How to keep the “new car excitement” from costing you dearly
Q: We need a new car and have just started looking. With the price of fuel unstable, and the job market uncertain, do you have some suggestions to help us not waste money? - H. K., Idaho
A: New car excitement can cost you a small fortune over your lifetime. That’s money that could go a long way toward buying a home or funding your retirement nest egg.
A lot of people, when buying a car, focus solely on price and overlook the hidden costs. They rush into negotiating a deal without knowing how a car fits into their budget over the long term.
Because an auto is a major expenditure, it’s wiser to get control of your excitement and take the time to make a sound financial decision. Here are some ideas to help you do just that.
1. KNOW YOUR VEHICLE BUDGET
First determine what portion of your monthly household budget can be devoted to operating and paying for your car, and how much cash you’ll have for a down payment.
Look forward several years to make sure you can afford the car you select today and tomorrow. Don’t buy a new car that you won’t be able to afford next year or that your family will soon outgrow.
2. DO A COST COMPARISON
To help you compare several cars including hybrids, do a cost comparison. You can do this using paper, pencil and a calculator, or a computer spreadsheet.
Start by listing the:
- Invoice price
- Dealer profit (premium)
- Add-on costs
- Sales tax (when applicable)
- Less any credits
Add these up to equal the total purchase cost.
Estimate how many miles you drive each year and how many years you plan to hold the car. Multiply the number of years by the estimated annual costs of the following items:
- Registration, license fees and property tax
- Financing cost
- Auto insurance cost
- Fuel cost
- Maintenance and repairs
Add these up to equal ownership costs.
You can get this information from auto dealers and brokers, and from online sources such as www.edmunds.com. This particular Web site allows you to specify the year, make and model of a new or used car so you can get detailed information. It also gives you a five-year “true cost of ownership” estimate.
Now get an estimated trade-in value for the car at the end of its term from the above sources. Add your total purchase cost to your estimated ownership costs. Then subtract your estimated trade-in value from that figure. This will give you your total cost of ownership.
Divide this dollar amount by your estimated mileage and you’ll have an average cost per mile for each car you are considering. It’s a lot of math, but well worth the exercise.
3. LOOK FOR BETTER VALUE
Buy late in the model year: You may actually be able to get a better car by buying late because the dealer needs to sell inventory to make room for the new cars.
Be aware, however, that buying a car late in the model year accelerates the car’s depreciation. At the end of one year’s driving, your car will be considered 2 years old, and worth less than a 1-year-old car.
Buy a good used car: Because cars depreciate more rapidly in the first few years of use, your best value often might be a 2- to 3-year-old car that is in good mechanical and cosmetic condition. (You can get a report on a particular car’s history at www.carfax.com or www.autotrader.com.) This way, someone else has paid for the large initial depreciation. By using this strategy over your car-buying lifetime, many people accumulate the cash needed to fund several years of retirement.
4. NEGOTIATE FROM STRENGTH
Always, always, always negotiate on the price of the car, not on the monthly payments. The auto dealer may try to convince you to buy a car based on low monthly payments, but this can be misleading. Make it clear from the start that you are interested in getting the best price. Talk about your trade-in after you get the best price.
Don’t rush to a car lot without doing homework. Predetermine the price range you will pay for your car in advance. Take your time with negotiations; don’t feel pressured by salespeople.
Don’t be afraid to ask for a lower price. The dealership will not sell you the car if it’s not profitable.
Shop at several dealers, auto brokers and online; one may have a stronger motivation to accept your offer or give a better price.
If you are going to take out a loan to pay for the car, arrange financing with your bank or credit union before you go shopping. Some dealers may be able to offer you a great financing deal, so know what’s available beforehand.
5. GET THE WORTH OF YOUR USED CAR
Your used car may represent a major part of the down payment. Find out what it is worth using some of the sources mentioned above. Selling the car yourself will likely get you a higher price than trading it in, but many people prefer to avoid the hassle.
Either way you decide to sell your car, fix any minor repairs needed and show the car clean and polished. Also, you may want to explore giving your car to a favorite charity and receiving an income tax deduction for its fair market value.
CHECKLIST FOR BUYING A CAR
|
RESOURCE CENTER |
This information is brought to you by The NAEPC Foundation and Noverus, your financial and estate planning partners. © Copyright NAEPC, The NAEPC Foundation, Noverus and Valentino Sabuco, CFP®, AEP®.
