When should you replace your vehicle?

When was the last time you had a whiff of that "new car" smell?  If you are seeking financial independence and you aren't relying on finding the next Apple stock in its infancy or winning the lottery, it has probably been awhile or maybe you've never owned a brand new car.

Our only vehicle is a 2001 Chevy Tahoe. When I first started thinking about this post, we had just put $1,400 worth of repairs into it to fix our shocks and to get a non-functioning window working again.  Two weeks later (today), it won't start.  Fortunately, the vehicle is at our home and we will have our emergency roadside service tow it in the morning to a repair shop.

Last year, we put another $800 of repairs into the Tahoe.  So are we on the cusp of substantial repairs every year?  I have to admit that even though we only have 120,000 miles on the car, I am highly tempted to call it a day and replace it!

Image courtesy of Wikimedia.org

Image courtesy of Wikimedia.org

Repair vs. Replace a Car?

So that leads me to the big question - where is the tipping point on a used vehicle for ensuring that you don't spend more than you should on repairs?

One line of thought is to take the cost of the repair and estimate how much useful life will be added to the vehicle.  If a repair costs $500 and gets you another 12 months of use, then that repair is only costing you $41.67 per month.  If you replaced the vehicle, you would compare the monthly repair amount to the cost of replacing the vehicle.  If you were to take out a car loan, it would be the monthly payment.  Since I don't do debt, especially not for something that depreciates in value like a car, then I would compare the repair amount to the opportunity cost of using money on a car purchase instead of having it grow in a mutual fund.  

For our $500 repair example, I would want to compare it to what I would spend on our next vehicle and the average interest that money would earn.  If I were to spend $15,000 and could expect 8% on that money, then I would be giving up $100 a month - $15,000 x 0.08 is $1,200 per year or $100 per month.  Since $41.67 is less than $100, then that is a point in favor of making the repair.  Do you follow me?

There are other factors to consider, such as reliability and safety.  Our Tahoe is safe and until the last two weeks it has been highly reliable.  We also don't need it that much given our city life and that it is the summer.  This might be different for people in other locations.

We'll see what the mechanic has to say tomorrow!