Transportation is one of the big three expenses that must be managed to get to financial independence. In this segment, we’re going to focus on transportation and specifically transportation for those who have to use a vehicle. If you can use a bicycle for all of your needs, this post is not for you.
Related: Your Car is Not a Status Symbol
Three economical situations to choose a vehicle:
Situation #1: The Traveling Professional.
I’ve fit into this mold for most of my career and I’ve been surrounded by people in the same situation. The travelling professional needs a vehicle that meets minimum socially acceptable standards for the job while providing reliable transportation. This example assumes the travelling professional will put at least 12,000 miles per year on their vehicle either reimbursed through an employer or reimbursed through higher pay the job earns. There are a few models where this can support the economics of buying a new car.
The Traveling Insurance Agent Example: Honda Accord LX, bought new and replaced every 200,000+ miles. I first saw this example from a commercial insurance agent I got to know early in my career. He put 30,000+ miles on this car that he was paid mileage by his employer for. In the early 2000s, this meant a brand new Honda Accord that was no frills, including windows that you still (gasp!) rolled down by hand. The vehicle was roomy enough to be comfortable for a high mileage driver and respectable enough to carry up to three passengers when needed.
Today this Honda can be purchased for just over $23,000. When I plug this vehicle into Edmunds total cost to own calculator, it comes out to $33,643 over the first five years of the vehicle. If you drive 12,000 miles per year for five years reimbursed at the IRS rate of $0.535 per mile, the reimbursement on this vehicle is $32,100.
The math is similar for a Honda Civic and the Toyota Corolla and Camry. These vehicles carry the lowest depreciation cost in their first five years and it causes a wash between buying new and buying used.
Situation #2: Buy at Five, Drive for Ten
This financially responsible example involves buying a used vehicle around its fifth year of service and driving it for the next ten years. The majority of people fall into this category for their transportation needs. A five year old car with 60,000 – 80,000 miles will absorb 45-65% of its depreciation but only 30% of its useful life. This vehicle can be driven for the next ten years with good reliability, minimal maintenance, and still retain some residual value at the end of its fifteen year life.
This is a sweet spot for used vehicles because of a robust market for five year old models. The major used car sellers will have robust used inventory at this age as well as local new/used dealerships. If you want to strike a better deal, follow Craigslist and Nextdoor for mass affluent areas and look for a private sale. There should be plenty of detail about reliability and annoyances in the car models once they’ve been driven for five years and you can find some high mileage folks on message boards that will give you a heads up of issues that may arise.
I recommend playing around with different models using this True Cost to Own calculator to help make the right financial decision. For further reading, you can also check out Justin’s analysis which uses a similar premise for a six to eight year old vehicle.
Situation 3: The Car Enthusiast / Hobby Mechanic
There’s a subset of individuals with mechanical skills that have mastered the art of owning a vehicle with zero depreciation. These folks can purchase a 10-20 year old vehicle that has obtained its maximum depreciation and enjoy working on vehicles. I’ve never had the patience or ability to work on cars myself, so I have the utmost respect for these individuals. They typically buy vehicles that have a floor on their residual value either from hobby or work uses. Mr Money Mustache profiled someone with these talents in The Man Who Gets His Cars for Free.
Example 1: The Land Cruiser enthusiast. I know someone who loves the Toyota Land Cruiser. These are behemoth vehicles and after 2013 only have the ultra-luxury model sold in the US. These vehicles are sold worldwide and are engineered to have a 25 year useful life. They are the rugged vehicle of the United Nations in developing countries.
The Land Cruiser enthusiast purchases a domestic land cruiser around 200,000 miles for $13,000 to $15,000 and drives it an additional one to two hundred thousand miles, then can still sell it for over $10,000 for its overseas uses. He knows the model well from years of experience and can figure out many of the repairs himself.
Example 2: The Jeep Wrangler fan. The Jeep Wrangler is on many people’s wish list for a car. Jeep has sold 70,000+ Jeep Wranglers for the last twenty years and that number continues to climb. The Wrangler finds a floor on depreciation after 15 years and/or 125,000 miles and some expensive repairs start showing up (plus that glorious soft top replacement). This is a igh production vehicle with message boards, driving clubs, and a robust used market for people who want to put this in their garage and drive it on nice weekend days. Someone who is mechanically inclined can purchase a jeep with some issues, repair it, and sit on a vehicle that will not depreciate further. Someone who isn’t mechanically inclined can likely find a good jeep mechanic through one of the local clubs.
Example 3: The small truck mechanic. Early in my career I worked with a hobby mechanic who had a knack for flipping small pickup trucks. He would buy compact pickup trucks with mechanical issues for around $500, fix them himself, then drive them until he could find the next deal. A high mileage but running compact pickup truck at the time was worth $2,000+ to a small trade professional. He also had the benefit of working on a high profile corner and would drive the car to work then put a for sale sign on the vehicle while he was in his office. It was a consistent supplementary income
So what does this mean for you?
Regardless of what random people may tell you, there is no perfect answer for everyone on how to manage your car expenses. The examples above all drive the total cost of ownership down while providing effective transportation and fit a majority of people. This comes down to being a personal finance decision, it is personal and you need to pick what is right for you.