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.