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How to Buy a Car (The Ramit Way)

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Matthew from Overland Park, KS, asks: “I have a car that I’ve been making payments on for a little over a year and I want to get something else. Is it a good idea to trade it in when making another purchase?”

Matthew: You are what’s wrong with America!

Some points to consider:

  • I’m not one of those financial “experts” who says you can’t buy new cars…if that’s what you really enjoy and plan accordingly. In fact, I bought a new car, shocking online frugalistas everywhere.
  • However, whether your car is new or used, one of the biggest savings you can lock in is to buy a great car, then hold it for as long as possible. The math is compelling once you’ve made your payments. Yet Americans trade in their cars entirely too frequently for their financial situation, erasing any amortization and chaining them to a new car payment.
  • It’s NOT a good idea to trade it in to buy a more expensive car if you have credit card debt or haven’t built a conscious spending plan. This sounds obvious but you would be shocked how many people in CC debt decide it would be a good idea to trade their car in.
  • Before you trade your car in (or buy a new one), consider:
    • Have you maxed out your 401(k), IRA, automated finances, etc.?
    • Consider TCO “Total cost of ownership”: What about phantom costs like registration, gas, insurance, tickets, etc?

The Shocking Number That Almost Everybody Misses: Phantom Costs

Phantom Costs represent a huge, invisible portion of expensive purchases like a car. For example, when I used to have a monthly car payment of $350, my total out-of-pocket expenses (gas, insurance, registration, garage, etc) was $1,000.

From $350…to $1,000/month. Imagine how that affects your Conscious Spending Plan.

Almost nobody calculates TCO, so buying a car or house ends up being dramatically more expensive than the sticker price.

Yet there are ways to save big on a new car purchase.

If you’re thinking of buying a car, there’s a better way. I used this technique to buy my car at $2,000 under invoice. To get the exact method I used, see below for a mini-report I put together.

Sign up to my Insider’s List and I’ll give you a PDF report on how I got one car dealership to sell me a car at $2,000 under invoice without haggling.

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37 Comments

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  1. Ramit, you honesty is refreshing!

    Just one thing you forgot to mention, the sleazy people who sell cars. They try to talk you into all that bullshit you don’t need, gap insurance, undercarriage coating, etc.

    Thanks to the advice in your 10-year strategy, I set aside money for a new car every month, and I will never have to haggle over car payments at a dealership again.

    • I love haggling actually. This is why I like Ramit’s stuff. He makes it even more fun to haggle because I think he likes it too. I don’t think all car sales people are sleazy. The guys at toyota have been pretty good to me actually.

      I leased a BMW x5 about 6 months ago, my 3rd one. I’m a leaser not a buyer. But I’m over it completely, payment + gas = retarded.

      Just got out of my 3 year lease on swapalease.com, will break even in 1 month. Prius here I come. A non green, green person, just like everyone else in LA. Saving $500 per month. That means 125 more lattes each month for me. BAM!

  2. @Gimena: Paying cash doesn’t erase the value of haggling.

    • Gimena said she(?) wouldn’t have to haggle over the month payments, not the entire cost.

    • What I was getting at is than when you haggle over payments, they can do all sort of tricks, like extending repayment length, increasing the down payment, changing the payment frequency, to make you feel like you are paying less than you really are.

      If you are paying cash, you can only haggle about the price. Since there are less variables, I find it a lot easier.

  3. Tiffany Martin Link to this comment

    Yeah, this seems like a no-brainer, yet surprisingly many people do this! I’ve seen people who all work and the same company, make the same amount, yet some complain that they can’t afford anything, and some are able to feel financially comfortable. The only difference is that one will buy a 30k car every 2 years and the other has a 3k-5k car paid off that they’re running into the ground.

    It seems like people are really into the perceived status of having a new car (more than the reality of being financially set). It’s that status they’re after; they’re not car aficionados.

    (BTW I love that you mention toyota, honda, and subaru.)

  4. I will freely admit that I am vulnerable to certain messages from retailers & advertisers, but thankfully, the secret language of car ownership isn’t one of my weaknesses. I drive a well-maintained Japanese compact, and it never bothers me when I pull up at an award show or another glamorous event, among the BMWs & Mercedes, because I know I’ve gotten where I am because I put other things ahead of the purchase of a nicer car.

    I know Ramit talks about “conscious spending,” but it’s worth mentioning that one of the things to be conscious of is *how you think buying this thing will make you feel.* In my experience, cars are about the perception of status, and a belief that the owner deserves some intangible quality the car will bestow on them (comfort, respect, the fun of driving a zippy car, the pleasure of owning a beautiful object.)

    If buying a car for those reasons makes financial sense, by all means, go ahead. But if it would harm your financial situation, chances are you can figure out another way to get all of the above in another, more affordable way. Nothing will make you feel more respected than mentoring someone. A well-made pair of shoes can make you stand taller and feel better dressed. A week-long rented sports car will quickly remind you that 90% of the time, a zippy car is stuck in traffic with everyone else.

    We all have powerful unconscious needs, and honestly, there’s no point in arguing that we should ignore them, because as Ramit is so fond of saying, “try harder” pretty much never works. But just because companies spend a lot of money trying to convince us they know how to fill those needs, that doesn’t mean they have the only viable solutions on offer.

  5. Hilarious video! Love the brutal honesty. Keep it up. If I was Matthew, I’d be insulted but appreciative (after I mopped up my tears).

  6. Agree with all of your points, Ramit. Most people don’t factor in the indirect (phantom, to me, implies they occur without you knowing) costs, even after they’ve been paying them.

    If it helps paint a picture, because I track all of my costs and have a database to log all repairs/maintenance for my car I can share the TCO of my car:

    Car: 1999 Golf GT TDI
    Purchased: March 2008, 3rd hand. In working condition, but wasn’t properly maintained, so needed work to almost the value of what I paid for it done immediately after purchase.
    Purchase price: £2,850
    Repair/maintenance to date: £7,973.24 (including tyres, annual servicing & repairs)
    Interest portion of bank loan to buy & fix up car: £1,085.31
    Annual insurance & road tax: £1,842.52
    Fuel: £1,556.53
    Parking & fines: £588.76

    TCO after 4 years: £15,896.36

    Scary when you first work it out! 🙂

  7. Funny,

    The way I interpreted the question made me think this guy had already made the decision to buy another car, and that he was debating whether to trade the car in or sell it privately.

    Either way, the answer still stands; don’t do it. Always remember, it’s cheaper to keep her.

    • Is it though? What if he has a car with a high TCO and wants to switch to a car with a lower TCO. Like a more fuel efficient car. Or a smaller, cheaper car.

  8. Great advice. I have to tell you that when I started my business two of the best decisions I made were buy a old used car and moved a 1/2 mile from my business. I didn’t realize how much these two decisions effected my total cost of ownership.

    I bought a 1994 Mazda with 80,000 for $1500. I drove it for 7 years and put 120,000 miles on it. I just got rid of it because my auto mechanic said it would not pass inspection anymore because of body rust. First, most people don’t realize how much less you pay in insurance on an old car. Plus, with the short distance to my business, it saved me a ton on gas, insurance, and repairs. Imagine only paying for gas every four weeks and not paying for emission testing because you don’t drive enough miles in a year.

    The car didn’t look great but it was a great sacrifice when I was starting my business.

  9. Yes I agree with Ramit if you see a car as only a means of transportation. Buy a reliable, affordable car and keep it (I’d recommend Korean cars over Japanese as a value for money prospect, and American cars are much more reliable than before). However everyone is missing the point that cars are far more simple transportation. For many people it’s the most expensive thing they will ever own after a house. There is no rational reason to pay more for an Audi over a Toyota, but if you’re going to be keeping and using your car for years some people are willing to pay a premium to have a more comfortable and enjoyable place to spend their time. I drive a second hand Mini Cooper because it’s cute, fun to drive, and gets good fuel economy. I willingly pay more for increased maintenance costs, insurance, etc.

  10. I am 56 years old and have owned a total of 3 cars in my life. I started driving at 17, and live 30 miles from anywhere, so my cars keep going well into the hundreds of thousands of miles. My first car was an import (the same cheapo import one of the Car Talk guys owns). It took me 150,000 miles before rust killed it. My other two cars were not imports–they were Fords (I couldn’t afford imports). I maintained them regularly and they only needed minimal repairs (one starter motor, one belt, new tires–and that’s counting all 3 cars). My two kids learned to drive using my cars, so although I drive as gently as possible, they also were taken through the wringer by teenagers. They were even taken off-road (within the limits of the clearance from the carriage to the ground).

    Matthew, follow Ramit’s advice. If you have already ignored his advice, know this: call your insurance agent before you buy another car. The difference in insurance costs can vary incredibly based on some obvious things (safety options) and not-so-obvious things (color of car and numbers of thefts of the model and year of the car).

    Oh, and if you need the car for some “status event,” please be aware you can rent a luxury auto when you absolutely need to feel your very best (not that I’ve ever done this, but I have friends who have).

    Great video, Ramit. Thanks for telling it like it is.

    • Susan,
      The rent option is excellent advice. I’ve seen many people spend money for toys and never use them or barely use them. I remember a guy I worked with who complained all of the time about not having money.

      He liked Jet Skiing in the summer so he bought 2 Jet Skis for $20,000+ with a loan at 24% interest. When he complained about money, we would mention about the Jet Skis, but he didn’t feel they were the cause of the problem.

      BTW, talking about cost of ownership, he never rode his new Jet Skis because every time he when to the shore to use them something was wrong, the batteries were dead, the gas clotted the fuel injectors because it sat too long, etc. He would have been better off renting them for the few times he went to the shore even if it was extremely expensive to rent.

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