This summer has been a rough one for my old pickup. In early May, as the thermometer starting rising, my air conditioner went kaput. That cost me about $600 to make the repairs. Then, last week, alarm bells starting ringing and a red light shaped like a battery flashed on the dash. Unfortunately, it wasn’t a relatively affordable battery that needed replacing. Rather, it was a much more expensive alternator. After forking out another $500, the thought crossed my mind that it may be time to look for some new wheels.
New vehicles are probably the worst “investments” we make. It is not unusual to see the value decline by 50% in the first four years after driving off the dealer’s lot. That knowledge has led me to adopt a philosophy that I will drive our cars and trucks until “the wheels fall off” before buying a new one. As my unexpected repair expenses have accumulated though, some reminders of how expensive new cars can be helped to scratch that new car (or truck) itch.
I started with a quick visit to Kelley Blue Book® to see roughly what a new 2017 Ford F150 Platinum edition (the same model of my current pickup) would cost. $53,383 was the “Fair Purchase Price” that was indicated. Ouch, that was about all I needed to realize I am probably doing the right thing by continuing to drive my old pickup a while longer. But I can’t write an Accountable Update without analyzing it further, so I started checking out the values of older models, too.
I saw that a used 2013 model in good condition has a trade-in value around $26,000, which would be a pretty good indication of its actual value. Compared to the new price of $46,100 back in 2013, according to an article I found on Autotrader.com, it looks like the value has fallen just under half over the last four years. Of course, when you add in the approximate $3,400 of tax, title, and license costs in Texas (per this calculator on Carmax.com), plus whatever else you let the F&I guy talk you into at the dealership, and a 50% decrease per presidential term appears to be a good estimate.
That translates to a -15.91% annual rate of return. Put in dollar terms, a new $53,383 pickup would drop the following amounts over the next ten years assuming annual depreciation at that rate:
Depreciation Illustration
$53,383 pickup with annual depreciation of -15.91%.
In the first three years, that’s a total of $21,641 of lost value versus only $12,868 over the next three. If you put 12,000 miles a year on the vehicle in this example, the depreciation cost per mile is 60.11 cents in the first three years versus 35.74 cents for the next three.* Consider that the IRS mileage rate in 2017 for business is only 53.5 cents per mile. You could also supplement your income by driving for Uber, but their base mileage rate starts at $1.06 per mile, and you would still need to buy gas!
Remember that commercial that showed a guy driving an old car that spit change out of the air conditioning ducts? Driving a new car is like that, but exactly the opposite.
Some potential good news, especially if you are in the market for a new car, is that “…millions (of) cars that were leased two or three years ago, many of them used compact and midsized cars with low mileage, are heading toward auction lots and used car dealerships. That surge in supply threatens to depress prices for new and used vehicles…”, according to an Autonews.com article from earlier this month.
Some may be asking if a lease may make more sense than buying, but the lease amount incorporates the expected depreciation, taxes, and interest into the payment. At the end of the lease, you would then start the whole process over again, insuring that you are always paying the highest amount of depreciation. Plus you typically add in mileage penalties and wear and tear charges.
There is nothing quite like that new car smell, except that you may find adding to your retirement account, the kids’ college, or travel funds are even sweeter. You can certainly reduce the amount of depreciation each year by driving a new vehicle longer, but buying the used pickup in the example above would mean you could add an extra $3,000 per year towards goals that may make you a lot happier.
If you would like to discuss any of those plans, get in touch.
If you are in the market for a car, it looks like your timing could be pretty good. As for me, I think I’ll stick with my old pickup for bit longer.
*Arithmetic error corrected from earlier version