Used Car Math

Dave Sather’s Money Matters

Over the weekend I stepped outside of a party to get some fresh air. As I stood there a gorgeous Mercedes pulled up where a man let his wife out at the door. The car was still wearing its paper tags and the only thing that appeared to be missing was a big red bow on the hood. It was an immaculate machine.

After the owner parked the car and went inside, the comments from on-lookers started quickly. My favorite was “I can’t believe that a guy who sells junk is driving that car.” Another chimed in with “that car has an $82,000 sticker price on it.”

I quietly listened and then went back in to join the party and find the owner of the high class hot rod.

 “Jim” is a client of ours, but I didn’t want to give that away while standing outside. Most days he drives a pickup and wears coveralls. He owns a business that buys and reconditions a variety of industrial parts. Being a car person myself, I enjoyed giving him a hard time over his new “work truck.”

Jim laughed and reassured me that he had not lost his mind—and quickly told me that despite the opinions of the sidewalk gang, he had not dropped eighty grand on it.

Rather, he told me he was looking for something that was safe on the highway that could haul his family. He then revealed that although the car looked new, it was actually five years old. Better yet, it had 40,000 miles on it and he paid a mere $32,000 for it.

Jim is an engineer by trade and you could see he had done the math a thousand times. He proceeded to tell me “the original owner paid $82,000 for the car and sold it for $32,000—a 60% drop. That means in just depreciation he took a $50,000 hickey in five years. The original owner paid ten grand a year for that car or $1.25 per mile—not factoring in maintenance, gas, tires, etc.”

Jim then added, “We almost always buy used cars. The last car we purchased had about the same miles and we finally traded it in with 140,000 miles on it. We got ten good years out of it.”

“Assuming we do the same with the Mercedes, our cost of purchasing the vehicle will be about $3,200 per year—assuming it is worth nothing when we sell it. If we drive it 100,000 miles our purchase cost will be a mere $.32 per mile.”

As Jim beamed with his new toy, he said that since he is a “junk” dealer he is always happy to take someone else’s used stuff off their hands.

Many may think that Jim’s story is unusual. Although Jim is unusually successful, he is analytical enough to have run the math on car ownership. Broad statistics back up Jim’s philosophy also.

According to Bankrate.com the average car depreciates about 15% to 20% per year depending upon the make and model. If you don’t mind buying something slightly used you can often pick up a good pre-owned car at a tremendous discount to the new car price. As such, a three year old car may have 40,000 miles on it, but it may sell for half of what it did new. Furthermore, with the reliability of today’s vehicles, a well maintained ride can easily last well beyond 100,000 miles. The longer you can run a vehicle, the more efficient the purchase will be.