New Mustachian here, do I sell or keep my new car?

[ginjaninjaa]

Hi all! Going to give a backstory then ask my question.

I am 25 years old and graduated with a masters in aerospace engineering a year ago. I used student loans to fund my entire college education with a current total of $90k. I have a ramping payment plan, so paying $520/mo now with each year getting higher, to end my 10th year paying ~$950/mo. I was naive and sold my paid off car for a new jeep wrangler 4door, having a current car loan of $25k at a 4.49% for 5 years (started may 2017) . So most of my paycheck goes to paying loans.  I just discovered MMM a couple weeks ago and am wanting to get in the mindset of not consuming so much and saving as much as I can and investing it. I currently only put 6% into my 401k and am working on other areas of my expenses to increase that. I'm open to selling my jeep and getting a cheap car, but just wondering if that's the best decision. I think I can get at least $28k for the jeep leaving me with more(?) of a loss than just sticking out the length of the loan. All advice is welcome!

[PoutineLover]

Congrats on taking the first step! I would recommend doing a full case study with all of your income and expenses listed so we can give you even better advice. That being said, you should almost certainly sell the car and buy something cheaper, or go without and bike/transit if your circumstances allow. I would also suggest paying more than the minimum on your student loans to get rid of them faster and save on interest. Have you optimized your housing situation and other spending? As MMM would say, you have hair-on-fire emergency debt and you should be doing whatever you can to pay it off as quickly as you can.

[neo von retorch]

It's always tough to grasp the impact of sunk cost (including depreciation) when you talk about cars.

You bought the Jeep. At that point, you got a car and took on debt. Thanks to dealer magic, you probably, for example, paid $35k for a Jeep that if you turn around and sell is instantly worth $32k. And now nearly a year later it's worth just $28k. I'll repeat that - at this point in time your Jeep is worth $28k (in theory.)

If you would hold onto it until May 2022, paying all that interest and missing out on all those 401k contribution tax breaks and investment returns... well that's a lot of money. Plus you'll have a 6 year old Jeep worth... a lot less.

Alternatively, if you sell it for $28k and buy an $8k car, by the time May 2022 rolls around, you'll be in much better shape financially.

If you could rewind time, you could avoid the past mistake of paying for a Jeep from a dealer (I assume), and losing money to depreciation (I promise!) But that's already past you. (Though if you stay on this course, it will continue.) So forget past mistakes, make decisions that improve your future!

[ysette9]

The question you should ask yourself is: if you had the choice of buying a Jeep again today, would you do it or not? If the answer is no, then you need to sell that sucker.

Bad enough that you have all that student loan debt, but it got you a good education and, presumably, a good job. That is an investment. Borrowing money to pay for a depreciating play toy is not smart. I say this with compassion as I made the same mistake when I had recently started working out of undergrad. You can totally recover. It is just that you have less wiggle room now due to your student debt.

Despite my bad car choice, I put as much as I could into 401(k) immediately, ramping up to maxing it out within a few years, while building up a separate emergency fund. Today me is SO grateful that I got that good start. It makes a world of difference to me now, 13 years into my career (in aerospace, as a matter of fact).

[Ben Kurtz]

Sell the car immediately.

The nearly-new Jeep will cost you a whole lot more in gas, insurance and other consumables than the sane, rational car that you should be driving as an up-and-coming youngster with negative net worth. That's money per mile you'll never see again.

Furthermore, newer cars depreciate, which is a stealth loss that eats your wealth year-after-year. Strangely enough, your Jeep probably has lower depreciation than average for newer cars, just given what I know about the car market, but that's a relative statement -- it will still eat up your wealth.

If you have an aerospace engineering degree then you should have more ability and confidence than most to learn a few things about cars which will enable you to buy a reliable, cheap used car and keep it on the road at minimal cost. I drive around an ancient Volvo station wagon which I purchased for three figures (not a typo), because I'm a tiny bit handy with a wrench and know what's important in life. It has not cost much at all to maintain and keep on the road (fuel economy is not too great, though).

Again: Sell the Jeep, pay cash for a used Civic or Ford Ranger something equally idiot-proof and sub-$5,000 (my rule of thumb: your car should be valued at less than 10% of your yearly salary at least until you're a millionaire), and use your freed-up cash flow to increase 401k contributions to maximize the tax benefits and pay down student debt -- the balance between the two depends on interest rate of the student loan and your general financial comfort level.

You can post a full case study if you want, but if your housing situation is reasonable and you learn some sense regarding cars (hint: most of what passes for conventional consumer wisdom in automobiles is bonkers crazy when you sit down and think about your transport wants and needs logically) I have the feeling you'll figure the rest of this stuff out on your own. Don't subscribe to cable TV. Don't eat out or order restaurant food excessively. Don't slavishly update to the newest $700 iPhone every other year. Get some exercise. Read this blog first post to last. When you have a good bit of money in your 401k, become a regular at Bogleheads and learn the basics of investments.

We're good here.