In Love with a 1996 Saturn

You can probably guess the big reasons people file bankruptcy. Medical-related expenses top the list, along with job losses, divorce, and predatory lending costs. But another one might be sitting in your driveway.

Everyone knows the old saying that a new car loses a lot of value as you drive it off the lot. We still love to drive them off, don’t we? But if you start focusing on the day-to-day cost of the shiny new car, you can fall in love your old car all over again.

There are plenty of finance columns that discuss the problem with upside-down — owe more than the car is worth — financing. And if you are reading such columns, you’re half-way back to controlling your finances rather than being controlled by them. But there’s something about cars that make us lose our minds, most folks just wouldn’t be seen in an older car.

My ‘96 Saturn has well over 100,000 miles, with hail damage, chipping paint, and an iffy electrical system. What makes up for all that? It’s paid for! Although I represent people “going broke,” I could buy a new car every so often and I might do so in the near future. But my goal will be to pay cash or almost all cash. That’s easy for a big-shot lawyer to say but hard for real people to do, right?

Not really, this is how I’m doing it and I see folks every day who could too. Now don’t panic, but here come the numbers. It won’t hurt much, I promise.

Last year the average new car price was $28,400. With $1,000 down payment and a six-year loan at 8%, you’d pay over $480/month. That’s over $35,000 for the car after all those payments, before gas, repairs, and movies for the DVD player the kids insisted on.

OK, assume this is your current car deal and you’re making it. But it’s almost paid off. You’re looking at a car with some dings in it. It’s out of warranty at almost 100,000 miles, and it’s starting to cost you every year, besides the outrageous gas prices.

Those new cars are beginning to look good, aren’t they? So maybe trade this one in, get a new warranty, new paint job, new tires, and that new car smell! Time to be un-American. Keep this car and learn to love it.

But keep making the payment anyway — this time to yourself. (Don’t “trust” yourself — set up an automatic deduction from your checking into a savings account.) In five years, without earning any interest, you could save $28,800, or the price of the same car in cash.

Ah, you say, but the old car is going to cost more to maintain and will be unreliable. Plus, admit it, it’s not bright and shiny anymore. There’s nothing wrong with admitting to yourself that how it looks matters to you. You should admit this matters so you don’t use the other issues as a smoke-screen. So, say it with me, “a new car makes me feel good!”

True, it’s going to cost more to drive an old car and it looks like crap. I know, 11-year old Saturn, remember? So let’s assume you have $2,500 of added car maintenance costs each year because it’s older and out of warranty. That’s about $208/month or $12,500 over a five-year period that would probably come out of the savings you were putting in the bank. OK, so your savings after five years is really only a little over $16,000. But that number is artificially low because you will gradually be able to make more on the savings invested — you will be able to earn, rather than pay, interest! And the taxes and insurance on an older car are lower, so you’ll have more disposable income for your other expenses.

But let’s ignore the other savings. Focus on the $16,000. Suppose you want to buy a new car now. Assuming you get nothing for your old car as a trade-in (so you keep it as back-up transportation — no more rentals when the new one is in the shop!). You still have $16,000 to put down on the new car. This time you find a reasonable car for $28,000. And you plunk down the $16,000. So you borrow $12,000, say it’s another 8% loan but this time you can afford to go shorter — make it a four-year loan. Your payments would be about $293/mon. And you can keep putting money aside into the future car savings account, now only about $187/mon.

At the end of the new car loan you’d have $8,976, again without interest (you really should switch banks!). And, hopefully, you can start the cycle again. Keep this car for 11 years (like mine), this time you have seven-years of no payments. Ignoring that you might still have a warranty to help out and assuming your maintenance costs were still about $2,000/year, you’d save about $22,850 net, without interest. Your next car after that is almost paid for and suddenly the future car savings account is looking more like a wealth machine. Economists call something similar to this a “virtuous cycle.” I call it controlling, not being controlled by, your life.

And all this assumes you buy the “average” priced car, new. Not a lower-priced new or used car. When you start doing this calculation with much less car than you can afford, the savings starts looking like enough to buy new homes or college for the kid.

Modern cars are well-enough designed in most cases that you ought to be able to get a decade out of them, if you do the maintenance. That’s not the problem. It takes discipline — you have to save the money, not spend it on other things. It takes prioritizing — you have to buy less than you can afford because something else might be more useful. It takes focus — you have to care more about finally saving money and being in control of your life than you do about image. Money in the bank is a huge confidence-builder. And your old car can put it there.