We are on the cusp of a nice, long three-day weekend. I am excited for it as I haven’t had a time to relax much. There is so much painting to be done at the house. Did I mention I hate painting? Anyway, instead of putting up a post about saving money or making more money, I wanted to run a hypothetical by you. This is just supposed to be fun and make you think a little about the topic. OK, onto the topic!
One of the longer running pieces of personal finance advice is to never buy a new car. Seriously, most experts use the word “NEVER!” I am cool with that, especially as someone who has purchased quite a few new cars, I have learned my lesson. The justification of this advice is you can save a lot of money by just buying a car one or two years old. The majority of depreciation happens within the first year. After that, most cars depreciate on a sliding scale. Some do it slower than others, but I am not getting into that. So, let’s talk about this “never buy a new car” advice.
If We All Never Bought a New Car
What if we woke up one day and everyone started listening to this advice? What would happen? Even if everyone didn’t buy a new car, what if a large portion of our population started on the used car kick? Lets think about it for a minute. Remember, this is entirely hypothetical, but I wanted to provide you with information about how using the word “never” could end up being a bad idea.
Supply Vs. Demand
Economics 101 talk about supply and demand. Most people understand how supply and demand work. But what happens when demand suddenly spikes and supply can’t match it? This is what would happen when a large majority of people starting buying used cars. The supply of used cars would be greatly reduced, maybe even leaving some used car lots barren wastelands. If this were to happen, you can assume by basic economics that prices would rise. They would rise considerably. The same thing happens when supply is low for homes, but demand is strong. It becomes a sellers market. Bidding wars happen and people end up over paying for an item. The same scenario would happen with used cars.
The funny thing is the exact opposite would happen to new cars. With extremely low demand and high supply, new cars would come down dramatically in price. Car lots would try to offload the new cars in to order to try and meet the demand of used cars. You can forget about depreciation in this instance as well. Your new car would be worth less than its used counterpart. When you leave the dealership lot, your car would appreciate. Interesting. People with new cars could easy turn around and sell their vehicles for much more. It’s basic economics people. Demand controls supply in a general way, but it also controls pricing.
You Can’t Have Used Without New
I don’t have much of an issue with buying new cars. I am a car guy through and through, so they are an investment for me. They are a hobby and I enjoy them. As technology and safety evolve, some older cars need to be taken off the road and be replaced by a newer car. It is a product’s life cycle.
There is a lot of articles about how people shouldn’t touch a new car because of the costs. I just described it above. The problem with this scenario is it is pushed as general advice. Everyone should follow it if they want to get control of their money. I understand it. Where the problem lies is you can’t have used cars without someone buying a new car. Right?
New products can’t become used until someone actually uses them. That is the meaning of used. So, if we advise most people to stop buying new cars, we run into two issues. We slowly stop the flow of used cars into the market because people switch to used cars. This in turn creates the scenario above where used cars become extremely expensive and new cars become cheap and easy to afford. It is a crazy place we live in, right.
The Advice Would Change, Right?
OK, this might just blow your mind, but put a towel down and continue on. If this hypothetical world actually happened, then wouldn’t we need to change our advice? Instead of telling people to never buy new cars, we would have to tell people to buy new cars as they would become appreciating assets. The whole equation would flip. Used cars would be overpriced and the supply would struggle, while new cars would be cheap because the demand is low.
So, after many years and decades of telling everyone to never buy a new car, we would have to change our tune and show people they would be creating an investment opportunity if they bought new cars. I just love hypothetical scenarios. They make you think, but you really don’t have to worry about them.
In the end, if you really want to do the best you can with your money, then think about buying a used car. There will always be the “oh, shiny” factor with new cars and I don’t see our materialistic consumer culture switching around. I just like to think about what would happen if it did indeed change. Remember, I have fallen for the new car trap three times. These were all before I had my financial mindset screwed on tight, so I forgive myself and move on. You can’t take back stupid decisions, you can only learn and move on from them.