Many people believe the best way to avoiding costly repairs is to buy a new car every few years. However, that may not be the best approach. This article explores how often you should buy a new car.

Surely you have heard the saying about new cars and car dealerships. The moment you drive a new car off the lot it loses 10% of its value. That’s because it's no longer new. You cannot turn around and sell it for what you just paid for it.

Over the course of the first few years, new vehicles continue to depreciate rapidly. Then the rate of depreciation levels off. This might lead you to believe that the opposite is true; i.e., that you should keep your cars until the wheels fall off. That may not be the best approach either. The longer you own a vehicle, the more repairs and maintenance it requires.

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These two concepts are at odds with each other. To solve this puzzle, we turn to life cycle cost analysis. Life cycle cost looks at all of the financial aspects associated with buying decisions.

This chart represents the life cycle cost of a new vehicle. It includes initial purchase, loan interest, depreciation, repairs, maintenance, fuel, and resale value. The green area represents the car’s value, and the brown area represents repairs and maintenance.

As you can see, the car’s value falls rapidly during the first few years of ownership. Repair and maintenance costs slowly increase over time.

The biggest takeaway from this graphical representation is the difference between depreciation and maintenance costs. Depreciation is orders-of-magnitude greater than maintenance. Simply put, maintenance costs rise as a car ages, but depreciation is a much greater factor. This says the longer you keep a car, the more you get your money out of it.

Here's a short story to help illustrate the point.

The Road not Taken

Fast Eddie blows all his money to impress the ladies. Going back a ways, he bought the first iPhone and every year he buys a new car. He’s been doing this since he was 30. Women think he is just the best and every time you see him he’s got a different one on his arm. 

Evan, on the other hand, is the more conservative of the two. He also has his share of admirers, but they’re different from the ones who fall for Eddie. Evan bought a new car when he turned 30 just like Eddie, but he plans to keep it for 10 years. 

Skip ahead to Fast Eddie’s 60th birthday and we find him in all alone in a squalid apartment with a bottle of whiskey in one hand and a gun in the other. Eddie had a lot of fun with his new cars, 30 in all. But now his health is failing – all the booze and womanizing has taken its toll. He is no longer able to work, and with no paycheck and no savings he’s faced with a bleak future living off Social Security. 

There is no party, in fact Eddie’s made so many enemies it’s a wonder he's still alive. You see, not all of the women were single. In fact, most of them weren’t. Sitting on the floor, his eyes fall to the gun. In his drunken state he thinks about taking his own life.

Over on the other side of town, Evan and his wife of 30 years share a nice home. Evan is also 60. He enjoys spending time with his family. Evan’s wife is faithful and together they’ve built a successful business. They are living the dream.

Remember that new car Evan bought when he was 30? Well, he stuck to his plan and kept it for 10 years. Then he bought another one when he turned 40, and another when he turned 50. All total, he’s owned 3 cars in the last 30 years. With all the money he’s saved from not buying new cars every year, he’s banked over a million dollars.

How Often Should I Buy a New Car?

A person who buys a new car for $45,000 every year and trades it in at the NADA average trade-in value of 67 percent will spend $730,000 on cars over the course of 30 years (based on 3% annual inflation).

On the other hand, someone who buys a new car once every 10 years and invests what they would have spent buying a new car every year will have $1.3 million at the end of 30 years. That’s based on 20 percent trade-in at 10 years and a modest return of 6 percent.

Closing Thoughts

The less often you buy a car the better off you will be. You should keep your cars for as long as you can. However, don't take it to extremes. You only live once, you should enjoy your life.

The best approach is to buy used. When you buy a used car, you avoid the rapid depreciation that takes place over the first few years. The sweet spot is about 2–3 years old. That way you get a relatively new car while avoiding the rapid new car depreciation. In terms of how long to keep it, as long as you can but not more than 8 years. That way you avoid the inconvenience of owning a car that breaks down frequently.

Photo credit: Freepik Eggstack News will never post an article influenced by an outside company or advertiser. Our mission is to help you overcome uncertainty about retirement planning and inspire confidence in your financial future.