Category: Personal Finance
When is it better to buy a new vehicle versus spending the money to repair? The purchase of a new vehicle is a significant financial decision. Here’s one way to evaluate the options.
Since everyone wants to get the “most bang for the buck”, the question is whether you can extend the life of the vehicle to justify the cost of the repairs. If you can not, then putting the money toward the purchase of a new or gently used vehicle would be the better option. However, you also know that the longer you can keep a vehicle after it is free and clear of debt, the better it is for your financial situation.
Scenario: Normal Maintenance Uncovers a Problem
Let’s assume that you currently own a seven year old vehicle with 90,000 miles. It is a fine vehicle and it meets your needs for transportation. However, you recently had it to the shop for its normal maintenance and the auto mechanic has indicated that your vehicle will need $1,000 worth of repairs in the next month. What should you do? Should you spend the $1,000 that you have saved to repair the car or use the money as a down payment for a new one?
Will the Repair Extend the Life of the Vehicle?
Is it wise to spend $1,000 to repair a seven year old vehicle? Unfortunately, there is no easy answer. It requires you to have some understanding of the impact the repair will have on extending the life of the vehicle. Your mechanic may provide some insight to this question or you may be able to do some research on your vehicle model that will shed some light.
If you can confidently assume that the vehicle repairs will extend the life of the vehicle for a sufficient time period, then making the repairs can be the appropriate action.
However, if you do the repair now, will there be other repairs needed within a short period of time? If this is the beginning of a complete overhaul, then buying new may be the best alternative.
Evaluating Your Options
One way to consider the value of this financial outlay to repair the vehicle is to consider how long it takes you to save $1,000. If by making the repair, you extend the car’s life for a time period longer than it takes to save $1,000, you did not waste your money. Therefore, if you can save $100 per month, in ten months you have saved $1,000.
If the vehicle is repair-free for at least ten months, you made the right decision. At the end of ten months, you have your $1,000 back in hand for a future down payment on a vehicle purchase. You are no worse off for spending the money on the repair. For each additional month that you extend the life of the vehicle, you accumulate more money toward the next car purchase. Under this scenario, making the repair is the best option.
Purchase Option Creates Car Payment
If your seven year old car is debt free, you do not have a monthly car payment. This makes the payback period for the repairs even shorter. Let’s assume that if you purchase a new vehicle, your monthly payment would be $250. After just four months, you would have saved $1,000 in car payments. This logic would say that if making the car repairs extends the life of the car for only four months, you have recovered your repair expense.
The ability to repair a vehicle in a cost effective manner will eventually catch up with you. Once the repairs become too frequent, a purchase decision will become necessary.
Create a “Car Purchase Fund”
To save for the next vehicle purchase, consider this strategy: Once your vehicle is fully paid for, continue to make the monthly car payments into a “car purchase fund”. This can be a savings or money market account established for the sole purpose of accumulating funds for your next car purchase. In our example above, let’s assume that you paid off the car loan in five years with a monthly car payment of $250. If you continued to save the car payment for the following two years of the car’s life, today you would have accumulated $6,000 in car payments in your “car purchase fund”.
Once you own a car debt-free, the longer you can utilize the vehicle, the better. If you continue to “pay” the monthly amount to your savings account, you will be in a good position to purchase your next vehicle with little or, potentially, no debt.
Elaine E. Bedel, CFP®, is president of Bedel Financial Consulting, Inc., a fee-only wealth management firm providing financial planning and investment management services. For more information, visit their website at www.BedelFinancial.com or email to firstname.lastname@example.org.
To search the archive of Perspectives articles, go to the Search page