Fool.com: ...A Free Car! (Fribble) December 21, 1998

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Monday, December 21, 1998

...A Free Car!
(A tale of living beneath one's means.)

"The art of living easily as to money is to pitch your scale of living one degree below your means." - Sir Henry Taylor

If you've ever watched The Price Is Right, other than noticing that Bob Barker looks oddly fit for a 93-year-old and finding out that most people don't know the price of a box of Rice-A-Roni, you'll notice one thing. The contestant gets up on stage, hugs Bob, and waves to his/her friends/family in the crowd. Then Bob will introduce a game saying that the contestant has a chance to win...

... A NEW CAR!

And the crowd goes wild.

Well, I wouldn't mind getting a free car, but, since I'm not "planning to visit the Hollywood area," instead, I've decided to use my head and think a way out of the situation. And, oddly enough, I've come up with one. You see, the way to get a free car is to go to the dealership and talk about the financing for a new car, say a '99 Chrysler Concorde. That will run you about $22,000. Inquire as to the payment schedule -- in this example, a 2 year loan, 12% financing, $5000 down payment gives $800 per month. Next, gasp and walk out of the dealership.

Okay, here's the neat part. Take that down payment, that initial sticker price, and find a used car, same make and model, three years older. Doing this will save you about $9K on the price of the car. With the same down payment, same term, same financing, it'll run you $378 per month.

"So what?" you might be asking. Well, here's what. Take the difference, $422 per month -- no small chunk of change to be sure -- and invest it. I'm sure the Fools will be gracious enough to provide a link to the 13 Steps so you can get started someplace. (Editor's note: Why yes, Kevin, I've got one right here!) Say you get 11.5% return for your investment. And say you drive this car for six years. What do you have at the end?

The answer: A little under $18,000. This is great, until you realize that this is the cost of your car to start with, plus 2% inflation. That's the cool bit. Take the cash and ditch the clunker, buying a new 3-year-old. Your resale value is about $3,700 (if you had bought new, the resale would be under $6200), leaving $8500 in cash after buying the car. Leave this in whatever got you the 11% return. After another 6
years, you'll have... enough to buy another car.

Three for the price of one, with the catch being you've gotta buy them three years old. Not too shabby. But what about the free car? Get 15% on your investments, which you historically can with the Foolish Four Method. Editor? Where's that link? Right here, Kevin! You'll be earning enough in interest to get a 3-year-old car every six years for the rest of your life! And you don't even have to kiss Bob.

Okay, the math may not fit your exact situation, so here's the basic scoop -- by avoiding buying new, you save a truckload on the depreciation. And by saving and investing the difference, you're putting that money to work while you're driving your car. Amazing things, depreciation, compound interest and Excel. (If you want my spreadsheet, e-mail me. I calculated depreciation based on an average of seven
different vehicle types and models.)

[For the Foolish way to get a new set of wheels, click here.]

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