that $11,000 mortgage reduction. Instead, $11,000 of my hard-earned money would have dissolved in a depreciation suck-fest.
However, I made the decision to dump my luxury car, pull my cash out of it, put just $7,000 of my cash back into the “car market” where it would depreciate only $2,000 over the next five years (instead of almost $13,000). So yes, I did experience some depreciation, but not too bad!
Pictured above is my old Audi. This is literally a bad investment vehicle… Ha!.
What you’re seeing is the culmination of all the things we’ve talked about: patience in finding deals, buying with cash, negotiating for discounts, and buying used.
As you do these over and over, you’ll find that your savings and success compounds with each deal.
For example, because over the last two years I had been saving $300 per month for our next vehicle, I had saved up $7,000 to contribute toward a “new” car. Well, with how the deal went down, I only needed about $1,275, leaving me with $5,725 to keep saving for our next replacement (which is at least 4-5 years out).
I’ve lowered our monthly savings rate recently to $150 per month, so by then, I should have another $7-$9,000 saved on top of the current $5,725. It’s so much cash that I’ve decided to invest it in an index fund and put that money to work rather than let it collect dust in a savings account.
Not a bad problem to have, right? This can be your story as well.
Next Steps: Analyze Your Situation
I just shared the fine details of our success with cars over the last half-decade. To say that discipline and financial savvy with cars has made us rich would be … SPOT ON.
Not having car expenses as a distraction in our finances has enabled us to get to the juicy wealth building activities MUCH faster, and as you know, time is everything. The sooner you can start, the better.
Here’s the thing. My situation isn’t extremely unique. Most people out there have ridiculous cars they are paying a high premium to show off, just like I was. They just aren’t seeing the opportunities I saw, and hopefully what you can see. That’s the key difference.
What is your situation? Do you see an opportunity to boot a luxury car in exchange for some serious debt reduction? What about the chance to save money or be prepared to pay cash on an upcoming purchase?
If you enjoy winning with money as much as I do, please share this on Facebook and Twitter, and also subscribe to my weekly recap.
Seeya next time!
Get Your Act Together.
Are you ready to get out of debt and get more out of life?
Sign up to get a weekly digest of new posts and pro tips!