FINANCIAL FRESHMAN #072

TL;DR → With dealerships often marketing to recent graduates, there are a number of things you should know before you ever pursue buying a car. Cars depreciate in value quickly, and should never be considered an asset. You should define your needs well, let someone else pay depreciation, and always buy the most cost-effective, reliable car that makes sense for your situation.

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The Holiday Car Dream vs. Reality

Last week we discussed The Psychology of Money, and talked through several finance tips that can help you escape an endless cycle of expensive, materialistic upgrades. We also set the stage to talk about one of the largest and most important purchases you’ll make in your adult life—your car.

The holidays are upon us, which means that car dealers everywhere really want you to do two things:

• Skip straight past Thanksgiving (gift time!)
• Surprise your significant other with a brand new car, and don’t you dare consult them about it first

Just kidding, please don’t do that. Instead, start learning the car-buying process today. Graduating from college brings independence, and dealerships try to capitalize on that with discounts for students and recent grads along with messaging that makes it feel like you’ve earned a new car.

The reality is that buying a car is a major financial crossroads that you should certainly slow down for. Let’s use this post to make you something that no car dealership ever wants you to be—informed.

The Reality of Car Value

Before buying a car, one of the most critical lessons to learn is what happens to the value of it once you drive it off the lot. The answer, as you may know, is not a good one.

Data from Kelly Blue Book highlights that a new car can lose 20% of its value in the first year of ownership, and half its value after five years.

When you purchase a car, you should immediately think about your exit strategy, and this is why. Do you intend to drive it until the wheels fall of? Will you want to sell it and upgrade at some point? If your answer to the second question is “yes,” just keep in mind that you may get stuck paying for the depreciation indicated by this graph.

The Asset Myth

Among other things, this significant depreciation highlights another fundamental truth that you should know before buying—vehicles are not assets.

Could you at any point turn your daily driver into cash? Sure. But if that makes your car an asset, then so is your refrigerator and your phone. You will not be able to sell your car for profit, and it will also not make you money while you own it. In fact, owning it will actually cost you a fair amount.

Consider the figures from this table below, where we’ve outlined the estimated annual cost of owning a 2021 Honda Accord, as an example.

On top of your $415.83 car payment, in this example, we can plan to spend almost $2,500 additional dollars just to insure and maintain this car. The state you live and the condition of the car will certainly influence these numbers, but you should plan for all of them (not just your monthly payment) before signing on the dotted line.

Your Buying Options

To simplify the buying process a little bit, consider that there are only five different ways to procure a car to use as a daily driver.

As a potential customer, you’ll have to decide whether you’d like a new or used car, and your financial picture will determine whether you will pay in cash or finance. If this is your first time buying a car, #1 is likely not on your radar, and #3 may be a stretch too if you don’t have savings built up just yet.

This is one of those areas where personal finance becomes very personal, so it will be up to you to determine what works for your situation. In the final thoughts of this post however, I’ll provide a good framework to help you navigate the choice itself.

The Dealership Playbook

Regardless of the route you take—new or used, cash or financed—you should know that dealerships are ready to target students with a set of well-practiced tactics.

• One common approach is the low monthly payment trap, where they advertise an enticingly small monthly cost, but longer loan terms that inflate the total price significantly.
• Emotional appeals are another tool, using phrases like “you’ve earned it,” “freedom,” or “adventure” to connect your purchase with your newfound independence from graduation.

Dealerships also push upsells and add-ons, including gap insurance, extended warranties, and service packages. This is the psychological phenomenon of anchoring in action, as your brain may quickly think “what’s another $100, when I’m already spending thousands?“

The key is to pause, and ask yourself “do I really need this?” Evaluating all the details critically can prevent unnecessary spending and help you make a smarter financial decision.

Final Thoughts & Our Car-Buying Framework

I’ve been objective at this point, simply trying to outline some pieces of knowledge that you should take with you when you go buy a car. That said, I do believe in a specific car-buying framework. Call these Financial Freshman’s three tenets of car-buying, if you will.

Take these tenets to heart, and happy driving!