Would Warren Buffett Finance a New Car? Here’s What He’d Say About a Big Auto Purchase
Written by
John Csiszar
Edited by
Rebekah Evans
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Warren Buffett, billionaire CEO of Berkshire Hathaway, is one of the most quotable investors in the world. Famously frugal, Buffett sprinkles his financial advice with a folksy wisdom that’s direct, easy-to-understand and popular with investors all across the globe.
When it comes to financing a new car, Buffett has offered his opinion over the years about what he thinks is the most financially sound course of action, at least for his own life. But his general investment advice and strategy, which he has discussed openly and honestly in the press for decades now, gives even more insight. Here’s what Buffett might tell if you were planning to finance a new car.
Also here’s what Buffetts frugal lifestyle could teach us.
New Car = Depreciation
Buffett is famously a fan of investment value. And when it comes to the pure finances of it all, buying a new car is not usually the way to get the best value. Depreciation knocks value off your car the second you drive it off the lot and most cars lose 15% to 20% of their value or even more within just the first year.
A few years down the road, some cars can lose as much as two-thirds of their value simply due to depreciation. This is why Buffett tends to buy used cars and hold them for as long as he can.
You Should Only Buy What You Can Afford
Buffett is not alone in believing that you should only buy things that you can afford. Some financial pundits, like Dave Ramsey, go so far as to say that you shouldn’t buy a car unless you can pay cash. For most buyers, this would mean that you should only buy a used car and that is definitely a strategy in line with Buffett’s philosophy.
With the average new car now selling for over $48,000, according to Kelley Blue Book, financing a new car is prohibitively expensive for most households. According to Experian, those high new car prices translate to an average car payment of a whopping $742 per month. If you instead pay cash for a used car that you can truly afford, you can avoid that huge monthly drag on your cash flow.
Don’t Leverage Yourself
Some investors believe that borrowing money on margin and leveraging yourself is the best way to amplify your gains. But Buffett, one of the most successful investors of all time, believes the exact opposite. Even though Berkshire Hathaway is the sixth-largest company in America, it carries essentially zero debt. In fact, Buffett has famously built up a surplus cash pile of over $334 billion, according to Fortune.
If you finance a new car purchase, you are leveraging your own financial situation, as you are putting only a small amount of equity into the car and borrowing the rest. If your down payment is too small, you run the risk of owing more on your car than it is even worth, a situation known as being “upside-down.” In that scenario, if you total your car, you might be forced to come up with additional cash to pay off your loan, even after you get your insurance proceeds.
Think of a Car as Utilitarian
Buffett’s frugality is one of the reasons Buffett has been able to increase his wealth over time. Whereas many new car buyers get caught up in the excitement of owning a new car with all of the latest bells and whistles, Buffett takes the opposite approach. To Buffett, a car is a utilitarian purchase, designed for the purpose of getting you from point A to point B.
Viewing it instead as some type of exciting, technological wonder that you must have will likely draw you to buying much more car than you actually need. And as any basic financial literacy course will tell you, spending money on “wants” instead of “needs” will keep you from ever being truly financially secure.
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