Considerations for taking this risk:
1) We desperately needed a car. And we strongly prefer to have a small SUV like a CRV, Rav4, etc…
2) We don’t have much money. A year earlier we had left the Peace Corps with hardly any financial assets.
3) We’re highly materialistic people so buying an old beat-up 1980s Mazda just wasn’t an option.
We saved ourselves over $10k and we had a beautiful car that we otherwise could never afford.
Here come the financial considerations. At what point would you, as a financial professional, “maintain the asset” or “cut your losses”?
1) 1 year after we bought the car, we finally check out the growling noise emanating from under the hood. Turns out it’s the transmission, and it needs to be replaced.
- Cost = $2500.
- Decision = Maintain the asset. I just bought this car. I’m ticked off. But since smashing the car with a baseball bat isn’t an option, I pay up.
- Cost = Not sure but probably another $2500 since we don’t have a warranty
- Decision = Do nothing. Let the transmission run into the ground.
- Cost = $900.
- Decision = Do nothing. I’d rather keep plugging up the leaking radiator with “bars leaks.”
- Cost = $1500.
- Decision = Maintain the asset. We had gotten over a year more of run time on the old radiator. And it isn’t uncommon for a vehicle with over 100k miles to need a new water pump. Pay up.
- Cost = $2500
- Decision = ? What would you do? $2500 would keep the car running for likely another 5 years, at which time it’s definitely time to get a new car. Keep in mind that other than a brake replacement and new tires, no other work has been done on the CRV. No tune up, no timing belt. It runs really well.
In the corporate setting, they would likely continue to maintain the asset. But it still stings. The only true way to solve this dilemma is to make a time machine and decide not to buy the car in the first place. But even then… even then… even then… after all the repairs, we’re still cheaper than if we had bought a new CRV in 2006.