Buy tires and keep car for 12-36 months, or replace car now?
I have a car that was purchased in 2010 for around 20k, it now (2016) needs new tires but im going to replace it in 12 to 36 months time. The current resale price is around 8K and the replacement of the tires is around 1k. Im guessing the replacement car would cost between 25-30K as the purpose of the car has changed.
Emotionally I think if I'm going to replace in 12 months time i think im better off purchasing now but at 36 months time im better off waiting. Im not interested in the emotion of this I would like to see a calculation that can be used to guide this decision to the one that is likely to be the best one on an objective financial basis
Remember its the calculation im after not advice on actual prices unless that forms part of the calculation.
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Would you buy this used car, in its current condition but with new tires, for the price of the tires?
If so, buy the tires.
I tend to agree with Rocky's answer. However it sounds like you want to look at this from the numbers side of things. So let's consider some numbers:
Cost of new car: K
Value of old car: K
Out of pocket expense: K
I'm assuming you have the money to buy the new car available as cash in hand, and that if you don't buy the car, you'll invest it reasonably. So if you buy the new car today, you're K out of pocket. Let's look at some scenarios and compare. Assuming:
Annual Inflation Rate: 2.5%
Old Car Depreciation Rate: 8%
New Car Depreciation Rate: 20%
Annual Investment Returns: 5%
If you buy the new car today, then after 1 year you'll have:
Starting Cash: K
Value of Old Car: N/A (sold)
Cost of New Car: K
Value of New Car: K
Remaining Cash: [CO] (spent buying new car)
Total Assets (new car + cash): 000
If you keep the old car, after 1 year you get:
Starting Cash: K
Cost of Tires: K
Value of Old Car: 60
Cost of New Car: 625
Remaining Cash: 800
Total Assets (old car + cash): 160
After 2 years, you have:
Starting Cash: K
Cost of Tires: K
Value of Old Car: 70
Cost of New Car: 265
Remaining Cash: 640
Total Assets (old car + cash): 410
And after 3 years, you're at:
Starting Cash: K
Cost of Tires: K
Value of Old Car: 30
Cost of New Car: 920
Remaining Cash: 520
Total Assets (old car + cash): 750
Or in other words, nothing depletes the value of your assets faster than buying the new car. After 1 year, you've essentially lost K to depreciation.
However, over the short term the immediate cost of the tires combined with the continued depreciation of the old car do reduce your purchasing power somewhat (you won't be able to muster K towards a new car without chipping in a bit of extra cash), and inflation will tend to drive the cost of the new car up as time goes on. So the relative gap between the value of your assets and the cost of the new car tends to increase, though it stays well below the k that you lose to depreciation if you buy the new car immediately. Which is something that you could potentially spin to support whichever side you prefer, I suppose.
Though note that I've made some fairly pessimistic assumptions. In particular, the current U.S. inflation rate is under 1%, and a new car may depreciate by as much as 25% in the first year while older cars may depreciate by less than the 8% assumed. And I selected the cheapest new car price cited, and didn't credit the tires with adding any value to your old car. Each of those aspects tends to make continuing to drive the older car a better option than buying the new one.
I don't see how anyone could give you a hard-and-fast formula, unless they know where to get some applicable statistics. Because several factors here are not a straight calculation.
If you don't replace the tires but keeping driving the car, what is the increased probability that you will get into an accident because of the bald tires?
How much will bald tires vs new tires affect the selling price of the car? Presumably the longer you drive the car after getting new tires, the less increase this will give to the market value of the car. What's the formula for that?
If you keep the car, what's the probability that it will have other maintenance problems?
Etc.
That said, it's almost always cheaper to keep your current car than to buy a new one. Even if you have maintenance problems, it would have to be a huge problem to cost more than buying a new car. Suppose you buy a ,000 car with ... what's a typical new car loan these days? maybe 5 years at 5%? So your payments would be about 0 per month. If you compare spending 00 for new tires versus paying 0 per month on a new car loan, the tires are cheaper within 3 months. The principle is the same if you buy with cash.
To justify buying a new car you have to factor in the value of the pleasure you get from a new car, the peace of mind from having something more reliable, etc, mostly intangibles.
It depends how detailed you want to get in your calculation, but fundamentally, 1K < 25K.
On a very basic level, divide the cost (less what you sell it for) by the time you'll have the car for. If you junk it, K/12 month = /month to buy tires to have a car for a year. If you sell it for K, then it become [CO]/month. (Plus other maintenance, etc..., obviously).
If you pay 25K and keep the new car for ten years and sell it for nothing, it becomes roughly 8/month (plus maintenance).
If you want to get more accurate, there are a lot of variables you can take into account--time cost of money, financing, maintenance costs of different vehicle types, etc...
There are a few factors I like to consider when I'm reasoning financially over my households cars.
How many KMs will the car travel each year because I like to factor in how often tires will need to be changed, how much tires for my models cost as well as how gas efficient they are.
Knowing how much the car is driven and in what environmental/road conditions is also important factors to know because that will help guestimate possible repairs cost.
Also possible taxes should be taken in to consideration. For example a few years ago I had a diesel Citroen C5 that had yearly taxes of roughly 500$.
The replacement costs only 150$ a year in taxes. So switching cars 3 years early would have saved me 1050$ in taxes.
So some information on possible taxes, how far you drive each year, what environmental conditions, type of driving (daily long rides or just short etc..) as well as the fuel efficiency of both cars would help to better calculate your costs for say three scenarios. Car change in 12, 24 and 32 months respectively.
If the car is in otherwise good shape, it's always less expensive to keep it longer.
Think of it this way: you have to buy new tires no matter what. It's just a question of whether or not those new tires are attached to a new car or your current car.
New tires will increase the resale value of the car; while not by the full cost of the tires, it will not be entirely a sunk cost.
You'd need to factor that in and find out how much the new tires increase the resale value of the car to determine how much they would truly cost you. However, I suspect they would cost you less than a ,000 car a year early would.
That new car would cost some amount over time - it sounds like you buy a new car every 8 years or so? So it would cost you /8 = .3k/year. That would, then, be the overall cost of the new car a year early - .3k (as it would mean one less year out of your old car, so assuming it was also k/8 year or similar, that year becomes lost and thus a cost).
If You use the car regulary, I don't think that driving on the bald tires for 3 years is a reasonable option.
Have You considered buying used tires? Those will be cheaper and will last till You get to replace the car.
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