The Economics of Depreciation: An Auto Example

As I write this, I am in the middle of a decision. I own a 5 year old sedan that is operating wonderfully. I am daft enough to think that a brand-new, stick-shifting, turbocharged sedan is more fitting for me. This is a problem. I tend to live on the frugal side of the imaginary spectrum, but since I have been doing some work on my car, I have started to Jones for a slick one. So, as with most difficult decisions, I took to excel.

As most of us have heard, driving a car off the lot is one of this biggest value-hits one can take. I found that o be true. Below is the depreciation curve of my current car.

car dep.png

This is not exactly depreciation of the straight-line variety we studied in school. I have taken a beating over the last 5 years, but going forward my vehicle will be quite cheap to run. As it stands I must forget about the past as that is a sunk cost. The next 5 years look like this:

Cost (Trade-in Value) $ 8700
Value in 5 Years $ 3500
Purchase 11/4/2017
5 Years 11/4/2022
Monthly Cost $88.11

Not so bad, right? You would think that this would deter me from looking further; nope, I’m too stubborn. Here is what a new ride would run over the next 5 years:

Cost $ 26800
Value $ 14100
Purchase 11/4/2017
5 Years 11/4/2022
Monthly Cost $215.19

Pretty dumb move, right? Well, yes and no. I thought about it some more and realized that this is not apples to apples, although it does portray the next 5 years and my present situation. What I haven’t accounted for is the next 10 or 15 years, as I have no problem holding my current car for 10, I will likely have less of a problem holding my fancy one also.

Here are two 15 year scenarios:

  1. Buy new car, hold for 10, Buy another…
  2. Hold old car for 5 more and new one for 1

In scenario 1, I am looking at a 15 year average monthly cost of $193 for some cars that will add value to my new interest. In scenario 2, my cost to hold onto my car and wait would be $151. As with most things in life, it pays to wait. Here’s where my analytical mind tends to trip up: I equate the numbers and obviously point to the cheaper option. I do this without adjusting for the value it may bring me.

As the saying goes, “he knows the price of everything and the value of nothing”. That’s how I feel when I’m in full-on frugal mode. Take this as a justification, if you will, but for an increase in cost of $45 per month to have a fun car to drive, I think it would be prudent to weigh the options.

 

 

Disclaimer: This flies in the face of most personal financial writings. I have been on both sides of the fence and I am staring to find a balance. Obviously it pays to save and have an emergency cushion, but the whole point of creating wealth is to use it in accordance with your interests. Obviously, buying new cars is not an ideal choice f you are trying to pinch every penny. As the graph shows, buying a 5 year old car seems to be of great value if you are not a motorhead.

Kindly take this analysis with a shaker of salt.

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