So how do you win financially - I mean really crush it - when you’re buying a used car? The basic idea is simple to understand. Let’s start with an example of not crushing it. If you buy a used car for $10,000, drive it for several years, and then sell it for $2,000, you’ve just taken a financial hit of $8,000. That difference is called your “net price” of the car, and represents depreciation. You’ll never get a bill for $8,000, because it comes in two pieces at two different times. But that $8,000 comes out of your financial bathtub just as surely as if you had.
Pretty simple, right? Now here’s exactly the wrong way to look at that example.
“I paid $10,000, but I got a really great deal! The used car dealer told me that cars like that usually sell for $14,000, so I actually saved $4,000 on it! Now that I’m selling it, I’ve got another $2,000 coming in! So that means I’ve made money coming and going, I’ve made $6,000 off that car!”
Ummm… no. Your net price is $8,000 worth of depreciation. Plus the cost of gas, repairs and maintenance, insurance and parking while you owned it. If you still think you made $6,000, go buy 10 cars just like that one, and see if your net worth goes up by $60,000. (Hint: “Used car dealer financial logic” sounds much better at the car lot than it does afterwards.)
Back to our example, but now let’s add a twist. What if you found a very different $10,000 car, one you could subsequently resell for $7500. Now the net price is $2500. The difference in depreciation between the first car and the second one is $5500 ($8000 net price on the first car, $2500 on the second.)
Is it really that simple? Am I really $5500 closer to financial independence by choosing the second car rather than the first?
Yes. It really is that simple. Unless of course you could get away with not buying a car at all, or sharing a car with someone else. Or, if there were something about the second car that made it much more expensive to own and operate. But yes, all other things equal, that’s $5500 dollars that’s now available for you to save and invest, that wouldn’t be available if you’d chosen the first car. (Just to emphasize the point, I rigged the example to be exactly enough to make the maximum annual contribution to a Roth IRA.)
The prices of the cars are identical. But the first car is a resale loser, while the second is a resale winner. The difference between buying a resale winner and resale loser isn’t a few percentage points, it’s thousands of dollars to your net worth! And a lifetime of buying resale winner after resale winner makes a huge, measurable difference to your financial independence timetable.
Now you know! The real way to win financially when buying a used car is to choose one with a relatively very light depreciation bite - a relatively low net price - in other words, a true resale winner. As simple as this is to understand, it comes as a real eye opener to most people. After all, this isn’t the way that the automotive industry encourages you to think - far from it. And it’s probably not the way you’re used to thinking, either. Buying a car is probably the biggest purchase you’ve ever made, and it’s one of the few things you buy that you know ahead of time that you’ll resell some day. That combination calls for a different way of thinking, and it takes a little getting used to. But once the ”resale winner” light bulb goes on in your head, you’ll never think about buying a used car the same way again. Any questions? Ha, I thought so!
A. There’s no such thing as a brand new car that’s a resale winner. Ever, ever, ever. No matter what the ads say. No matter what the nice people at the dealership say. That new car smell? That’s just highly concentrated depreciation. Nuggets don’t lie:
A. Not necessarily. The “drive it into the ground” strategy can be a financially savvy one, but it’s not for everybody. You have to really know what you’re doing, both financially and mechanically. Cars can have “end of life” issues that can require a lot of careful judgement to determine whether increasingly extensive - and expensive - repairs are worth it. On top of that, not everybody is thrilled at the prospect of being seen regularly driving around town in an end-of-the-road beater or potential safety hazard. So consider it an “advanced strategy” beyond what we’re discussing here, but if you’re up to it, go for it!
A. That would require a whole separate post - at least. Remember above, when I said “buy a used car and drive it for several years”? The actual depreciation percentages you would shoot for depend a great deal on the details - what type of car, just how used it is when you buy it, how many miles per year you’ll drive it, and how many years you’ll drive it before reselling. So there’s no one hard and fast depreciation percentage goal; it’s more about adopting a mindset of always thinking about resale maximization when it comes to cars. The keys to finding the resale winners that we’re about to talk about apply in all situations. Follow these principles, and you’ll tremendously improve your net price, and knock the depreciation way down.
A. I love the passion, used car buyer! I’m happy to tell you that you can officially relax. We feel your pain, so we have net worthily done all the work for you.
Behold the Car Resale Winner Calculator below! It guides you through the nine keys to choosing a resale winner. You see, you don’t have know exactly when you’ll be selling the car, or exactly what you’ll sell it for. Instead, just choose a car that passes all (or most) of the nine tests, and you’ll be assured of putting the resale odds in your favor, no matter when you sell.
The calculator is mostly self-explanatory, but here are some helpful notes:
1. Used car, yes or no… what is this, a trick question? Of course it is! Just in case somebody who hasn’t read this post gets their hands on the calculator, or somebody who knows better starts getting that new car fever brought on by 24/7 automotive advertising, we need this question right off the bat to reboot your thinking.
2. & 3. The combination of a used car’s age and mileage turns out to be a powerful determinant of resale value. You want lots of years, but very few miles per year. Some people call this combination a “Grand car” - like your grandfather’s ancient car that sits in the garage and rarely gets driven.
The graph below summarizes what you’re looking for. As you’re looking at used car listings, use the calculator to weed out anything in the “NO!!” zone.
NOTE: Items 4, 5 and 6 come from a Carfax report. Those aren’t free; they cost between $20 and $40 per report from Carfax, depending on how many reports you’re ordering. Despite the expense, you never skip this step for any car you’re seriously considering. The seller may volunteer the information you’re looking for; they may even have their own copy of a Carfax report that they’ll show you, or give you a copy. It’s nice - maybe - that they offer, but you’ll want to order your own. I know, it’s hard to believe, but sometimes sellers of cars have been known to either fudge or forge a car’s shady past a little if it will help get them a sale.
4. You want one, and only one title status - clean! There may be a perfectly valid reason for some other title status, and that reason may have nothing to do with the quality of the car or its drive-ability. Sorry, doesn’t matter. Any title status other than “clean” will hurt you in resale - if the seller offers to discount the price for you because of that, it’s a very safe bet that you’ll have to discount when you resell, even more. The best way to win that game is not to play.
5. The best number of previous owners? One. Two isn’t bad. After that, same story as above - you’ll give up too much on resale once this number gets to three or beyond.
6. You want a car that’s had a boring, uneventful accident history. In the world of Carfax, accidents are either “minor” (driven away from the scene) or “major” (towed). Even one major accident disqualifies a car from your consideration. By now the cold hard nature of resale logic should be getting familiar to you. Even if a car with one major accident was repaired superbly, and now drives identically to completely undamaged one - doesn’t matter. It will still cost you too much on resale, so your best financial move is to pass.
7. The NHTSA website gives a safety rating, on a 5 star scale, based on a car’s year, make and model. Five stars is great, four is good - any less than that, you’re not interested. Certain older, or more obscure makes and models won’t have a rating. While that might raise your safety anxiety level (as it should), from a pure financial standpoint, it’s neither good nor bad - it’s neutral, because it won’t hurt you on resale. So if that’s the case, just plug in four stars, and rely on the other 8 tests to guide you.
8. When it comes to buying shoes, choosing a hairstyle, or selecting a travel destination, many people are eager to fully express their individuality. “What, me? Passively follow the crowd, like a sheep in the herd? Never!” Your attention please: being relentlessly unconventional is a terrible strategy when it comes to maximizing used car resale. The same thing goes for heavily customizing your car after you’ve bought it. You want the makes and models that are super popular, year in and year out, in your area. When you get ready to sell, you want to be assured that there will be the biggest possible market of potential buyers out there. Try to find other, less financially painful ways to express your individuality.
9. Your new favorite three letter acronym is PPI - pre-purchase inspection. The key is that the inspection is performed by somebody that you select, that you’re 100% sure is independent, and not in cahoots with the seller. Yes, you’ll have to pay for it, but this is perhaps the most important step of all.
The sheer number of used car listings available to sort through can be overwhelming. Finding the true resale winners can seem like finding a needle in a haystack. What you have going for you, though, is that the haystack is so big, there are bound to be lots of resale winners in there.
One tip is to do as much of your research, via the calculator, ahead of time as possible. Buying a car has an undeniably emotional aspect to it, and people who sell cars - especially the long time pros - know all about it. The worst time to pull out your trusty calculator is after you’ve test driven a resale loser and fallen in love with it. Whether you’re buying from a dealer, a private party, or anywhere in between, do all of the non-Carfax research that you can before seeing any car.
Now here’s the final tip.
STEP ONE: Use the calculator to narrow down your search to one or a few true resale winners.
STEP TWO: Close in on a purchase price with the seller.
Most used car buyers skip step one, and now you know what happens to most of them - they frantically negotiate what they believe is a good price on a resale loser that they never should be buying in the first place. Any “savings” earned by negotiating a great price will be much more than lost years later, on resale.
But not you! Using the calculator, you’ll find a resale winning needle in the haystack, and the difference in depreciation - across the whole car-buying part of your financial life - will end up inside your financial bathtub, instead of down the drain.
So what kind of price offer should you make? What’s the best negotiation strategy? The automotive industry might have you a little brainwashed, and have you thinking only in terms of making a “great deal.” Our advice? Put most of your energy into finding a car with great resale; then aim to make a “fair deal” on it, rather than a great one. Do the research on KBB or NADA ahead of time, and determine the very small range that represents a fair and square price for that car. Study the details; you want to be sure of yourself on this. Then, before you mention any numbers, tell the seller that you have no interest in back and forth haggling, and that you intend to make one fair and square offer, based on KBB or NADA. Ask if they’ll agree to that approach. If they won’t agree to that approach, you should be prepared to walk away - this won’t end well. If they say they’ll agree, but then start haggling anyway after you’ve made your offer - don’t cave in, stick to your range, and walk away if the seller won’t come down to it. But if the seller agrees to the approach, then actually does so - boom, a great resale winner is yours, with minimal negotiation required, at a fair and square price!
The key to wisely buying a car is to focus on minimizing net price (initial purchase price minus anticipated resale price).
Maximize your chances of buying a resale winner car by sticking to seven well-established rules of thumb.
Minimizing miles driven will minimize almost every category of automotive expense.