If you are going to own a vehicle, you will pay for depreciation. It is one of those unavoidable expenses which, like termites, will quietly and secretly gnaw away at your financial foundation.
Depreciation expenses are especially sinister because they remain in the background (who actually writes “vehicle depreciation” into his budget?) and are therefore all too often ignored. If you are looking for ways to save money and tackle this silent parasite, these three tips will help:
1. Buy used instead of new.
Research found at Edmonds.com indicates that new cars will lose 60% of their value in the first five years of ownership. A $30,000 car, therefore, will be worth $12,000 in five years — a depreciation of $18,000.
However, by opting for a used car, a savvy buyer can allow the original owner to throw that $18,000 down the black hole. Assuming that the five year old car depreciates 40% over five years, the depreciation expense will only be $4,800 … a savings of $13,200, or $220 a month. I realize that new versus used is not comparing apples to apples, but $220 a month is worth considering.
2. Buy new, but drive it till it drops.
The more years you drive that new car, the less depreciation you will pay per year. With our example above, buying a new car every five years will continue to cost you $18,000 every five years ($300/month) forever.
However, if you were to drive that same car for 15 years (and it is worth $5,000 at that point), your depreciation cost would only be $140 a month.
3. Compare before buying.
All vehicles depreciate, but not at the same rate. Therefore, if you insist on buying new, compare depreciation costs of different models before buying. If vehicle A costs less up front, but depreciates faster than vehicle B, you may be better off buying vehicle B.
Bonus tip: never buy a car you can’t pay cash for. If you are like me, that one principle will limit you to buying used cars. The good news? You will not only be saving in depreciation costs, but also interest charges. A car with no payments is the best one you can buy.