Thursday, February 7, 2008

Love Your Car, Save Money, Send a Kid to College

With real estate values falling, the economy slowing, unemployment rising, inflation threatening and credit drying up, Americans are being forced, to their horror, to save. Painful adjustments are made--less latte, more joe, less dining out, more kitchen time, fewer impulse trips to Paris, more DVD-weekends at home. Hard choices are made between reducing credit card balances and funding college savings accounts for the little ones.

But don't lose hope. There's an easy way to save that's also pretty painless. Just keep each of your cars one year longer than you'd otherwise planned. It will save a fair amount of change, for little trouble on your part.

Let's say you're a car enthusiast and get a new one every three years. We'll also assume that you have the average life expectancy for Americans (somewhere in the mid-70s overall), and that you own cars for about 50 years. A new car every three years means that you'll own about 17 cars over your lifetime. But if you get a new car every 4 years, you'll have about 12 cars. The difference is 5 cars. Most cars depreciate about 50% in the first three years of their lives. Let's assume that you pay an average price of $28,000 for each new car, which is about today's average. You're losing $14,000 to depreciation every time you trade in the old car for a new one. After 5 cars, you've lost $70,000. For the sake of simplicity, we're not factoring the cost of financing or inflation. But they wouldn't change the big picture very much. Owning a car for 4 years means additional depreciation in year 4 of about 10% per car or a total of $33,600. The net savings would be around $36,400.

The $36,400 you'd save would help a fair amount to covering the cost of educating a child in a public university, which is where most kids go to college. And even if you have a gifted child who's headed for a prestigious private college, you'd probably find an extra 36K handy.

What if you already own cars for longer periods of time? If you plan to own your cars for, say, 5 years, then you'd buy 10 over the course of 50 years. But if you held each car for 6 years, then you'd buy only 8 cars over 50 years. Most cars today depreciate about 70% over 5 years. Using our average price of $28,00o for a new car, that's $19,200 of depreciation per vehicle. Buy two fewer cars, and you avoid losing $39,200. Factor in the additional depreciation for year 6 on eight cars, and you'll net about $21,280. Not bad. Do you have an easier way to put together $21,280?

There was a time in living memory when brake pads and mufflers had to be replaced every 15,000 miles. Indeed, many of the cars that the Greatest Generation drove right after returning from WWII needed an oil change every 1,000 miles. By contrast, modern cars are well-built and need much less shop time. They'll almost always go from year 3 to year 4 without giving you much trouble or requiring more than a bit more routine maintenance. In fact, unless you drive 20,000 miles a year or more, going from year 5 to year 6 will often involve only somewhat larger bills for routine maintenance and perhaps new tires.

Very few people will notice whether your car is 3 years old versus 4 years old. Most won't notice if it's 5 years old versus 6 years old. And a lot of the ones who notice won't care. The new car thing is mostly in your head. You buy a new car because it makes you feel better. With the quality of modern cars, you usually won't need a new one for a lot longer than 6 years. At the end of your life, you won't care whether you had a new car every 3 versus 4 years, or 5 versus 6 years. But if your child or children dropped out of college because of lack of funding, you'll lose some peace of mind. Love your car a little longer, save some money, and help your kid finish college.

Legal News: lawyer turns the other cheek.

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