Why you should never buy a new car

There are many ways to find you have lost money without it being your fault.

You can call the market wrong and buy the wrong kind of fund, or invest in a fund that later suffers from a disastrous change of manager. You can buy shares in a company that looks just fine, and then find that an unexpected regulatory change wipes out its profits.

You could buy a house that turns out to have nasty structural problems, make the wrong bet on interest rates when you take out a mortgage - or be bamboozled by the small print on a credit application.

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These things happen. But there are other ways to throw away money that are really very stupid indeed. One of them is to buy a new car. Every time the petrol price goes up we hear endless moaning about how much it costs drivers.

But a penny on a litre of petrol adds up to a mere £113 a year for the average driver (doing 10,000 miles in a car that does 8.8 miles to the litre, or 40 miles to the gallon). That's nothing compared with the money most people chuck down the drain every day just by owning their cars.

A new car loses a fifth of its value as soon as it leaves the forecourt and will be worth a third less than its list price within three months. If you had bought a Citroen Xsara Picasso 1.6 SX in 2004 it would have cost you £14,100: this, by the way, is a great deal more than the same car would cost in France - not for nothing do Europe's car manufacturers call Britain Treasure Island.

Try to sell it today and you would get about £6,000, according to What Car.

That's a loss of more than £8,000, or 57%, in 18 months. You would have lost a similar amount on a Ford Ka 1.3 hatchback (£5,000, or 52% of your cash) or a Saab 9-3 1.8 4 door (£9,250 or 45%). On the Saab you are losing about £ 17 a day. On a really expensive luxury car you could be losing £100-plus a day.

This doesn't make any sense at all. Why would anyone throw that kind of money away just to drive a brand-new car?

None of the answers to this question stands up to scrutiny. Some say they just like to have a car that nobody else has driven. But there's no such thing - how do you think your new car got to the showroom?

Some say they like that 'new car' smell. And maybe they do, although I can't think why, given that it is a smell of plastics, metals and various not particularly desirable chemicals. But if that's the case they could amuse themselves by putting a plastic bag over their heads and ripping up £50 notes. The effect would be the same, although driving would be difficult.

Some say that with a new car they know that nothing is likely to go wrong. They also know that if it does they have a guarantee, so they get peace of mind. This too is nonsensical. If a car has been on the road for five years and been properly serviced there's no more reason why it should break down than a new car. And if you buy a second-hand car from a reputable dealer you can get the same kind of guarantee you would get with a new car anyway.

And as for the often-voiced concern that if you buy a second-hand car you could end up with one that has been in a accident and been reconditioned, this really isn't a a big deal either. For £100 or so, you can get any car checked any time by your own mechanic, or by the AA, before you buy it.

The final reason people give for buying a new car (when pushed) is that it shows off their relative wealth and status. I'm not going to start on the stupidity of this, except to point out that anyone who really thinks that driving a new Picasso gives them more status than driving a year-old one probably has bigger problems than we tend to address in MoneyWeek.

While I'm on the subject of money wasted on cars, let's go back to petrol. Why on earth do people insist on buying super unleaded petrol at about 96p a litre, instead of just unleaded at more like 89p?

The AA says it makes no difference to performance or petrol consumption, so if our average driver uses super instead of normal on a regular basis, he's throwing away another few pounds every time he fills his tank. Why?

If you are very rich and status is very important to you, go ahead and buy all the new cars you like but if you aren't and it isn't, then go to your nearest car supermarket next time you need a change of car and stop buying overpriced petrol.

Then put the £10,000 you save in a pension. You'll thank yourself later.

First published in The Sunday Times (19/03/2006)