by Cara
KEY POINTS:
Cars are liabilities. They always lose money. But they also have utility.
The game of cars is to lose the least amount of money in the most efficient way and get the most amount of usage.
You most likely have never been taught to look at the most important number
Focus on your net loss, not the purchase price
COVID was a wonderful time for car shopping- if you knew which number to look at
Follow the principles to show you the opportunity
Repeat after me: “cars lose money.”
Cars are depreciating assets; a liability, even.
But unlike a bad performing stock, cars have utility. They carry function and is something to be used, even enjoyed. So cars are not straight losses.
The game of car economics can even be broken down into its simplest concept: lose the least amount of money for the most amount of usage.
We call this principle Cost of Ownership, or COO for short. Understanding COO will save you thousands of dollars and allow you to win at this thing called cars.
THE MOST IMPORTANT NUMBER YOU’RE NOT TAUGHT TO FOCUS ON
COO is the money that we really pay to use our cars.
COO is not your monthly payment. It’s not the sale price. It’s your loss.
COO EXAMPLE
Say you bought a car for $10,000, kept it for 3 years, and put 30k miles on it. Let’s also say you paid $3000 to maintain the car (typical brakes/tires/fluids- nothing too crazy) and sold it for $6k. Here’s your math:
Entry price - $10,000
Maintenance - $3000
Exit price - $6,000
COO - $7000. Or $194/mo for 36mo.
Let’s say you can lease a car for $194/mo all-in, you would’ve lost the same amount as if you bought and sold this $10k car.
LOSE MONEY “STRATEGICALLY”
When you focus on the COO, you can be strategic in how you lose that money.
Lose as little as possible using the least amount of money
If the loss is the same between a newer car and an older car, go for the newer car
If the loss is the same between a lease and a used car, consider the leased car
If the loss is similar between a cash purchase and a finance, consider leveraging through to protect the opportunity cost of your cash
If the exposure (or potential loss) is small to use the car for another year, consider keeping the car longer
If the car is reaching a certain milestone (100k mi, for example), consider selling earlier to get top dollar for your car and avoid expected repairs, keeping your COO lower.
THE PRINCIPLE; NOT THE RULE
We hear comments like this all the time:
“Never buy new, buy used only.” “You should only lease.” “Never finance, pay cash.”
These are rules- not principles.
Rules only work because it’s supported by principles- until they aren’t. I’m not married to the method- I’m committed to the principle.
Some cars are best bought used. Others are best bought new. Others are optimized with a lease.
While these are just the foundations of understanding COO, this is our advice: let the opportunities speak for themselves are prove which way you should go. Divorce yourself from the rules and get grounded in the principles.
