The Shadow
Dear Dave,
My wife and I have paid off all our consumer debt, and we’re in Baby Step 3 building up our emergency fund to six months of expenses. When do you recommend buying a new car in the process? Do we have to wait until we’ve finished all the Baby Steps?
Aaron
Dear Aaron,
Congratulations! You two are taking really positive steps forward in gaining control of your finances. I’m proud of you!
Ok, I’m not sure if you’re talking about buying a newer car—like a great two- or three-year-old model—or an actual new car. I don’t advise buying a brand new car, unless you have a net worth of at least $1 million. Why? Because at that point, you’ve got enough assets that you won’t get rocked by the crazy depreciation that comes with buying a brand new vehicle.
Don’t get all down after hearing this. I’m not saying you should drive a junker until you pay off your house. I recommend that people drive the minimum they can in terms of a car until they complete the first three Baby Steps. As you already know, Baby Step 1 is a beginner emergency fund of $1,000. Baby Step 2 is paying off all debt except for your home, and Baby Step 3 is fully funding your emergency fund with three to six months of expenses.
After you’ve accomplished the first three steps, then you can move up to a nicer car. Notice I didn’t say move up to a new car. I want you to save up cash, and get a really nice, slightly used car—one that someone else has taken the big hit in depreciation on. That’s what the typical millionaire does.
And I want you to model your financial behavior after people who are in the position you want to be in one day!
—Dave
