No matter what anyone tells you, with very few rare exceptions, all new cars go down in value. A new car is not an investment. An investment should go up in value. According to the Motley Fool, new cars on average lose 20% of their value in the first year, with some losing as much as 40%! Second year average depreciation is around 15%. Ug. Can you afford that kind of hit on a $20,000, $30,000 or $40,000 vehicle? Likely not. This kind of year over year losses are not acceptable anywhere else in your financial life, so why accept it here?

According to this USA Toady article, in 2004, the vehicle with the best resale value retained just 62% of the original cost after 3 years. Why take the loss? For the thousands that you'll save by buying a 2 or 3-year old vehicle, you can self-insure through a lot of repairs. Even if you are a big warranty freak, many vehicles are coming with longer and longer warranties these days, and those can usually be transferred between individuals. And that 'new-car smell'? It's a combination of chemicals, adhesives and off-gassing plastics. People like it because they are getting a buzz from all of the fumes they are huffin' while sealed inside their ride. We'll pass.

Convinced to buy used? Ok, good. Now lets go.

Budget
You need to know what you are willing to spend before you even start looking at cars. There's no need to go through the heartache of falling in love with a vehicle, just to find out that it's $4000 more than you can afford. If you just sold your car, then maybe your budget is set - ie the proceeds from that sale. Don't forget to withhold some money for the taxes you'll incur. Maybe you've been saving a few hundred per month, and finally have enough to pay cash for a car. If so, then way to go! That's really awesome. There's few better feelings than paying cash for a car, and knowing you'll never make a monthly payment and never owe interest on you car.

Research