How To Score a $50 Car Payment For Life
Our latest big ticket purchase included a free membership in the Large Family Club. That’s right, we bought a minivan. “Purchase a minivan by 2008” I typed in my first FIRE spreadsheet back in 2006. Oops, eight years late but it still counts, right?
The main reason we were eight years late buying a minivan is because we didn’t need it prior to the last year or two. It was our planned five week multi-thousand mile road trip up the East Coast into Canada that convinced us that a larger vehicle would be more comfortable for long road trips. We are in the middle of planning our 2016 summer adventure (more details later!) and decided to upgrade to a larger car for this trip.
The minivan might not be flashy or fancy, but it’s a very effective mass transporter of people and materiel. Our kids are getting older. They have friends. We don’t work. We can take fun trips around town during the work day with our family of five and up to two (or three or four if we break seat belt laws…). The seats fold flat and/or pop out so we can haul full size sheets of plywood if necessary.
We still own the 2000 Honda Accord for now, though we don’t use more than one vehicle at a time, and rarely use either one much (the minivan’s trip odometer reads 15.9 miles three weeks after purchasing it). We are back to the dilemma of wondering whether we should keep two cars or drop to one. For the month that we were a one car family, there was only one time that we actually needed two cars (to haul 12 kids to the skating rink for a birthday party) but our one car plus UberXL could have done the job for $5-6 each way.
I hope we don’t fall into the trap of the status quo cognitive bias. From Wikipedia: “The current baseline (or status quo) is taken as a reference point, and any change from that baseline is perceived as a loss.” Too often we assume our current state of affairs is the best way to handle something but that’s often not true. In the context of “How many and what kind of car(s) should we own?”, I believe the correct answer is one car and the right kind of car is roughly a minivan. I think it makes sense to sell the old Honda Accord because there is no way we would go out today and buy a second car if we only had the minivan. Time to right size our car ownership over the next couple months if we can overcome the status quo bias.
Before I jump into the math behind our perpetual $50 car payment, let me show off our new beauty:
It’s a 2009 Toyota Sienna LE with 111,000 miles. We paid $7,900 plus a few hundred in random sales tax, property tax, and fees. We also spent $98 on a pre-sale inspection at our trusted independent Honda/Toyota shop. They were shocked in a good way at the condition of the car inside, under the hood, and underneath the car and figured we would pay at least a few thousand dollars more for the car in its condition. I guess we got a good deal. The dealer and I thought it was a lower trim level (a “CE” instead of an “LE”) while we negotiated the price, so we also scored a bonus $600 value with a higher trim level (LE = it has cruise control and radio controls on the steering wheel).
It’s amazing what $8,000 buys you in the used car market today. This van is sweet! Very spacious and clean, runs well, and looks decent on the outside other than a few irrelevant scratches and dings that no doubt saved us some cash on the purchase price. The Japanese minivan is also a favorite of fellow frugal early retirement types Mr. Money Mustache (for stuff hauling in his construction hustle) and the Frugalwoods. They both own the Honda Odyssey which is the vehicle we initially targeted in our used car search until I did some research. The Odyssey is priced about the same as the Toyota Sienna in the used car market, however online research and the sage advice of our in the know independent mechanic confirmed that the Toyota model outshines the Honda in the age range of vehicles we were searching for (2008-2010). Fortunately we found a nice deal on a Toyota before we found a nice deal on a Honda.
The $50 forever car payment
Enough bragging about my awesome new used car. I want to share my philosophy on the perpetual $50 car payment. Whenever I pull together an annual budget (like our 2014 and 2016 budgets), I always stick about a thousand bucks in the “auto” line item to cover a new used car purchase every seven or eight years. That works out to $83 per month and is most likely more money than we need to spend on a new used car. But I like to plan for the worst case and then optimize spending when it comes time to actually part with my cash.
Here’s the math behind my $50 car payment. Buy a gently used six to eight year old car with low to moderate mileage for around $8,000-10,000. Run the car almost into the ground and then sell it after nine or ten years when it’s 15-16 years old for $3,000. The net depreciation (cost of new(er) car minus sale proceeds from older car) for those nine to ten years is $5,000 to $7,000 or about $50 per month ($6000 divided by 120 months = $50/month).
Now that we have completed one cycle of the “sell the sixteen year old car and buy the seven year old car”, I know that $50 per month is probably closer to reality based on my periodic car replacement strategy. In my case, I sold my sixteen year old Civic for $2,900 (as reported in my February 2016 Financial Update) and bought a 2009 Toyota Sienna for $8,300 including all fees. My net out of pocket cost for upgrading to a new(er) car (a year 2009 instead of a 2000) was $5,400. Spread the $5,400 cost over nine years and it works out to exactly $50 per month. My hope is that our new minivan will last for about nine years and I can sell it as a well-maintained still running low-ish mileage vehicle for about $3,000 at that point.
I don’t think this is the absolute cheapest way to keep car expenditures to a minimum but it does a good job of balancing low cost with our goals and needs. We could buy complete POS’s for a couple thousand bucks, cross our fingers they would run for another 5-6 years and then sell them as “needs work” cars or as industrial scrap for a few hundred dollars when they die. That might get the per month depreciation cost down to $30-40 but then again we might be eaten alive by maintenance costs and plagued by the frustrations of breakdowns in the interim.
Under our replacement strategy, we pay slightly more but we get a lightly used car with modern-ish amenities every eight to ten years, and then drive it until we expect to see troubling repair bills. By buying a car that’s six to eight years old, we skip the steep part of the depreciation curve and pay a quarter to a third of the new price of the vehicle without losing a lot of reliability (we’re talking about Hondas and Toyotas here). Since we’ll probably be taking a multi-thousand mile road trip every other year, reliability is important to us. Owning a used car also saves us hundreds of dollars per year on property tax and even more on insurance (an $8,000 car is cheap enough that we don’t carry comprehensive or collision coverage since we are our own insurance company).
Instead of paying a $300-500 monthly car payment essentially forever if we followed the “buy new and replace after three to six years when the shine wears off” method, we are instead paying around $50 per month and still get to enjoy a new-ish car occasionally. Of course I definitely appreciate the sellers of lightly used six year old cars flooding the market with inventory (so they can upgrade to a new car) because it makes it easier for me to acquire a used car at a sweet price.
Tips on finding a new used car
While searching for a good deal on our minivan, I employed a few basic strategies.
Do your research. Identify the vehicles that fit your needs, then figure out which of those models are the most reliable. In our search, I found that the Honda Odyssey often had transmission problems after seven or eight years, whereas the Toyota Sienna held up reasonably well with few complaints.
Don’t be in a rush. Start looking for a replacement vehicle before you absolutely have to have one. Set up automated searches at Craigslist and other used car search engines. Narrow your search to highlight only those cars that are good to great deals based on price, year, make, model, and mileage.
But then hurry. Once your automated searches find the right car at the right price, check it out ASAP. We bought our car on the first day after the car lot lowered their asking price by $1,000 to an amount below Kelley Blue Book value.
Focus on the lower trim levels. I like the cars with fewer options. For a 6+ year old car, I consider things like moon roofs and power everything to be more of a liability than an asset. The extra features can break and cost money or time to fix. They also cost more in the form of a higher purchase price. However, when you sell the car once it’s almost dead, you likely won’t recoup any of the higher purchase price. To the buyer of a 16 year old car, “does it work?” is more important than “how fancy are the amenities?” (“runs well” IS the amenity).
Don’t be picky. Are there a few scratches or dings on the outside of the car? Jackpot! You’ll pay less money and you won’t worry the next time you get another scratch or ding because the new blemish will already have a built in friend network elsewhere on the vehicle. It also helps to not restrict yourself to a single color, trim level, or even make or model (as long as the car meets your specifications like “7+ seat vehicle with storage”).
Get a pre-sale inspection. Our local independent shop charges $90 (plus $8 sales tax – thanks North Carolina!) for a rather in depth inspection of a vehicle that might prevent you from purchasing a car with a latent defect lurking in the inner workings of the vehicle. It’ll also provide an objective second opinion of the quality and condition of the car. In my case, a few small problems were uncovered that led me to ask the seller to provide the fix ($25 worth of parts from the auto parts store). I think it’s better to “waste” $90-100 on a pre-sale inspection in order to avoid buying a dud. In my situation, I negotiated the purchase price then asked to take it for an inspection before closing the sale.
Check out the CarFax report (or use a similar service). The dealer I bought from pulled up the CarFax report online and let me review it before we talked price. The CarFax report will usually uncover unexpected surprises like salvaged title, a rebuild after a wreck, collision damage, poor (or good) maintenance, and ownership history (location of ownership, number of owners).
Negotiate the price. This should be obvious, but the asking price is never the final price. Know what the car is worth by checking the Kelley Blue Book value and other online pricing services. Don’t be afraid to walk away if the seller isn’t willing to agree to a reasonable price (remember, you can always find another car). I used the “I’ll have to check with the boss” strategy when negotiations reached a stalemate and went outside for a few minutes to chat with Mrs. RoG. Then I came back in and said “look, we’re close to a deal but not there yet. My wife said I have to take a little more off the price and she’ll be happy, otherwise I can’t get the car. How about drop it another $100?”. Maybe he took pity on me, because it worked.
Our $50 per month car buying strategy might not work for everyone, but I’m hoping it continues to work for us. By the time we are facing the next replacement cycle in another eight to ten years, we will likely be looking at a smaller vehicle since the oldest two kids will be starting college around that point. We may go back to a two car household once the kids start driving in another five or six years, which could impact our new(er) car purchasing decisions.
What does your vehicle replacement plan look like? Do you prefer new cars or used cars?
Trying to get ahead with your finances? Track all your expenses and investments in one place FOR FREE with Personal Capital.