Replacing an automobile is an inevitable and recurring life event. Many of my clients struggle with the question—buy or lease? If you buy, should you buy new or used? What would Dave Ramsey say? He does not want you to borrow money, lease a car, or even buy a new car.
Do not get me wrong, I love being able to pay cash for a car. But I have been in situations where I have been presented with 0% or 0.9% financing. I went to a dealership with cash and was told if I got a loan—even for 3 months—I would get a percentage off the car.
The bottom line is that the preferences and needs of each individual must be considered along with the overall costs. Many competing factors bear differing degrees of importance. Fortress Planning Group has a flowchart to cover the key things to consider: cost, cashflow, mileage, safety, technology, depreciation, and flexibility.
In this episode of Best in Wealth, I want to help you identify the best course of action for you. Let’s walk through the questions you need to consider to make an informed choice.
Outline of This Episode
- [1:29] Did you buy your kids a car?
- [4:30] Should you buy or lease a car?
- [6:46] Factors to consider when making the decision
- [8:55] When you should consider leasing a car
- [11:32] When to consider buying a new car
- [15:55] When to consider buying a used car
- [18? Revisiting the pros and cons of each option
- [20:04] What is the most important thing for you?
When you should consider leasing a car
Many people are working from home because of Covid. People are traveling far less. If you like a new automobile every few years and you do not drive a significant number of miles, you could consider leasing.
Secondly, are you a business owner? You may be able to deduct leasing and operating costs associated with the business use of your vehicle. It can be done on a per-mile basis or you can break down your costs—the lease that you are paying, the depreciation, the gas, and the maintenance.
Leasing offers several advantages, including a short-term commitment, warranty coverage, and temporary use of a depreciated asset. The worst part about a new car is that the moment you drive it off the lot, depreciation sets in.
Do you drive a significant number of miles each year? If yes, then leasing—even with a high mileage lease—may not be advisable due to mileage limits and the expensive per mile overage and wear and tear fees. You have to consider your driving habits when you make a choice.
When to consider buying a new car
If safety is a large deciding factor, consider buying new. Safety features and technology quickly become obsolete. I bought my wife a brand new Subaru Outback a couple of years ago. The safety features are considerably different from my 2015 vehicle. But if new safety features and the “new car smell” are not a big deal, do you want flexibility in how long you keep it and what modifications you can make?
If you want flexibility, explore financing options that work for your budget, including paying cash or low financing rates. There are many options out there. I bought a minivan when my two youngest were little. I thought I was buying that van with cash but it was better financially to get a loan and pay it off six months later. Do not be afraid to explore financing options when you buy new—but stick with your budget.
If you are building wealth—already have an emergency fund, are contributing 15% to retirement, and are debt-free—then you can consider splurging on a new car.
When to consider buying a used car
If you want to minimize the immediate costs of deprecation and minimize the purchase price, buy used. Take advantage of the depreciation that has already occurred. There are plenty of vehicles you can buy that are just a couple of years old. I am driving a vehicle that I bought in 2015 that was brand new in 2014. I may not get that brand new car smell but I sure saved a lot of money.
It was a point in my life where my company was still getting off the ground. I was not in the position to buy a new car. If you have other debt or want to retire in five years, do not buy a new car. On the flip side, if you are just getting started in the workforce, do not buy the new car when you could buy a perfectly fine used car and start investing in your Roth IRA.
I dissect more of the pros and cons of leasing, buying new, and buying used in this episode of Best in Wealth. If you are in the market for a new—or new-to-you—vehicle, do not miss this one!
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The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.