Dear Johnny Q&A: Should I buy a new vehicle after graduating college?
Dear Johnny, thank you for your question! First off congrats on graduating college, education is a key piece to long term success.
Your question is regarding if you should purchase a new car after graduating from college, I will give my personal opinion below. This is not a recommendation, just my opinion.
There are a bunch of questions you need to ask yourself.
How much total debt do you have? (include all student loans, credit cards, everything)
Do you have a job? How much is it paying?
How bad do you really need a new/different car? Do you have one that currently runs and is reliable? Are you wanting to purchase a new car to fulfill a lack of happiness in your life?
What are your monthly expenses? What is your net income after saving a minimum of 15% for retirement? (more than 15% is better) What is your profit cash flow each month? Ie: (Expenses are $3,000/month, take home pay after contributing to retirement is $4,000/month, net profit is $1,000/month)
Do you have 3-6 months of money set aside for an emergency?
Key takeaways to consider:
If you do not have the above questions answered, then no, you should not buy a new car.
If you have any debt, I would not purchase a new car.
If you can ride your bike or use your current car longer, I would not purchase a new car.
If you do not have 3-6 months of money set aside for an emergency, I would not purchase a new car.
If you do not love your career or cannot imagine staying in your current job long term, I would not buy a new car.
If your profit cash flow each month is negative, I would not buy a new car.
If you cannot pay cash for your new car, I would not buy a new car.
I am not a fan of new vehicles. They are huge money wasters. They depreciate on average 60% in the first 5 years of owning. If you purchase a vehicle for $30,000, after 5 years it is worth $12,000. (not a very good investment). I believe most people should be buying 3–5 year-old vehicles. They are new enough to be reliable and fun to drive, but you save a tremendous amount on how much it depreciates.
Another few good rules of thumb: (if you want to become wealthy)
1) Keep your vehicle price to 10% or less of your annual gross income. If you make $100,000/year, your vehicle purchase price would be $10,000 or less.
2) Keep your vehicle price to 5% or less than your total net worth. If your net worth is $85,000, your vehicle price would be $4,250. If your net worth is $750,000 your vehicle price can be upwards of $37,500.
These numbers and questions may make you a bit nervous and frustrated, that's normal. Most recent graduates driving new cars are poor. You do not want to be them. The average age of a new car owner is between 50-55 with a net worth of $200,000-$400,000k (+/-). (for this age group is still very low in my opinion)
You've got time to purchase a new car. Get your other priorities in order, focus on growing wealth, health and happiness.