Wednesday, August 19, 2009

Keep Your Cash, I Want My Clunker

Keep Your Cash, I Want My Clunker: "

The following guest post is from one of my favorite writers, Neal Frankle of Wealth Pilgrim. After reading the post, head over to Neal’s site and check out his free subscription options.

Let the Government go bail out somebody else. It’s too expensive for you.

I’ll admit that I haven’t followed all the ins and outs of this program but I have two good reasons for not doing so:

  1. I have a 1995 Camry that I love. My two eldest daughters used it to get to and from high-school. I still have a ten-year old at home and my ultimate goal is for her to use it to get to high-school 6 years from now.

  2. As long as I have a pulse, I will do everything I can to stop anyone I know from buying a new car. It’s a complete waste of money in most cases.

So why am I bothering to write about this? Well, the subject came up over the weekend. My daughter is thinking about getting a new car and “taking advantage” of the “Cash for Clunkers” program (with my beloved Camry no less!). I’m dead set against it.

This program stinks worse than the junk you find when you clean out your trunk for one major reason:

It forces you to get rid of a very inexpensive mode of transportation and burdens you with a very expensive form of transportation.

An automobile is a device we use to move around. That’s it. It’s not a social statement or a tool to increase your self-esteem. It’s a hunk of metal that moves you.

That being said, the question is, how do you get from point A to point B in the safest manner with the least cost. Right? Am I missing something?

Let’s look at my Camry to illustrate the “virtues” of this program. You tell me where I’m wrong.

Let’s take the first scenario where you trade in your clunker, receive $4500 and buy a new car. What does it cost you to own that new car over the next 7 years?

A 2009 Camry (SE) costs a hair over $23,000 if you buy a new one. Assume you buy it after turning in an old clunker, drive it for 7 years and sell it. In this case, here’s how your numbers add up:


So, if you buy the new car, it will cost you about $1700 per year to own. This is without the high cost of insurance you must buy when you own a new car. It also excludes the jacked up price you paid for the new car because everyone wants one right now and it excludes the maintenance cost. (I could not find good data on what it costs to maintain a used car.)

Now, lets assume you pass on the cash and drive your clunker. Here’s what it costs you to own it per year:


This means you could spend up to $1400 per year on repairs and still save money vs owning a new car. This assumes the car is safe and reliable for your particular needs. In my case, my 1995 gem is perfect.

By the way, this analysis ignores the low cost for insurance for the used car. No question about it, the clunker is better than the cash.

Will the clunker last another 7 years? Maybe not. So let’s consider another alternative.

If and when my good old 1995 Camry dies, I’ll replace it with a 2 or 3 year old car. It’s still going to be much cheaper than using this program. Take a look:


I used the Toyota site to determine the new car prices. I used the Kelly Blue Book site to get residual values. Again, this excludes the higher cost for insuring the new car but the lower maintenance expense. Buying used saves you $600 every year.

The bottom line is even with the clunker cash, it doesn’t make sense to buy a new car. So just remember this, friends don’t let friends buy new cars.

Post from: Frugal Dad