I just got back from talking to Kevin. Kevin just traded in his perfectly functional 1998 Cavalier towards a 6 month old used car. As a matter of fact I wouldn't really call it a trade in, looking at the total price of the vehicle, he essentially just gave them his Chevy Cavalier for free, as his final price with trade in was right about the Kelly Blue Book retail on the car he purchased.
Kevin's Cavalier was bought and paid for and has never needed a single repair. It only had 80,000 miles on it. When I asked Kevin why he did that he said that "I need something reliable, I can't afford to pay for repairs". When I brought up the fact that he only has $800 a month left over after paying his child support and he is spending half of that on a car payment, well, he just changed the subject.
Which brings me to my main point. Repairing a vehicle is almost always less expensive than replacing it. But many people shackle themselves with expensive automotive financing because they are unable to handle their finances well enough to do anything else.
If you are living paycheck to paycheck and refusing to save any money then it can be quite scary to drive an older vehicle, after all an older vehicle can break down at any time. And if you are as irresponsible as the average person, then you are not going to have enough cash on hand to fix it.
Lets look at some real world examples. Shall we, first we will go over Kevin's situation, then we will go over mine, and then we will briefly touch upon Tony's and Ryan's individual situations as well.
Kevin will pay right around $5000 this year for the privilege of driving his new car. $270 monthly for the payment, and $130 monthly for the insurance, along with several hundred in property tax (I didn't bother to mention the $1000 in sales tax he paid). Kevin's expenses are going to be fairly fixed until the warranty runs out (which, I might add will be long before the vehicle is paid for). At the end of the year Kevin will owe more money on the vehicle than it is worth. He won't ever really own the vehicle free and clear because he will let the dealership steal it from him (like the last one) a month or two after it is paid off.
I drive a "throwaway car". It is 21 years old. I paid $1000 for it. I have had it about 20,000 miles, in that time it has hit me up for one set of tires and a single repair (which was $240). My vehicle expenses this year will be far more variable than Kevin's. My minimum expenses will be $540 which is simply liability insurance and property tax. My expenses last year were more like $900 with that repair and the tires. There is no "maximum expense" with a used vehicle, but if the engine blows up you can replace the whole vehicle for $1000, and I would have to have that happen 5 times to equal Kevin's fixed expense. Also note that my vehicle has not depreciated at all, it is still worth $1000, as long as it is in good running order it will be worth around $1000.
Ryan is Kevin's brother. Ryan is married and has one young child. Ryan's company provides him with a company vehicle. But Ryan still felt the need to purchase a brand new SUV so that his wife (who does not work), has something "reliable" to drive. Ryan's annual costs are more like $6000, and they are pretty much 100 percent unneeded.
Tony always buys brand new cars, and he doesn't buy the cheap model either, he tends towards the full size cars with all the options. But Tony tends to drive his cars for twenty years (before letting the dealership give him $250 on a perfectly maintained car in excellent condition). Tony's costs change quite a bit over his twenty year cycle, at the beginning of the cycle he is paying that $6000 per year, but at the end of the cycle he is down there around $500. Much like Kevin, Tony also makes the mistake of trading in perfectly good vehicles for nothing. His 1984 Ford Station Wagon he just traded (for $250) didn't have a scratch on it, had less than 150,000 miles and ran perfectly.
Now I am not telling you what to do with your money, but for my money I decided the throwaway car is the way to go. I am saving a fortune doing it. I can't tell you how good it feels to know that if the engine blows up in my car that I have enough money in savings to buy five more of them (and that is just the money I saved last year). It feels great to know that if the transmission goes I can get a used one for $100 from the salvage yard and pay someone else another $200 to put it in (used transmissions cost a fortune for newer cars and are dirt cheap for older ones).
If you do decide to go the throwaway car route it is important to actually save some money so you have enough money on hand to replace or repair that car at any given moment. If you do find yourself in a position where you have to replace the vehicle then you can use a handy trick I learned (which will really cut down on your repair bills for the next few years). That trick is to buy another one of the exact same car. Invite all your buddies over the first saturday that you have both of them, and provide some beer and tools and strip the old one for parts. Box up all the parts (including the transmission) and put them in your garage or basement. Now you have a spare of everything, which will eliminate many repairs for quite some time.