What's the most financially responsible way to buy a car?

If you've read some of my other posts, you'll know that my wife and I are very in-tune with our finances, and are working to keep our bills low and our net-worth high. As a car-enthusiast, I care a lot about what car to buy and didn't like the advice to buy the cheapest car you can find. I've found a lot of mixed advice about the "right way" to buy a car so I've done a lot of asking around and have thought a lot about the options. Here's my take on the "best" way to buy a car.

TL;DR, the "best" way to buy a car is to buy a used car in cash, but new cars are cool too, if you can actually afford one.

THERE IS NO "RIGHT" WAY!!!

That's right, there is no single "right" or "best" way to purchase a car. How much you decide to spend on your car is highly variable and there's not a ton in the way of generally-accepted rules of thumb for the total. 

A lot of people look at a car in terms of monthly payments. While that's good in the sense they have some idea as to what they can afford, it shouldn't be the primary factor in determining how much car to buy. It's not too hard to draw out a loan over a longer term that makes a car that is WAY too expensive for your budget come with acceptable monthly payments. You could be bled dry but so slowly you aren't even realizing it. 

How much to spend?

If you only get your car-buying advice from financial people, they'll tell you that since a car is a rapidly depreciating asset, the correct amount you should spend is as little as you possibly can. Many advise to buy "beaters" and when it breaks, buy another. They're right, but reliability is what many car buyers value most and "reliable" isn't the first word that comes to mind when I see a 20 year old car on Craigslist for $600 advertised as a "Mechanic's Special". Personally, I cannot get into my car 2x a day and pray that it starts each time, but other may be less risk-averse than that. Others recommend figures based on a small percentage of your gross household income, such as not spending more than 50% of your annual income on vehicles (Dave Ramsey) (IE, if your household makes $70k/yr, you should buy no more than 2x $35k vehicles, etc.), or keeping your monthly payments to no more than 10% of your monthly net income (Nerd Wallet). These nuggets of advice make great sense if you don't care about driving and see a car primarily as an appliance that gets you from point-A to point-B.  

There is such a thing as intentional spending, or what I call "put your (extra) money where your heart is". Take care of your responsibilities first, but the rest is discretionary income so it's really up to you what you do with it. If you're a car enthusiast, you'll need to suss out for yourself how much is having the car you love worth to you? If you can afford it and you really, really enjoy it, then how much you're willing to spend is up to you. But remember that you only have a finite amount of money to work with so a larger car payment will almost always mean cutting back on something else. 

Cash vs Financing

Since cars do lose value at relatively rapid rates, if you can save up and buy in cash, you'll save a lot over financing. However, there is an opportunity cost for spending all of that cash. For example, in theory, if you spent $30k on a car in cash, you're out $30k. But if you qualify for very low interest financing, then you could put $6k down and have $24k for other opportunities. Sure, the interest on the loan is going to equal something, and investing that $24k could likely offset the interest hit plus some. However, if you're financing because you need those low monthly payments to "afford" the car, then you might want to take a tough look at your priorities.

In my research, I learned of the 20/4/10 rule for auto financing. It's not a rule so much as a best-practice way to lessen the blow of borrowing money, so to speak. 20 represents the percentage of down-payment you should make. 4 represents the maximum length of the loan in years. Here's the kicker for most people; 10 is for the percentage of your monthly income the TCO (Total Cost of Ownership) should not exceed. With that information, if you absolutely must finance a car, and you take home $5k/month from your job, TCO for the vehicle should not exceed $500/month. From my reading on this, some include car insurance, while some others do not. 

Whether you choose to buy new, buy used, or lease, there's technically no wrong answer. Each have their pros and cons. 

Leasing

From a purely financial standpoint, leasing is often a bad idea, but if you place a high value on getting to drive a new car, and you accept the higher cost over time, then you do you. There's are some scenarios where a lease generally isn't a bad idea though. Let's say, you're on a semi-long term assignment for work, such as you've been transferred to another country for work but only for 2 years and you need a car. Getting into a lease is similar to buying a car, but when the lease term is up, you just return the car. No need to worry about resale value, depreciation, having to deal with Craigslist idiots who ask you how many miles are on it when you clearly put that in the ad, etc. Your lease payments essentially pay for the depreciation of the vehicle. 

Buying New

Usually when people talk about buying new cars, they talk about depreciation. It's true that you're underwater on your car as soon as you drive it home, unless you put down a sizable down-payment. The value of your car only matters when you go to buy it and when you go to sell it. It's not an investment, so it's likely not to appreciate in value. If you keep it long enough (IE, 10+ yrs), then the whole depreciation argument is almost moot. If you genuinely plan to keep it a long time AND having a new car is really important to you, and you've accepted the added cost, then and only then, does buying new can make sense. I say that buying new CAN make sense because there are actually a lot of pros to buying new, though it usually comes at an added cost. Financially speaking, the best value is buying used.

Buying Used

You might not be getting the latest tech, but if you buy something 3-5 years old, then it's new enough to have good safety and technology, but "old" enough to have done a significant amount of it's depreciation. Roughly speaking, that $50k car after 3 years might only be $30k or less. Some makes, models, or car types depreciate faster than others. A 3 year old car at the time of this writing, will likely have safety features such as lane-keep assist, adaptive cruise control, automatic emergency breaking, ABS, a backup camera, side-curtain airbags, etc. Tech might include hands-free Bluetooth systems, Android Auto / Apple CarPlay, Navigation, TFT or LCD Instrument panels, a heads-up-display (HUD), etc. Your options will largely depend on your price point and other factors. Since depreciation is in percentage, it's proportional, so the higher the MSRP for the car, the more value it will lose over the same period of time compared to a car with a lower MSRP. However, as stated above, some cars hold their value better for a variety of reasons. A Porsche Boxster holds it's value well, partially because the demand is good for most Porsche models and the fact that it's starting price is normally $75k+ (I cannot find one under 15 yrs old for $25k, but that's a different topic). The Tesla Model 3 actually appreciated in value for a time due to high demand. Meanwhile, EVs tend to lose value the fastest primarily due to the fast pace of change in technology. From battery technology to advancements in AC motors and charging standards, EV tech changes quickly.

In the grand scheme of things, how you buy a car is really up to you and what your priorities are. Personally, while the car-guy inside me would love to go plunk down some cash for a new Supra or Model 3, the finance guy inside of me reminds me that doing that will mean I'll have less money to invest, less money to do other things, higher monthly bills that I can't get out of should I lose my job, etc. I'll buy (lightly) used and in cash so I'm not paying any interest and after someone else took the initial brunt of the depreciation.