Good money management has two sides to it. On one hand, successful investing makes you the money you need to live the lifestyle you want. But how you handle the other side of the money equation -- your spending -- is at least as important to your overall financial security.
Take the vehicle you drive. Everyone knows that the minute you drive a car off the dealer's lot, it immediately loses a big part of its value. And no matter how strongly you may believe that your 1980 harvest gold Ford Fiesta should be a collector's item, most cars will never make it into the limited realm of collectors' vehicles that actually go up in value over time. Face it -- eventually, your car will go to the junk heap.
But that doesn't mean you need to accelerate the process. With cars, as with many things, it's not a matter of turning lemons into lemonade. Keeping unavoidable costs such as repairs and maintenance low is one winning strategy. But even though there's only so much you can do to stay out of the repair shop, you can cut costs by replacing your car less often.
The three-year itch
Of course, not everyone feels that way. Plenty of people still want to drive a brand new car every few years. Especially in the luxury-car segment, vehicle makers such as Daimler's (NYSE:DAI) Mercedes-Benz and Ford's (NYSE:F) Jaguar division have tried to entice people into newer cars through lease programs and financing incentives.
For many, however, the frequent desire for a new car is just a habit they've developed over a lifetime. In the past, the short lifespans of vehicles made frequent replacement more a necessity than a luxury. There's a reason old cars have only five digits on the odometer -- getting 100,000 miles on a car was cause for celebration. Now, even a million miles is within reach for some.
In general, though, used-car prices still reflect the greater demand for new vehicles. According to Kelley Blue Book, the average car loses 65% of its value in the first five years. Even cars that win awards for best resale value, including the Honda (NYSE:HMC) Civic and the Toyota (NYSE:TM) Corolla, are lucky to retain about half of their value.
Keeping it forever
But consider the second half of a car's life. Even if a car loses half of its value in three to five years, it might keep running for another 10 or 15 years after that. That's as much as five times the value for the same price.
Now, granted, older cars tend to need more frequent and costly repair work. In deciding when it's time to bite the bullet and replace a car, the final straw is often an expensive repair that costs more than the vehicle's current value. So if you own your car with the intent of running it into the ground, you need to be prepared for the day when you finally succeed.
Yet over your lifetime, think about what a big difference it can make to hold on to your cars longer. If you buy a new car every three years, that means you'll buy 15 cars from your college years to retirement. At $30,000 per vehicle, even if you get half of your value back in trade, you'll still fork over $225,000 throughout your lifetime to your favorite dealer.
In contrast, if you buy new and run your cars into the ground, you might have to buy only three or four. That'll save you at least $100,000, which should more than make up for the extra repairs you'll need to keep those older cars running.
Cutting your losses
Car buying is just one example of an expense most people can't really avoid. But you can minimize even unavoidable expenses. By being open to money-saving ideas, you can create big savings that will give you more money to spend on the things you really want or need.
For more on keeping your commuting costs low, take a look at:
- Why you should buy a used car.
- How to find a car for the long term.
- What to watch out for if you lease a car.
