[Editor's Note: Our question/guest post this week comes from Jonathan Clarke, MD, an emergency physician practicing in Texas.  Jonathan is one of my former residents, who is not only nearly as cheap as me, but twice as good at practicing emergency medicine.  We have no financial relationship. ]


I currently have a financial dilemma that I'd like to share with you and perhaps your readers.  The topic has been covered before, but my ultimate decision may fly in the face of conservative financial wisdom and advice.  The decision is whether to buy a new or used car and whether to pay cash or finance.  I know what you think (used, cash) and I would typically agree, but some other factors may skew my decision.



2013 Subaru Outback

2013 Subaru Outback

1. I'm 37 years old and I've never bought a car.  My current daily driver is a 1998 Jeep Cherokee Sport (not the Grand Cherokee) that my parents bought for me in college.  It's been my daily driver now for 15 years and has racked up over 206,000 miles.  It's mean and green and it just keeps running.  The only reason I would even consider getting a newer car is that the Jeep has become rather unsafe/unreliable as my primary commuter, where I'm currently driving 40-80 miles per workday in Dallas, Texas.  If you've never driven in Dallas, it's NUTS!  So, I'm in the market for a newer car which is very safe, reliable for years to come, relatively inexpensive and also fits my off-duty lifestyle, which includes cycling, camping, sailing, kayaking, etc.  In other words, a Subaru Outback.


2. Our family lives well below our means.  We give 10%, save almost 25%, have a very low housing to income ratio and live quite comfortably on the remainder with plenty to spare.  Oh, and I just made partner a year early.  Our other car (which my wife brought to our marriage) is a 2006 Subaru Outback which she bought used in 2009, and now has 100,000 miles on it.  In a city full of ridiculous bling, some would say we border on being hippies.  Don't even ask about the chickens, bees and organic garden!




The quandary is really whether to pay cash for a 2-3 year old Outback (conventional financial wisdom) or finance a new one (I know, I can hear the shrieks of dismay!).   I completely understand and whole-heartedly subscribe to to the conservative wisdom that one should pay cash for a good used car.  “Financing a new car is the worst investment one can make.”  Yes, but is it always?  With the background I've laid out above, here are a few of my arguments (rationalizations?) in favor of financing a new car.




The Old Car

The Old Car

First of all, the car in question is NOT a luxury vehicle or a status symbol.  It's an average-for-our-day-priced (about $30k) wagon and the difference between new and 3 years old is about $5k (Subarus hold value well).  First I'll tackle the finances… DEPRECIATION.  Yes, I understand that the new car will statistically lose 15-20% of it's value in the first year.  But, I statistically drive my cars for a decade into the flat part of the depreciation curve!  And I'm not planning to sell the car – I'm planning to drive it into the dirt. So depreciation isn't really a factor that's relevant to me and I'm willing to pay an extra $5k to get the car I really want.


Secondly, does anyone (besides a car dealer) REALLY believe that a car is an investment?  Of course it's not.  It's a consumable item, part necessity and part luxury.  If we can agree that it's not an investment, then why should we compare it to our investments?  I expect my investments to serve me by growing in value to support my future.  I expect my car to serve me in my transportation and recreational pursuits and provide a high degree of safety so that I can enjoy that future.  I have no notion that a car is intended to serve my financial interests.  Now I understand that less financially fortunate souls often reach too high to finance a status-symbol car and so strain their finances, but this purchase would have (almost) no impact on our monthly budget.  What WOULD impact our budget is if I were to nearly wipe out our emergency savings by plopping down $20-25k for a used model.  We've just bought a home, so extra cash is a bit tight for now.


Additionally, my savings account at Ally is earning 0.95% interest and I can get 0.89% for 3 yrs financing a new car from USAA.  If I pay the car off in 1-2 years, I lose just a couple hundred bucks in interest charges, while the interest I'm earning on my emergency savings account out-paces what I've lost on the car finance.  So I'd actually come out slightly ahead by financing and keeping my cash in savings… before taxes on either, of course


As an option (and you've suggested this), I could save for a year to pay cash for a slightly used car without breaking the bank now (I just used a big chunk to buy the house).  Yes, but then I have to drive my unsafe beater for another year and hopefully avoid a serious wreck in the meantime.  Hopefully.  Well, living on disability or cashing in my life insurance policy are both unpalatable, so I'd rather have something safer now.  I will certainly begin saving to replace my wife's car now, but I've hopefully got another 150k miles before that eventuality.


What about financing a used car (keep my emergency savings), save $5k and avoid depreciation?  Could do.  But, several safety updates have been made since 2012.  Most significantly, I'd like to get the Eyesight collision-avoidance package (no used cars out there with them yet), since I'm frequently driving 40 miles in traffic after being up all night.  So I'm willing to pay a premium to get that feature.  And this car will likely go with my daughter to college in 6 years, so I want to get the safest car I can now.


Getting a job closer to home or vice versa is another reasonable option and would allow me to keep driving the Jeep, but the current arrangement is too lucrative to make a switch at this point.


So, within the current decision-matrix of long/dangerous commutes with an old Jeep, new car safety features, minimal difference in new vs used prices, good disposable income, and great interest rates… I'm leaning towards financing a new car.  I really hate to hear myself say that and it totally goes against the grain of who I am and what I believe, but there you have it.


What do you and/or your readers think?


First of all, I'd like to correct a few of your misstatements.  I have no problem whatsoever with someone buying a new car.  You can't take your money with you when you go.  So long as you're putting enough away for retirement (and you are), you get to spend (or give away) the rest however you like.  I don't care if you use it as firewood to impress your friends.

Second, it appears you're not looking for just basic “Subaru Outback” transportation.  You're looking at a top of the line tricked out Outback.  The basic one goes for $22,600 new and about $16,000 when 3 years old.  The top of the line version goes for $30,300 new and $25,200 when 3 years old according to Kelley Blue Book.  An outback might not be a luxury item, but those seat warmers and the sun roof probably qualify.

Third, Ally's savings account is only paying 0.84%.  That's less than the price of your financing, and after taxes, quite a bit less.  Now while it's probably true that if you invest the money in riskier assets you're likely to come out ahead, you won't do so using that fully-taxable Ally savings account.

Living Beyond Your Means

The problem I have with people financing depreciating assets like cars isn't so much a math issue as a behavior issue.  As you mention, financing $10K at 1% for a year is only going to cost you $100 in interest plus a few hundred dollars in fees (and perhaps a few hundred dollars that you could have knocked off the price by paying cash.)  Given your salary, it's peanuts.  Even Suze Orman would agree you can afford to finance this.

The issue I have with it is the habit.  First it's the car, then the house, then some nice vacations, then private college for the kids and before you know it you're that 65 year old doc still working 15 shifts a month because he has to who seems to detest his patients, has no tolerance for new nurses and overall seems to hate his life.  Financing a depreciating asset is by definition living beyond your means.  It's a slippery slope.  Knowing you, I doubt you'll go far enough down that slope to matter, but it's worth at least recognizing what you're doing.

Justifications Are Just That

Now, just for fun, a few words about your justifications.  You say you “drive your cars into the ground.”  No you don't.  You sell them in order to get a safer car when you hit 206K miles.  For most modern cars, 206K miles is a long way from the ground.  As a general rule, the longer you drive a car, the better deal it is financially.  It's okay not to get a good deal on a car, as long as you can afford it.  But driving it for 10 years or for 200K miles isn't the same as driving it into the ground.  Driving it into the ground is driving it until it doesn't run and the repair to make it run costs more than the car is worth, and sometimes even further if it's close.

A common justification for upgrading is to get a safer car.  The likelihood of you being in a crash or near-crash where a new safety features actually makes a difference in your health is statistically very low.  If you were really concerned about your safety you'd hire a driver, sleep over at the hospital after a night shift, or move closer to the hospital, not just upgrade your car so you get an extra airbag or better anti-lock brakes.

My favorite of your justifications is “I'm 37 and have never bought a car” because that type of thinking is so common among doctors. “I've been in school and training for 15 years and all my college roommates have great houses, drive fancy cars, are about ready to retire, and go to Fiji every year and I deserve to have the same things even if I have a negative net worth!”  All I have to say is “patience, young Paduan.”  I was commenting to my wife last night about what an awesome life we have.  We've got a three car garage with two SUVs and a boat in it attached to a huge house with a 100 mile view in an outdoor recreational paradise, our kids go to one of the best public schools in town, we have a rapidly growing nest egg, and there is pretty much no single consumer purchase my wife could bring home that I couldn't pay for with cash by the time the credit card bill comes due.  How long did it take to get into this enviable position?  7 years out of residency.  Given your habits, you're not far away.  But the world doesn't owe you the good life just because you went to med school.  You still have to earn it with hard work, good financial decision-making, and just a little more delayed gratification.

A Couple Of Other Options

You presumably make something in the neighborhood of $30K a month.  You save 25%+ of your income.  That's $7500 a month.  Even if you don't want to touch your emergency savings at all for this, you're only looking at saving for four months in order to get your desired vehicle.  Less if you can get a few thousand for your beater.  You can probably still get your 401K maxed by the end of the year so there's no opportunity cost.  If you were really antsy to get a new car, you could sign up for a few extra shifts in the next 2 months.  If your group is like mine, as soon as the kids get out of school for the summer there are plenty of docs willing to give away a few shifts.

You could also use the emergency fund, and replenish it over the next 4 months in the same manner.  It isn't like it's paying you anything anyway.  Yes, I suppose you could get burned if you needed it in the next 4 months, but I suppose you could always sell the car in that situation and get most of its value back if it were that dire, or even raid retirement investments if needed.

At the end of the day, there are a lot stupider things to do than to finance a car at less than the rate of inflation, so if you can't help yourself, go get your Outback and quit feeling so guilty about it.  But don't make a habit of it.

[Update prior to publication:  In his next email Jonathan said his wife was mad at him for not getting the car yet.  At which point I told him happy spouse = happy house and happy wife = happy life and told him to go buy it.  He did and managed to get a very good price ($27K.)  I hope both kayaks fit on top of it.]

What say you readers?  Is it okay to buy cars on credit?  Do you pay cash or finance at a cheap rate?  Comment below!