Why Should I Keep Dumping Money Into My Old Car Or Other Old Junk?


That older car of yours is starting to show signs of wear, and it seems month after month you’re fixing something or other.

When should you call it quits and upgrade to something newer?

If you’re frugal, you’re trying to get every last stinking mile out of your car possible.  If you’re like me with 4 kids, you think it makes no sense to get something newer that kids will destroy.  The body of my black 2000 Nissan Maxima (bought used with 50,000 miles in April of 2005) is in fairly good condition, the car looks decent, and I’ve taken care of it.  I’ve got 145,000 miles on the car and in the last couple of years I’ve had to replace several costly parts, including new tires for about $300, the alternator cost about $600, the new radiator last month cost another $500, and the exhaust system replacement cost another $300.  Not to mention, someone broke the lock last Thanksgiving breaking into my car (which cost $350 to fix).  Throw in other small items and the bill in just 2 years was over $2000.

Nearly every time a new bill came up I wondered to myself if it was time to buy something newer.

As an Accountant who has worked for various large manufacturers with multiple plants and millions in equipment, I’ll share how we evaluate purchasing or replacing capital equipment and other big purchases.  I’ll then help you better evaluate a potential large purchase or replacement purchase should your car breakdown, your roof starts leaking, your water heater starts giving you problems, or maybe your A/C is on the fritz and your unsure whether to pay for a service call or if you should go ahead and buy instead of taking a chance wasting money on a call.

Payback Period and Internal Rate of Return are so simple to understand, they really sound more complicated than they are.

Payback Period, like Internal Rate of Return (IRR) are simply cost-benefit tools.  Businesses use them to determine how long it will take to recover costs, so they look at how much revenue the asset they are buying will produce and comparing that to how long it will take for them to payback the cost of the asset.  In other words, they use various financial formulas to help determine which investment is best.

Take a piece of equipment like a new baking oven that costs $1,000,000 and it produces $500,000 in profit per year.  The payback period would be 2 years, as it would take two years to recover the $1,000,000 in cost.  Now say you can either buy the new baking oven, or a new building with more retail space for $1,000,000.  The new building would generate $400,000 more in sales each year.  The payback period would be 2.5 years.  If you have to pick, you would choose to invest in the baking oven.

The Internal Rate of Return, net present value, discounted cash flow, and other formulas are used to take into account interest rates for financing the asset, as well as analyzing cash flows to better calculate the true return and payback periods on investments.

When deciding whether to buy a newer car or not you need to decide whether you’re spending more by maintaining your car or if you’re better off with a payment by analyzing the cash flows like you would do in using a formula like Payback Period, Net Present Value or Internal Rate of Return.  If you’re able to hold off and save money to pay cash for a car you can avoid the interest charges you will pay the bank and instead earn interest on your deposits, thus saving you tons of money in the long run.

Let’s continue with the car example.

So, I spent $2,000 in two years on my car.  If I were to have bought another newer used car and avoided all of the replacement costs, I would have spent about $15,000-$20,000 or around $400 per month.  So in two years I would have spent $9,600 in payments.  Not to mention, I would still owe $400 for 24 months or two years too.  That’s an additional $7,600 to have less hassles with a car up to this point.  And many know there is no guarantee with even newer vehicles, even those repairs may be covered by warranty – but you still have the hassle of getting the car repaired.

Obviously the question looms, how much longer will my car keep going and what could possibly wrong with the car before I would part with it.  Let’s say a transmission went out on the car for $700, or even the motor for $2,500.  It’s clear, I could have replaced all of these things and still been better off than buying newer in just two years.  After four years I would have spent nearly $10,000 more to not have to potentially deal with a car breaking down.

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Not to mention, a newer car means a higher insurance premium.  With an older car I only carry liability insurance, with a newer car you will have to carry comprehensive.  That would cause my car insurance to double.

Now what if we would have instead taken the money that we paid for the newer car and invested it in savings instead, over 2 years compounded annually at 4%, we would have ended up with nearly $8,100 and would have been half way to paying cash for a newer car.  If you had bought and financed it, the bank would earn that off of you. Why give them the money?

When considering buying an entire new roof, new A/C, or water heater, ask yourself what will repairs cost compared to buying new.

If a service call costs $100 and buying new is only $500, and you know your A/C is past it’s warrantied use, you need to ask yourself if it makes sense to pay the $100 if this is the 2nd or 3rd time.  Being frugal doesn’t necessarily mean being cheap either.  It may cost you more in the long run to keep repairing, instead of buying new.  See if they will apply service costs towards a new purchase if something is fatally broken or irreparable.   If you can put it off, do it and build a cash stash instead.  Only buy new as a last resort.  Being frugal is being smart, if your car can be fixed for a reasonable price, fix it.  Avoid pay financing charges and build cash to buy your next big purchase.  Unless a car is breaking down so frequently that it’s affecting your ability to get to work, putting your job in jeopardy, deal with the issues as they arise and you will save a ton of money.

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Published or updated May 19, 2013.

Comments

  1. Aaron @ Clarifinancial says:

    As a car nut who knows not to act on his actions, this was a great reminder why. With some basic accounting skills in hand, we can make better decisions. Now if only I could decide to temporary sell my car. We don’t really need it now, but we probably will in the future. However, I don’t think I could confidently find another car as valuable to me for the same money. hmm.

    • That’s a tough call when you don’t need your car now. If you know you aren’t going to use it and you have a garage you could turn in your plates?

  2. Thanks for allowing me the privilege of guest posting FFB! I hope all enjoyed my article and will come over to FinanceDad to check out what else I’m writing!
    .-= FinanceDad´s last blog ..Saving money by cutting out the pros =-.

  3. The biggest thing is that you need to do is avoid considering sunk costs. It’s hard to ignore that, especially if you’re frugal. If you’ve put money into something, it feels like it’s a waste to give up. But there’s that old saying about throwing good money after bad. In the end, what matters is what the continued costs are of repairing vs buying new, including extra insurance and car taxes (although, likely, fewer repair bills for the first year or so).
    .-= Abigail´s last blog ..Sanity Savers II: Coupons and Specials =-.

  4. I have a car that seems to be right on the edge of my keeping it. So far I’ve had to replace the clutch, timing chain and most of the front end parts and I still need to do struts and shocks. The repair bills are over $3000 on a car that I paid $5000 for.

    Right now, the car has about 180,000 miles on it. The strange thing is that my last car was the same model but a decade older and I finally had to let it go because both door handles broke at 329,000 miles and I couldn’t get in any more.

    Over its lifetime, that car needed a radiator, heater core, water pump and alternator all of which I was able to do myself for the cost of parts.

    Both cars are the same model, body style, engine and options. It just proves that repairs can be very vehicle specific.
    .-= BillyO´s last blog ..Contigo 2 Pack 16 Oz Double Wall Vacuum Insulated Autoseal Stainless Steel Travel Mugs – Pink & Turquoise =-.

    • I’ve seen reviews of cars that are great for one year and bad for another. All it takes is a different plant.

      Still, it sounds like you get a great amount of mileage out of your cars!

  5. John DeFlumeri Jr says:

    The car will last a lot longer if we maintain it.

    • Sometimes it really is that simple. I’ve had to replace tires because I didn’t take the time to have them rotated. Stupid maintenance mistake.

  6. I have an old Honda with over 200K miles. It’s still going. I put around $1,000 – $1,500 into it a year, but as long as the repairs are still reasonable (I say under $2,000), I’m going to keep driving it.

    I really love my old car – it gives me such a peace of mind to know that I don’t have car payments, I won’t have a heart attack if it gets dinged, and my insurance premiums are as low as they can go.

    • Man, I hate the first dings to a new car! Drives me crazy. But I’m so much more relaxed once it has some miles on it.

      If you can safely keep the car running then that’s the way to go (and it doesn’t get too expensive!).

  7. It’s a tough and risky decision. I did that as well and spent about $700 on brand new brakes only to have my car completely die on me within the next 2 months and had to then buy a brand new car.

    • I guess that’s a possibility on an old car. You have to weigh the risks with the costs though. If you didn’t get the brakes fixed it would definitely cost more and who knows if anything will break down. In recent years cars have been built to go longer (most) without as much maintenance. It may very well be a risk worth taking.

  8. Thank you so much for this. I have a 2001 Rav4 with almost 147000 miles on it. Been paid off since 2004. It needs about $1500 in repairs, but the interior is leather and in fine shape and I had it repainted 2 years ago so the exterior looks good, too. My father has offered to give me his new 2011 Corolla, with 800 miles on it but I don’t like the car (neither does he). He said I could sell it. Probably could get $23000 for it. I love my Rav4, but it’s starting to make noises and I’ve put about $1400 in it in the last 12 months. I know less than zero about cars. Is it better for me to sell his car and put $1500 into my Rav4 and bank the rest of the money? I’ve been laid off for a year and a half and could really use the peace of mind of having a nest egg if this economy keeps going the way it is. Any thoughts are appreciated! And thank you again for this article. I’m leaning towards keeping my car and shopping around for the best price of repairs.

    • If you have been maintaining the car and the repairs aren’t too serious then your plan to sell the other car sounds good. Just make sure you bank the sale money and see what you can actually get for the car. Most card lose a LOT of value once they are driven off the lot.

  9. Thanks! That’s what we’re going to do.

  10. It’s also a good idea to consider gas mileage. With new cars rated and 40+ mpg your could very well save some money over the life of your vehicle. I have an 02 cavalier that I will be replacing at some point in the future. Right now it gets about 34 mpg on average at 40,000 mile a year I could says between 6 and 7 hundred on fuel alone. It’s not quite cost beneficial to me at this point but for someone coming from mid 20’s that could mean $2100-2300 in savings a year in fuel cost, on top or repair cost.

  11. I have a 92 Buick lesabre 230.000 miles average repair cost is $400.00 a year Dwight h saves me thousands in bank fees I don’t care that its its old its reliable and saves Ms thousands plus I owned a 3 year old car the oil pan blew out it cost more for a oil pan than I have in my Buick. So dont tell me I’m saving money buying new when my engne tranny alternater and oil pan are factory cars last years if you take care of them. 2002 Ford tauras back in 2005 tranny blew up cause new cars suck.

  12. My sister is considering leasing a new 2013 Toyota that will require $500 down and $250/month, with an additional $40 for insurance on top of what she is currently paying. Currently, she has a 2004 Suzuki Forenza with about 150,000 miles on it. Recently, it broke down completely while she was driving it and needed it towed to a mechanic. The mechanic is not entirely sure what he will find, but estimates it will possibly cost $1500 to replace the head gasket. In the past year there have been numerous repairs, totaling approximately $5000, most of which was spent on a new radiator. A review of message boards indicates that the Forenza has a number of issues and it is hard to tell if all the major ones are out of the way. The car is valued at about $1000 as a trade in and $1700 in a private party transaction. My sister is a graduate student who is about to graduate this spring. She has summer work and part time work lined up for the fall, but will continue to look for a full time job or take on antoher part time job. Given all of these concerns, what would you reccomend?

    • LEt me ask you something – why a lease? Why not a used car? With a lease you are going to be responsible for payments for the term of the lease. It sounds like your sister’s job situation is a bit fuzzy. What will she do if she doesn’t find a job after the Fall? She’ll still have those lease payments.

      • I think the lease is an attractive option because she has a connection at Toyota that will allow her to get a car without a cosigner. Since she does not work as much while she is in school, the dealerships require a minimum income of $2,000/month without a cosigner. I agree completely about the downsides to a lease, the bigest one being that you have nothing to show for it after all those payments at the end of the lease. Worst case scenario if she does not get another part time job in her field or a full time one within the field, she will have to get a second part time job in retail or at a restaurant or something. She will absolutely have to get something else to cover bills. The reason I ask on her behalf is she is looking for a loan from me to fix it or help he get a new car. I am leaning toward fixing it, but what worries me is that the car value is likely below the cost of repairs and there is of course a possibility of new repairs down the line. I don’t want it to be a situation of I pay $1500, then more repairs come up and we are back to square one. Of course there are no certainties in either situation, but I just want to make a smart choice here that does not leave me with a lot of extra bills and IOUs from my sister. I will ask her though about the used car possibility.

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