We have paid off all our debt. When do you recommend buying a new car?

Dear Dave,

My wife and I have paid off all of our consumer debt and we are in the third phase of increasing our emergency fund to six months of expenses. When do you recommend buying a new car? Do we have to wait until we’ve finished all the Baby Steps?

Aaron

Dear Aaron,

Congratulations! You two are making really positive steps forward in gaining control of your finances. I’m proud of you!
Okay, I’m not sure if you’re talking about buying a new car – like a great model from two or three years ago – or an actual new car.

I don’t recommend buying a new car unless you have at least $1 million in equity. Why? Because by that point, you’ll have enough assets and won’t be overwhelmed by the crazy depreciation that comes with buying a new car.

Don’t be upset when you hear this. I’m not saying you should drive a junker until you’ve paid off your house. I recommend that people drive as little as possible until they complete the first three “little steps.” As you already know, Baby Step 1 is a $1,000 emergency fund for beginners. Baby Step 2 pays off all debt except your home, and Baby Step 3 fully funds your emergency fund with three to six months of expenses.

Once you’ve completed the first three steps, you can move on to a nicer car. Notice I didn’t talk about upgrading to a new car. I want you to save up some money and buy a really nice, slightly used car that someone else has taken a lot of depreciation on. This is exactly what a typical millionaire does.

And I want you to model your financial behavior after the people who one day are in the position you want to be in!

—Dave