The car he bought today is a 2004 model, which makes it about 7 years old. He'll see some depreciation if it he keeps it 5 years but not nearly the depreciation he'd see if he bought a much newer and more expensive car. Overall buying newer cars is not "bad" but it is pretty ridiculous when you have a negative net worth and little cash on hand.
I like to suggest the beable buy it twice rule. You should have enough money in the bank in real accessible cash to be able to purchase your car 2x over. If you have 2 cars then you'd need their total value x 2. The reason for this rule is two-fold. One, by postponing gratification and creating the habit of saving, you will value the dollars you spend more. You will grow to like and enjoy the feeling of having a good amount of cash in the bank. You will realize that the car purchase is not as much a purchase as it is a "trade". You are trading your earned cash for the car. Once you buy the car, the cash goes away. If you spend your cash as soon as you collect it, you will of course have 100x more feeling for that cash then when you spend borrowed money, but you won't have as much discipline as when you save 2x the purchase amount. The second reason for saving your cash until you have 2x the purchase amount is that at that point you can drop comprehensive insurance on your car. You don't need to protect yourself from having to replace your car because you have the cash to replace your car. This means that if you drive your car into a tree and ruin it, then you can go out and buy another car. If you can't do this, then you have to pay for full coverage insurace on your car. You of course must have full coverage if you borrow to buy you car because the bank that lent you the money knows for a fact that you can't pay for a new car. How do they know you can't pay for a new car?...well, you couldn't pay for the first one..which is why you came to them to borrow for it.
Some people will say "if I don't have full coverage and I do get in a wreck, then I'll have to pay for the repairs"..to which I say the same thing I say regarding "free" public education..."trust me, you're still paying for it". Firstly, if you have to carry more insurance then you are paying more in premiums. If enough years pass without making a claim, then the insurance company wins..which of course they do most of the time because after all they are a business that requires profits to survive. Then, if you do make a claim, the insurance company is likely to still win because a) they collect your deductible first and b) they can raise your rates. Over time, just like gambling in a casino.. you will loose..because the game is designed for you to loose. The only way to beat a casino is to not go into it or to own it. The only way to beat an insurance company is to not use it or own it. The more you can take on the risk by reducing coverage and raising your deductible, the less you are using the insurance company and the more you are acting link your own insurance company. Of course you are required by law to carry liability insurance and so you must. In fact, you might want to carry a good bit more liability than requried by law. Supppose you take out a van of students on a mission trip or a bus. If you do $50,000 of damage to 7 people plus a $20,000 damage to a vehicle, then you're going to need to pay up a great deal more than the minimum liability required coverage. However, if you have millions in the bank, you again can self insure this aspect and only carry the required liability amount.
A few years ago my wife's $2,000 Saturn sedan with absolutely no features except the manual transmission (She preferred a manual and I could see mini-vans in her 20 year horizon, so I figured I better get her that 5 speed now), got broken into. The thiefs stole maybe $200 in music CDs, tools, and other stuff in the car. They didn't take the change in the cup holder for some reason. Well, if we had super full coverage and a $100 deductible, then we could have made a claim and gotten $100 from the insurance company. However, over years and years of only carrying liability, we've saved thousands of dollars in insurance. So, when it came time to replace the items in the car, we just replaced them. We functioned as our own insurance company. Statistics being what they are..we are still way ahead over time and will likely continue to win in this game.
When deciding what car to buy or more importantly, deciding how much to spend, remember to take a little snapshot of your net worth. Your net worth is how much money you have. It also includes other assets like your house and usually it includes cars and furniture and stuff. I don't like to count my cars and furniture. For one, neither are worth that much in my case so why count pennies when you're busy counting Benjamins. Secondly, my used furniture and cars don't really make ore save me much money month to month. They are just things I have to have to function. Now, a house saves me money each month in rent. And, stocks and businesses generally make me money each month and year, so they really should be counted. Also, it is these assets that make money that will allow you to quit working someday and retire. You can't retire off the value of your DVD collection.
So, to arrive at your net worth, add up the value of any real estate, businesses, stocks, and other bank accounts you own. Then subtract from that hopefully hefty total, any debt you owe (credit cards, school loans, car loans, store card balances, medical bills, and home mortgage). If you end up with a negative number you have a negative net worth. You might be poorer than most homeless people. Think about that while you treat yourself to $9.00 drinks at the bar on Friday night. If you have a positive net worth then you can start to compare the purchase of your new car to your net worth. If you're net worth is $5,000 because you have no debt and $5,000 in the bank, then you might end up spending 100% of your net worth on car. This is not ideal but sometimes necessary for a first car purchase. Later on, you'll want to always be reducing the % of net worth you spend on everything. Imagine how freeing it would feel, and how much my no full coverage auto insurance make sense, if you have a net worth of $300,000 and you buy a $10,000 car. The car will be 3.3% of your net worth. You can re purchase that car 33 times over. I like that feeling. You can apply this to anything...furniture, college tuition, clothing, vacation spending. Lets briefly look at vacation spending. If you have a net worth of $10,000 because you owe $20,000 to your college loans and auto loan and you also have $30,000 in retirement savings, then a $5,000 vacation is 50% of your net worth. Think about it 1/2 of your total financial worth spent on vacation!
You can also play the percentage game in relation to income. How much do you spend on vacation per year in relation to your annual income? I try to keep my vacation to 5% or less of income. As time goes on, this should be a decreasing % of net worth. Imagine the power of your net worth growing faster than all of your budget items. This will undoubtedly happen if you invest well and continue to make savings your #1 budget itme. If you save 30% of your income and spend 5% on your vacations, then over time, your vacations will be smaller and smaller portions of your net worth. Eventually your net worth will grow much more on its own than you spend on vacation. When your net worth grows more on its own than you spend on all of your expenses, then you are officially able to retire...as you won't need to produce earned income any longer. Your investment income will pay the way. And, to bring it back to the car purchase...the day of arriving at retirement is brought closer the less you spend on your vehicles and the more you spend on savings.
