Auto Depreciation

Several months ago, Molly and I attended a few financial management classes by Dave Ramsey. It was part of his "Financial Peace University" series. I would highly recommend it to everyone. It is not just for those that struggle financially, because, let's face it... We can all make better decisions when it comes to money. Dave Ramsey says there are usually two personalities when it comes to finances - the nerd and the free spirit. I'll let you determine which one I am.
So I was looking at depreciation rates for our 3 cars (I know there are only two drivers in our household, but who doesn't need an extra car now and again to keep around) and was trying to track the monthly depreciation in Quicken (it's ok to scream nerd, now). To my dismay, our 2003 Suburban had decreased in price radically and the other two cars (both around 10 years old) were looking like we might as well pay someone to take them off our hands now rather than continue to spiral uncontrollably towards worthlessness.
I was amazed to find out that most vehicles depreciate between 15% - 20% per year. Even if you buy a nice used car for 10,000 that's around $150 a month down the toilet. And that doesn't even consider the 6% - 8% interest rate that you're paying on the car loan. So, for a newer car that you finance, you're looking at losing anywhere from 21% - 28% per year. YIKES.
So, it got me thinking, how can you avoid such high costs. Intuitively, I thought there was probably a break even point where as soon as your repair bill started to exceed what a monthly car payment would be, you might want to think about buying a new car. The problem with that thinking is that repairs never come as consistently as a car payment. And, by the time the big repair cost hits, it's too late, you might as well keep it for a while longer, because you know you won't have to repair that item again.
Being an engineer, I knew that there must be a way to calculate the breakeven point when one should off-load their old car and upgrade to a newer vehicle. So, I was ecstatic to find this article that modeled the life-cycle costs of owning a vehicle. (http://css.snre.umich.edu/css_doc/CSS04-01.pdf). (Feel free to scream nerd, again). This article is amazing (for a nerd) and looks at everything from increasing car prices, gas prices, gas efficiency, insurance premiums, etc. and models vehicle reliability, depreciation rates, everything. The findings of this study is that the economic breakeven point of owning a vehicle is somewhere between 17 and 19 years. Here's what the article says:
"In other words, it is economically advantageous to purchase an older vehicle in good working condition and pay for any additional repairs while avoiding the low repair but high depreciation newer vehicles."
Although, the paper is quick to point out the empirical observation that leasing programs are very popular and that newer cars makeup a majority of vehicles on the highways. The paper concludes that consumers are willing to pay a premium in order to drive newer vehicles. This paper looks at the ownership costs of replacing your vehicle at regular intervals (i.e. every 3, 5, 10, 15, 20 years) and concludes that the ownership costs are exponential and are considerably higher if you replace every 3 years. Based on the graph, it looks like the ownership costs are fairly level for replacing the vehicle every 7 years or more.
Considering all of this, it looks like Dave Ramsey was right. We have allowed advertisements and marketing agencies to control our spending habits. Why else would we replace our vehicles (or pay for leasing programs) at the most expensive point of the curve (3 years) when we could save thousands of dollars by keeping it for only 2 additional years?
What if we were different? What if we started making spending decisions based on facts and smart choices. Maybe, we would find that people don't like to ride in our 10 year old cars. But hey, at least it's paid for.