The Truth About Buying and Leasing Cars

The plain, harsh truth is that buying and owning a new car can potentially destroy personal wealth generation more than almost any other expense. This is especially true if you only hold on to that new car for under four years.

If you calculate the amount that your new car would depreciate year over year, and imagine instead of buying the new car, withdrawing that amount from your bank account and setting it aflame, you may get a better idea of the real cost of new car ownership. 

Take a lesson from a young Warren Buffet. For years, the now billionaire was adamantly opposed to selling his Volkswagen, despite having enough money to buy all the new cars he could ever want. Why would someone with such seemingly limitless means refuse to use them? Because he knew that investing that same money would, over the course of a lifetime, yield an enormous return.

On the reverse end of the spectrum, new car owners should also avoid holding on to their cars too long. When your costs for annual repairs outpace a new car's annual depreciation, you reach a point where it would be better to replace your existing car than to maintain it. 

Let's say your old beater costs you $1,500 in repairs each year. But there's a comparable newer used car you can buy that would only drop $900 in value each year. If you decide to hold on to that beater, you're swallowing an extra $600 per year, or 100% more than you otherwise would had you bought that newer used car instead. To boot, you can expect minimal maintenance and repair costs for a good couple of years or more.
 
When considering leasing a new vehicle, beware of the risk of getting to a place where you owe more money on the lease than the car is worth (known as going "upside down"). This is how auto dealers rake in the dough at the buyer's expense. To avoid this horrendous possibility, avoid any leases that have longer than a four-year payment term.

Quite probably the ideal model for owning a car, considering all that's been discussed in this article, is to buy a used car that's around three to five years old and has under 40,000 miles on it. Hold on to it for no less than five years or until the cost of repairs goes above $1,500 per year. This way, you enjoy the benefits of an almost-new car without the drawback of the steep decline in value that occurs in the first two years. If all goes right, the car should even still have time left on its warranty. And, most importantly, you have a game plan for when to make the switch to another vehicle before you risk spending more than your existing vehicle is worth.
 

Kenneth C. Kelly is the President of Strativia, a financial management software development and services company specializing in applications for personal and business use.  Strativia is the developer of Budget Forecaster, a sophisticated home budget and personal finance management software package.  Website: www.strativia.com.  Contact: info@strativia.com.  

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