It sounded like a yak had taken residence in my garage. From their respective driveways, my neighbors’ heads immediately turned toward the chaos to see what was amiss. I took a deep breath and slowly backed my 15-year-old car, with 200,000 miles on it, out of my garage, fresh off its primal scream that awakened it every morning.
“I think it’s time,” I offered to my wife as we sunk down in our seats.
My personal philosophy has always involved paying cash for a lightly used car, then driving it until the doors fall off. But the tough part involves determining which repair should be the last repair before switching cars altogether. Holding onto an older car and driving it until it dies can be a practical approach to mitigating transportation costs. Until it isn’t. At the snap of a belt or the crack of a valve, your entire reality can change in a very bad way.
What makes this decision point incredibly frustrating is that a car, in most cases, is a depreciating asset. It’s worth less with each passing mile, and sinking money into something that is diving in value can seem ludicrous. It’s quite possible you’re driving a car around that’s worth close to nothing. Yet the fact that it still works reasonably well makes it valuable to you. But this is where things can begin to go horribly wrong.
The advent of YouTube has helped drivers get more miles out of dying cars, because many videos for “simple” repairs are available for anyone to view. An $8 part combined with a seven-minute video and two hours of work can save someone hundreds, if not thousands, of dollars. This still doesn’t change the reality of having an expensive part break or the need for an expert-level fix.
There are a number of reasons you might want to consider ditching your older car for a newer one, and the reasons aren’t always limited to repairs. For instance, if your older car gets 20 miles per gallon of gasoline and a hypothetical newer car gets 35 miles per gallon of gasoline, the fuel cost savings alone might make the switch worth it, especially if you are a high-mileage driver. At $3 per gallon for a 30,000-miles-per-year driver, a more fuel-efficient car offers about $2,000 in annual savings.
When considering a car change, take time to determine what it really costs to drive your car over the course of one year. This includes fuel, regular maintenance like oil changes, and the tough-to-quantify category—repairs. Draw a line in the sand by setting a dollar amount that would trigger the need to get a different car. For example, putting $4,000 in repairs into a car worth $1,500 doesn’t make a ton of sense, especially if you’re going into debt to make the repairs.
The next step is to determine what you have at your disposal to solve the problem. In other words, do you have discretionary income available or money saved? And if you need to borrow, is your credit up to the task?
You essentially have three options: Buy a lightly used car, buy a new car, or lease a new car. If you’re forced to buy a heavily used car to replace your heavily used car, you might risk even more unknown, involuntary repairs.
Car strategy is highly personal. I know multimillionaires who refuse to drive a nice car, I know hundredaires who refuse to be seen in anything other than a luxury car, and I know just about everyone in between. If you choose to make a car payment part of your monthly budget, limit the entire transportation category (including fuel, insurance, maintenance) to 15% of your net monthly income. Dedicating more than 15% to a depreciating asset is hard to justify, especially if you are working on other financial priorities.
The moment you come to the conclusion that your car is both worth nothing monetarily and valuable to your financial life, you must begin to craft a plan to solve the inevitable problem on the horizon. Start making room in your budget for a payment, especially if you don’t have more saved.
Is this easier said than done? Of course it is, but that doesn’t mean it’s not the appropriate course of action.•
Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to email@example.com.