When is the right time to buy and sell a car?
3000 euros! That's how much a repair of my 9-year-old Alhambra cost me. Was it worth repairing at all? Shouldn't I have rather sold it? What car and when should I buy it to make my purchase pay off financially? Read the third part of the series on car finance.
A year ago, I wrote my first blog from the miniseries about cars The Real Costs of a Car, where I discussed in detail all the expenses I incurred with my then eight-year-old car. That's when I found out that it actually cost me twice its official purchase price.
The miniseries continued with a part on Car Depreciation, which is one of our biggest living costs and is often overlooked. Knowing the reality was a slap in the face for me. The value of my car has dropped from 32 000 euros to barely 10 000 euros in 8 years.
I said to myself: "The car is eight years old; I will drive it for another five years and the mileage will be about 200 000 km. After all, my Alhambra drives quite reliably and most of the time it only covers short distances around the city. Now years will come, in which I will save the most on the depreciation of the car (a price drop due to wear and tear) because its price will not be falling so sharply."
Oh, how cruelly I was wrong. Less than 9 months later, I left 3 149 euros at the service station for repairs, which is, in my estimate, approximately 35% of the residual value of the car. And how easily it came about. After refueling, after about 40 km on the highway, the indicator lights for spark plugs and fuel filter came on. So we drove the car back home.
The next day, the indicator light was off. This went on for a few days. On for a while, off for another. Until I forced myself to go to the service station, all the sensors for the measurements (EGR valve, NOx sensor, and the glow plug were destroyed). The estimated repair cost of 2 000 euros. I rolled my eyes, but it was still a bearable figure.
When everything was repaired, they called me from the service station with another bad message: "Mr. Hrbatý, the catalyst also needs replacing. It's completely burnt." That meant extra 1 000 euros. "This will be a very expensive theme for the article," I said to myself. But what else was left to do when the car had already swallowed 2 000 euros and it still didn’t work.
I am very lucky that my family finances include a Finax account called the Emergency Fund. At least I didn't have to worry about where to get the money at that moment.
All that time, I was wondering if the repair was worth it at all. Shouldn't I have sold the car in the condition it was in and bought a second one? If yes, what kind of a car? For what price? How do I deal with it to get the most out of it? As a financier, I groped. That’s why I decided to have a careful look at it.
How do car service costs increase over time?
Let's start with the average cost of servicing a car. Those naturally grow over time. I have found several graphs for that. An article on the page YourMechanic.com, for instance, offers an interesting graph.
In the picture, we can see that from about the 12th year of the car's life, maintenance costs are the highest. Many people will think they’ll somehow manage to finish the car off, but it is necessary to realize that all cars have to pass technical and emission inspections every two years. Preparing a car for these mandatory inspections costs many owners some extra expenses.
I also found an interesting graph on the WhoCanFixMyCar.com website, where, among other things, they talk about the statistical probability that your car will break down. From the 8th year of the car, there is about a 10% chance it will break down.
Later, the probability decreases, which is also caused by the fact that many cars already end up in the scrapyard by that time, as the average life expectancy of cars is somewhere around the level of 12 years.
However, it should be noted that the total cost of maintenance and repair also vary by manufacturer. This statistic is from the US market, so European car manufacturers may seem more expensive in it. In their domestic European market, the order would probably be different.
There is definitely some truth to this table. My mother-in-law has a Toyota Auris and apart from a regular change of oil, filters, and one change of brake pads, she hasn't repaired anything on that car yet, and the car is already 12 years old. That is incomparable to my Alhambra. If you happen to find a better table for the European market, send it to me and I will replace it in the text.
Total depreciation, maintenance, and servicing costs
From the available data, I constructed a graph of how the total costs of car depreciation, maintenance, and repairs would develop. Notice that the depreciation costs are the highest at the beginning and the costs of repairing and maintaining a car are the highest at the end of the car's life.
As a model, I took a car with an average value of 30 000 euros. I used the data from the depreciation article and roughly estimated the maintenance and service costs from the graphs. The results are not completely accurate, but they give us a good picture to make the right informed decision when buying and selling a car.
From the 8th year of the car's lifespan, the total costs of depreciation and repairs are equalized, and in the following years, the costs of service and maintenance already increase faster.
That means the strategy of buying older used cars is no longer profitable, because cost-wise, it will end up being the same.
What did my mechanic say?
Hence, I asked my mechanic when he thought was the right time to sell my Alhambra and cars of this type in general. I asked him to think about it from the point of view of service and maintenance when his customers visit him frequently and leave too much money relative to the market price of the cars there. He mentioned two parameters he would focus on.
The first parameter is the mileage of 200 000 km. The second is the time of 10 years. These are the two main factors determining when the car starts to break down more often in Slovak conditions of winter (frost, snow, and road salt) and summer (heat above 35 °C). Many parts, especially rubber and plastic ones, start to wear out then, meaning it's time even he would get rid of his car.
Of course, a lot also depends on whether the car is garaged, how the owner takes care of it, whether it is regularly serviced, and so on.
Which period of holding a car is the most favorable?
Virtually all my friends, colleagues, neighbors, or any family member have a car at home. Interestingly, however, each of them has a different approach to buying a car and the duration of owning it. I know people who change cars almost every year, but some buy and hold their car until they have to take it to a scrapyard.
In my analysis, I tried to look into which four-year and which six-year periods should be the most favorable in terms of saving on expenses, looking for the so-called "sweet spot".
For four-year periods, I examined the cumulative costs from the first to the fourth year, the second to fifth year, and so on. In doing so, I used the example with the price of a car at the level of 30 000 euros again. This is the result:
If I own a car during its first four years, my total depreciation and servicing costs will be 17 700 euros, which is more than twice the amount payable in the case of owning the car from the eighth to the eleventh year of its lifespan. The total cost during those four years is only 8 599€.
What's more, this period (8th to 11th year) is the cheapest of all periods, as the car depreciation decreases very little in each of the relevant years and the maintenance costs are still at an acceptable level.
In the graph, I selected two periods that interested me. The first period is the fifth to eighth year. I would recommend this period in the case of the first car in a family or for families who want to indulge in a slightly higher standard.
There is a relatively sufficient number of cars in the market that the owners want to sell right at this age, as, for example, their financial leasing ended. You will definitely find a car with low mileage for a good price, which will probably last another four years without major repairs.
I recommend the period from the eighth to the eleventh year to families who want to save as much as possible on the car costs or in the case of buying the second car in a family. This should be the most financially favorable period. Holding a car for more than 11 years, on average, does not pay off.
I have also prepared costs over six-year periods for people who do not want to sell and buy cars so often. Once again, I have selected two periods that I personally like, one from the category "I can afford a better standard" and one from the category "price is the most important".
How may this cost cut translate into personal finance?
Overall, this data opened my eyes and I must admit that I had never viewed buying and selling a car this way myself. But now comes the biggest revelation and idea I would like you to take away from this blog.
For illustration, I will again use a car worth 30 000 euros, which I would like to keep for 10 years. I have three options.
- I buy a new car and sell it after five years, then I buy a new one again and sell it after five years,
- I buy a new car and sell it after ten years (I have used this strategy so far),
- I buy a five-year-old car and sell it after five years when the car is ten years old, and I repeat this twice.
Many people struggle to find even a euro in their family budget each month and this way, they can suddenly save 75 euros per month by buying a new car once in 10 years. However, if you buy 5-year-old cars and use them for five years, you will save 149 euros per month (17 902 euros in 10 years) compared to buying two new cars.
As Janči Tonka and I have written and mentioned in our podcasts many times, we should always look at the biggest expenses in our family budget, because they hide the greatest saving potential. And car definitely belongs among such expenses!
However, my ideas don’t end there. I also want to show you what pension this saving can provide you. If I assume that you would buy your first car when being 20 years old and retire at the age of 65, the amount you would save by a regular monthly investment of 149 euros with an average return of 8% is astronomical.
A young person would be able to save 720 thousand euros in his/her life solely by buying used cars instead of new ones. If you are 30 years old, these savings can earn you more than 323 thousand euros until your retirement.
Those numbers make my head spin. Why was I always buying new cars this whole time? Can someone explain this to me? I'm sitting here, shaking my head in disbelief.
If we put it in our pension calculator, savings in the volume of 720 thousand euros would bring you a true Swiss monthly pension of 4306 euros over twenty years, which we could even automatically increase by the rate of inflation each year.
For a better overview, I attach a table of savings and possible pension by age, if you are not 20 years old anymore and seek to start saving on cars today. The table compares the potential income from investing the money saved by the regular purchase of used 5-year-old cars and owning them for 5 years against the regular purchase of new cars for 5 years, resp. buying a new car and using it for 10 years.
In the end
Preparing this blog opened my eyes.
The next time I will be considering an exchange of my car, I will open it again and think carefully about the numbers. Yes, I want to buy a safe and reliable car, but whether I buy a new Toyota or the same Toyota that has been driven for five years, I get practically the same safety and comfort as with a new car but save a lot of money.
Wishing you the best of luck with buying and selling your next car.