I recently purchased a new car after finally parting ways with my last one after nine years. I was sharing the process I go through with a friend, and it reminded me to share my thoughts on buying a car with you.

You may not realize this, but car dealers and manufacturers know that households tend to purchase a car (on average) every three years. Yet, in spite of this high level of frequency, purchasing a car remains one of the most stressful activities we all participate in.

Car Ownership Statistics

I have yet to meet anyone who enjoys the process, which is why we receive so many questions. I don’t enjoy it either, but it’s a necessary evil if we want to get from Point A to Point B.

Given the enormous cost of cars these days, it’s a very good idea to take the time to evaluate the most cost-effective way to purchase your cars, both now and in the future. With all the available “financing” options, you really have to do your homework.

New vs. Pre-Owned

Before we begin with how you should pay for your next car, let’s talk briefly about buying a new car vs. pre-owned (formerly known as “used”).

In our home, in addition to purchasing new cars, we have also benefited from buying low-mileage pre-owned cars. I originally purchased my 2015 SUV with under 4,000 miles on it. It turned out to be not only my favorite car I’ve ever owned, but also a terrific value.

I mention all of this because, depending on the model of car you want, buying a low mileage, pre-owned car may be a good option for you as well.

Appreciating vs. Depreciating Assets

Assuming you’re considering the purchase of a “new” car, the first factor I believe you have to think about is purely financial.

Most of us have been conditioned over our lifetime to “own” everything, and I believe that’s a worthy goal. However, if you stop and think about that, what you want to own is “appreciating” assets.

For example, owning your home makes the most sense for the overwhelming majority of individuals, and it makes sense because residential real estate values have traditionally appreciated throughout history, although not always, as we all learned during the financial crisis in 2008-2009.

A car, on the other hand, is a “depreciating” asset. In fact, it depreciates rapidly, so you have to really question your desire to own it for “pride of ownership” reasons.

The exception to this, of course, is the individual who “really” likes cars and spends considerable time working on and maintaining them as a hobby.

Simply an “Expense”

Purchasing and owning a car is simply another expense much like many other expenses you have in your life.

It’s not a very good “asset” from an ownership standpoint, so for the sake of our discussion, let’s consider and equate all money that goes into the purchase and ownership of a car as an “expense.” For example:

  • buying the car for cash,
  • making a down payment,
  • making loan payments,
  • making lease payments,
  • paying sales and annual excise taxes, and
  • repairs and maintenance

These are all “expenses” you should consider in your overall analysis of “how” you’re going to pay for your new car. When you break it down, it’s all a matter of “how much” you will pay and “when” you will pay it.

I recognize that most individuals give little thought to how they’re going to buy their cars. However, I recommend having your own personal “long-term” car buying strategy, and that strategy should govern your car purchases.


Before we get into analyzing what would make the most economic sense, the question of buying vs. leasing a new car comes down to a few factors:

  • anticipated annual mileage, and
  • the make and model of the car (and, in turn, its residual value)

Let’s start with mileage. If you know you will be driving in excess of 12-15,000 miles per year, leasing gets pricey because they have to charge you up-front for excess mileage on the car. Given this, leasing rarely makes sense if you will drive in excess of 15,000 miles per year.

On the flip side, if you don’t drive very much, the value of leasing goes down substantially. If you turn in a leased car after three years and you only drove it for 18,000 of the 36,000 miles you were allotted, the dealer got the better end of the deal.

Given this, the sweet spot for leasing is driving between 9,000-12,000 miles per year (and possibly 15,000 depending on the model).

Car Make and Model

Depending on the make and model of car you wish to buy, two $50,000 cars can have monthly lease payments that are $150 per month different.

How can that be? Well, there are three components to the monthly lease cost:

  • price of the car,
  • the leasing rate (interest rate), and
  • the “residual value.” (The residual value is based on the price the leasing company believes they can sell the car for after you turn it in three or four years down the road)

Some cars have traditionally had higher residual values: Toyota (Lexus), Honda (Acura), to name a few. Others, unfortunately, do not.

For example, leasing a $50,000 Lexus can be cheaper than leasing a Chevrolet or a Ford with the same sticker price.

Now that we’ve laid this groundwork, let’s analyze the pros and cons of buying vs. leasing a new $50,000 car.


If you buy your cars outright or use car loans, let’s assume that you buy and keep them for approximately eight years.

Except for extreme situations, purchasing a brand-new car every three years with cash or using loans is very rarely a good financial decision. The reason is that cars depreciate significantly in the first few years, so you don’t walk away with very much. This is especially true if you trade them in to a dealer.

Assuming you keep your car for eight years, your cash outlay looks like the following:

  • Year One: You pay $50,000 in cash to purchase the car, plus taxes, title, insurance, and registration fees. Maintenance costs are minimal.
    • To free up this $50,000, you take the money out of an interest-bearing savings account, or you withdraw a larger amount from a tax-deferred account like an IRA and pay taxes before you can “net out” at $50,000 to pay for the car.
  • Years Two through Four: your out-of-pocket costs for maintenance are typically minimal. (oil changes)
  • Years Five through Eight: your out-of-pocket costs can be extensive as most significant car repairs and maintenance occur around 50,000 miles:
    • new tires,
    • brakes,
    • exhaust system,
    • timing belt,
    • tune up, etc.
  • Year Nine: Begin the process all over again. Hopefully, if your car has good residual value, you can sell it for a reasonable sum of money to use toward the purchase of the new car.


  • Year One: You begin the process by purchasing a car using a lease. As you would if paying cash for the car, you still pay up-front for any taxes, title, insurance, and registration fees. (We don’t recommend making a down payment toward the principal on a lease.) The only other cost when you pick up your car is the first month’s lease payment (approximately $700 per month for a $50,000 car depending on the make and model you want, and the residual value). And, just as if you bought the car outright, maintenance costs are minimal.
  • Years Two and Three (or Four if a Four-Year Lease): Your out-of-pocket costs are:
    • your $700 per month lease payment, and
    • minimal maintenance costs (oil changes, etc.)
  • Year Four (or Five if you have a Four-Year Lease): you begin the process all over again. You turn in your car to the dealer and begin leasing a new car just as you did three years ago.

What can make leasing an attractive option if all the other variables we discussed apply to you is that it “month-a-tizes” all of your car expenses: purchase and maintenance. When you buy cars outright for cash (or use loans), your out-of-pocket expenses are more random.

When you lease, you pay no lump sum down payment. You just make a monthly payment until the end of the lease (three to four years). At that time, you turn the car in and start all over again. There are three advantages to this:

  1. Outside of routine oil changes, you rarely pay for car repairs because cars typically don’t require repair in the first three years of ownership, and you’re not inconvenienced waiting for your car to be serviced.
  2. You never have to place large sums of money (down payments, etc.) into a depreciating asset. Instead, your money can continue to potentially earn interest or capital gains.
  3. You have a predictable monthly “car expense” payment which matches when most individuals receive their income, on a monthly basis.

The bottom line is to evaluate your driving habits and the make and model of the car you wish to purchase first. If you drive between 9,000 and 15,000 miles per year, and you plan to purchase a car with a high residual value, you should do the math and consider possibly leasing.

However, if you drive less than 9,000 miles per year, then it may make more sense to buy outright and keep your car for many years.

Either way, make your decision after carefully weighing the alternatives. Don’t allow yourself to be manipulated by a car salesman or the “finance manager” at the dealership.

Have a very definitive car buying strategy in mind and make your decision on your timetable, not theirs.

Source: Kelley Blue Book Announces Winners of 2024 Best Resale Value Awards

This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.savantwealth.com. The scope of the services to be provided depends upon the needs of the client and the terms of the engagement.

Author Jack Phelps Financial Advisor / Managing Director

Jack has been involved in the financial services industry since 1989. He is the author of "The Relaxing Retirement Formula: For the Confidence to Liberate What You’ve Saved and Start Living the Life You’ve Earned."

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