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Your math is off - for TCO you should be counting financing costs, not the payment itself. You don't really get away from financing costs by buying cash, incid

Your math is off - for TCO you should be counting financing costs, not the payment itself. You don't really get away from financing costs by buying cash, incidentally: then they become the opportunity cost of not having the cash invested. I think people wildly overestimate how much you can save by driving a used car. Used cars are frequently overpriced due to demand for lower up-front costs and lower payments. Edmunds' five-year TCO for a five-year-old Corolla LE is $27095, for a new one it's $26634.

sokoloff 5y ago
The cashflow differences between buying an $8K car for cash and a $40K car with 20% down are the entire monthly payment [plus the required collision insurance], not just the interest charge portion. I'd wager that poor people are generally running their lives on a cashflow basis, not on an accrual basis. When I was a near-broke college student, that's how I thought. With regard to the savings of paying cash being offset by investment returns foregone, I also agree with that, which is all the more reason to save the $32K as above.
- buescher 5y ago
  Yes, that difference, as I pointed out, is one reason why sensible used cars are overpriced. (Another is the "market for lemons" effect) Now you're comparing a $40K new car to a $8K used car, which is not a reasonable comparison. Yes, used cars will save you some money, but they will generally cost you more money than driving a new Corolla or Civic. Poke around on Edmunds' TCO calculator. The problem with your argument is that you can save more and more money by imagining buying an even more expensive car to compare to. I mean, you could have bought an $80K car with 10% down, right? Now you saved $72K!!!
  - sokoloff 5y ago
    I took the average cost of a new car in 2020 or 2021. Make it a $28K new car instead of an $8K used car and you're still saving a ton of money even with a few repairs along the way. I know plenty of people who owe money other than a mortgage who are driving $50K+ cars/trucks and sometimes have more cars than drivers in the household (and both of those blow my mind for people with non-mortgage debt).
    - buescher 5y ago
      Why not compare it to a car you scrounged for free? I mean, I'm not just arguing with you to win points. I was you. By the way. there are other problems with your math: you're double-booking the cost of the payment and the depreciation of the car. Really, play around with a total cost of ownership calculator like Edmunds'. It will be enlightening. Let's look at the F-150, the most popular vehicle in America. For the regular cab XL 4WD trim level, a 2020 model is $38K (close to your $40k) with a five-year TCO of about $44K. A 2015 model is $24K... with a five-year TCO of $41K. That's a difference in TCO of $50/month. Hey, if you can save $50/month, do it, but don't tell me you're saving thousands every year.
      - sokoloff 5y ago
        One problem with that calculator is that it "rings up" the depreciation after 5 years, in effect assuming you'd sell the car at that point. Much of the savings here are driven by keeping the functional car for 10+ years, not having to carry collision insurance on a car that's too expensive to write off, paying less in transaction costs and taxes, etc. It's not the calculator is "wrong" in answering the question it asks, but that it's asking the wrong thing. Very few people want to buy an 11 year old car, so buying a 6 year old car and selling it 5 years later and doing the same thing again is overly penalized vs buying a 6-year old and selling it 10-15 years later (for much less), but only doing that once instead of two or three times. > Why not compare it to a car you scrounged for free? Because I can't repeatably find a reliable car for free. I can repeatably find many reliable cars for $8K in any city in the US. We paid $7500 for our 2005 CR-V in 2011. It was in overall great condition with high miles (165K-ish). It now has 220K miles on it and rust will kill it long before miles do (New England road salt). Edit to add: I agree that my method above was double-counting depreciation. I should have stuck to cash items rather than including a non-cash item.
        buescher 5y ago
        Yeah, if you want to take it out past 5 years, you can make your own estimates. You just won't have the benefit of Edmunds' data. You are right that you will save on transaction costs if you do not buy a newer car every five years. You're also a bit of a special case in that it seems you only put about 5,000 miles per year on a car. I'd estimate your TCO on that car to be about $2K/year, which is pretty frugal. It wouldn't make sense for you to buy a new car, because you'd be losing depreciation to age faster than you'd be wearing the car out. At 20 years, you'd have only 100,000 miles on a car that would be essentially fully depreciated. It is pretty tough, though, to get the cost of ownership on a car driven 15,000 miles/year below about $3,500/year. By comparison a new compact will be $5k to $6K per year in total cost of ownership. So if you are wondering why gold doubloons are not accumulating in the chests in your basement that much faster than they are for the guy who drives a new Honda Civic, that's why!
  - BeetleB 5y ago
    > but they will generally cost you more money than driving a new Corolla or Civic OK. Sorry. Your comment annoyed me enough to look up my actual expenses which I've been logging since late 2007, as opposed to hypotheticals. Between then and now, I've spent $6247 on maintenance and repairs of my cars. Note this includes standard stuff like oil changes and tire replacements. That's about $480 a year. If I extrapolate and go back to when I bought the first car, the estimate would be $8649 since 2003. How much did I pay for those two cars? $11200 total. They were reliable. I did two cross country trips in them, without worrying a bit. I didn't rent cars for road trips. So a total cost in the last 18 years of $19849. Had I bought new, and included standard maintenance[1], I surely would have paid a lot more. A new Camry in those days would already be over $20K. A Civic around $14K. And of course, insurance on old cars is cheaper. You'd think it's the other way round, but it isn't. Obligatory disclaimer: Research your used car models before you buy. If you don't, it will cost a lot more. [1] As a reference, my wife's almost new car has cost $3500 in repairs/maintenance in only 4 years. Yes - even new cars can end up being costly to maintain in just a few years.
    - buescher 5y ago
      Please don't apologize and please don't be annoyed. Like I told "sokoloff", I was you. I get it. "In this house we buy used cars for cash and drive them until the wheels come off." So of course I enjoy this topic. Let's look at your numbers. Say you bought two new Civics around 2003 for $28K total. Your maintenance & repairs should not be any higher for a new Civic than for any used car I can imagine. Let's assume gas is the same, and neglect transaction costs, finance costs, etc for now. So you have a difference over eighteen years for two cars of $16800 or $933/year. Per car, you saved $467/year or $39/month. Note we are also not considering that you could have kept the new cars on the road a few years longer. Also the insurance savings is minimal - figure you save $500/year for the first five years and then it's about the same when you go to liability only. That's another $139/year over 18 years or $12/month. Yeah, that's not nothing, but it's not the TONS OF MONEY that always gets mentioned in these discussions. Your wife's repair and maintenance costs look more in line with average than yours. Does she put a lot more miles on her car than you put on yours? I do agree that if you put a lot fewer miles per year on a car than average, a used car starts looking like a much better deal (see below).
imtringued 5y ago
> You don't really get away from financing costs by buying cash, incidentally: then they become the opportunity cost of not having the cash invested. I will never understand this logic. You do realize that this is investing on margin just with better conditions? At this point we are assuming that you already have an emergency buffer and no financial difficulty whatsoever. The reason why you should always finance your car even if your income is low is that you can build an emergency buffer that you can use on anything. If you have $30k in your bank account and buy a $27k car then you are only left with 3k. Any potential financial problems will force you to find a loan that very day. If your monthly payment is $500 your emergency buffer will last for years. If you invest that money you will have to compensate for any losses during that time frame by having enough income, it's as if you had $0 savings to begin with.
- buescher 5y ago
  No, you are taking out a mortgage on a depreciating asset and investing cash at your level of risk tolerance. If your level of risk tolerance is a savings account at 0.5% so you can always have an emergency buffer, that's fine. The argument is that to make an apples-to-apples comparison of total cost of ownership of one car and another, you should always include financing costs. They are basically your lowest cost of capital. Think of it this way: even if you're going to pay cash, leaving the finance cost in allows you some basis of comparision between the cost to you of putting say, $30K cash into a car versus putting $20K cash in. It's not exact but it's a useful simplification.

sokoloff 5y ago

The cashflow differences between buying an $8K car for cash and a $40K car with 20% down are the entire monthly payment [plus the required collision insurance], not just the interest charge portion. I'd wager that poor people are generally running their lives on a cashflow basis, not on an accrual basis. When I was a near-broke college student, that's how I thought. With regard to the savings of paying cash being offset by investment returns foregone, I also agree with that, which is all the more reason to save the $32K as above.

buescher 5y ago
Yes, that difference, as I pointed out, is one reason why sensible used cars are overpriced. (Another is the "market for lemons" effect) Now you're comparing a $40K new car to a $8K used car, which is not a reasonable comparison. Yes, used cars will save you some money, but they will generally cost you more money than driving a new Corolla or Civic. Poke around on Edmunds' TCO calculator. The problem with your argument is that you can save more and more money by imagining buying an even more expensive car to compare to. I mean, you could have bought an $80K car with 10% down, right? Now you saved $72K!!!
- sokoloff 5y ago
  I took the average cost of a new car in 2020 or 2021. Make it a $28K new car instead of an $8K used car and you're still saving a ton of money even with a few repairs along the way. I know plenty of people who owe money other than a mortgage who are driving $50K+ cars/trucks and sometimes have more cars than drivers in the household (and both of those blow my mind for people with non-mortgage debt).
  - buescher 5y ago
    Why not compare it to a car you scrounged for free? I mean, I'm not just arguing with you to win points. I was you. By the way. there are other problems with your math: you're double-booking the cost of the payment and the depreciation of the car. Really, play around with a total cost of ownership calculator like Edmunds'. It will be enlightening. Let's look at the F-150, the most popular vehicle in America. For the regular cab XL 4WD trim level, a 2020 model is $38K (close to your $40k) with a five-year TCO of about $44K. A 2015 model is $24K... with a five-year TCO of $41K. That's a difference in TCO of $50/month. Hey, if you can save $50/month, do it, but don't tell me you're saving thousands every year.
    - sokoloff 5y ago
      One problem with that calculator is that it "rings up" the depreciation after 5 years, in effect assuming you'd sell the car at that point. Much of the savings here are driven by keeping the functional car for 10+ years, not having to carry collision insurance on a car that's too expensive to write off, paying less in transaction costs and taxes, etc. It's not the calculator is "wrong" in answering the question it asks, but that it's asking the wrong thing. Very few people want to buy an 11 year old car, so buying a 6 year old car and selling it 5 years later and doing the same thing again is overly penalized vs buying a 6-year old and selling it 10-15 years later (for much less), but only doing that once instead of two or three times. > Why not compare it to a car you scrounged for free? Because I can't repeatably find a reliable car for free. I can repeatably find many reliable cars for $8K in any city in the US. We paid $7500 for our 2005 CR-V in 2011. It was in overall great condition with high miles (165K-ish). It now has 220K miles on it and rust will kill it long before miles do (New England road salt). Edit to add: I agree that my method above was double-counting depreciation. I should have stuck to cash items rather than including a non-cash item.
      - buescher 5y ago
        Yeah, if you want to take it out past 5 years, you can make your own estimates. You just won't have the benefit of Edmunds' data. You are right that you will save on transaction costs if you do not buy a newer car every five years. You're also a bit of a special case in that it seems you only put about 5,000 miles per year on a car. I'd estimate your TCO on that car to be about $2K/year, which is pretty frugal. It wouldn't make sense for you to buy a new car, because you'd be losing depreciation to age faster than you'd be wearing the car out. At 20 years, you'd have only 100,000 miles on a car that would be essentially fully depreciated. It is pretty tough, though, to get the cost of ownership on a car driven 15,000 miles/year below about $3,500/year. By comparison a new compact will be $5k to $6K per year in total cost of ownership. So if you are wondering why gold doubloons are not accumulating in the chests in your basement that much faster than they are for the guy who drives a new Honda Civic, that's why!
- BeetleB 5y ago
  > but they will generally cost you more money than driving a new Corolla or Civic OK. Sorry. Your comment annoyed me enough to look up my actual expenses which I've been logging since late 2007, as opposed to hypotheticals. Between then and now, I've spent $6247 on maintenance and repairs of my cars. Note this includes standard stuff like oil changes and tire replacements. That's about $480 a year. If I extrapolate and go back to when I bought the first car, the estimate would be $8649 since 2003. How much did I pay for those two cars? $11200 total. They were reliable. I did two cross country trips in them, without worrying a bit. I didn't rent cars for road trips. So a total cost in the last 18 years of $19849. Had I bought new, and included standard maintenance[1], I surely would have paid a lot more. A new Camry in those days would already be over $20K. A Civic around $14K. And of course, insurance on old cars is cheaper. You'd think it's the other way round, but it isn't. Obligatory disclaimer: Research your used car models before you buy. If you don't, it will cost a lot more. [1] As a reference, my wife's almost new car has cost $3500 in repairs/maintenance in only 4 years. Yes - even new cars can end up being costly to maintain in just a few years.
  - buescher 5y ago
    Please don't apologize and please don't be annoyed. Like I told "sokoloff", I was you. I get it. "In this house we buy used cars for cash and drive them until the wheels come off." So of course I enjoy this topic. Let's look at your numbers. Say you bought two new Civics around 2003 for $28K total. Your maintenance & repairs should not be any higher for a new Civic than for any used car I can imagine. Let's assume gas is the same, and neglect transaction costs, finance costs, etc for now. So you have a difference over eighteen years for two cars of $16800 or $933/year. Per car, you saved $467/year or $39/month. Note we are also not considering that you could have kept the new cars on the road a few years longer. Also the insurance savings is minimal - figure you save $500/year for the first five years and then it's about the same when you go to liability only. That's another $139/year over 18 years or $12/month. Yeah, that's not nothing, but it's not the TONS OF MONEY that always gets mentioned in these discussions. Your wife's repair and maintenance costs look more in line with average than yours. Does she put a lot more miles on her car than you put on yours? I do agree that if you put a lot fewer miles per year on a car than average, a used car starts looking like a much better deal (see below).

imtringued 5y ago

> You don't really get away from financing costs by buying cash, incidentally: then they become the opportunity cost of not having the cash invested. I will never understand this logic. You do realize that this is investing on margin just with better conditions? At this point we are assuming that you already have an emergency buffer and no financial difficulty whatsoever. The reason why you should always finance your car even if your income is low is that you can build an emergency buffer that you can use on anything. If you have $30k in your bank account and buy a $27k car then you are only left with 3k. Any potential financial problems will force you to find a loan that very day. If your monthly payment is $500 your emergency buffer will last for years. If you invest that money you will have to compensate for any losses during that time frame by having enough income, it's as if you had $0 savings to begin with.

buescher 5y ago
No, you are taking out a mortgage on a depreciating asset and investing cash at your level of risk tolerance. If your level of risk tolerance is a savings account at 0.5% so you can always have an emergency buffer, that's fine. The argument is that to make an apples-to-apples comparison of total cost of ownership of one car and another, you should always include financing costs. They are basically your lowest cost of capital. Think of it this way: even if you're going to pay cash, leaving the finance cost in allows you some basis of comparision between the cost to you of putting say, $30K cash into a car versus putting $20K cash in. It's not exact but it's a useful simplification.