Warren Buffett, billionaire and former CEO of Berkshire Hathaway, is one of the most quotable investors in the world. Famously frugal, Buffett sprinkles his financial advice with a folksy wisdom that’s direct, easy-to-understand and popular with investors across the globe.

When it comes to financing a new car, Buffett has offered his opinion over the years about what he thinks is the most financially sound course of action — at least for his own life. But his general investment advice and strategy, which he has discussed openly and honestly in the press for decades now, gives even more insight. Here’s what Buffett might tell if you were planning to finance a new car.

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1. New Cars Equal Depreciation

Buffett is famously a fan of investment value. When it comes to the pure finances of it all, buying a new car is not usually the way to get the best value. Depreciation knocks value off your car the second you drive it off the lot and most cars lose 15% to 20% of their value (or even more) within just the first year.

A few years down the road, some cars can lose as much as two-thirds of their value simply due to depreciation. This is why Buffett tends to buy used cars and hold them for as long as he can.

2. Only Buy What You Can Afford

Buffett is not alone in believing you should only buy things that you can afford. Some financial pundits, like Dave Ramsey, go so far as to say that you shouldn’t buy a car unless you can pay cash. For most buyers, this would mean that you should only buy a used car and that is definitely a strategy in line with Buffett’s philosophy.

With the average new car now selling for just over $50,000, according to Kelley Blue Book, financing is prohibitively expensive for most households. Those high new car prices translate to average car payment of nearly $750 per month. If you instead pay cash for a used car that you can truly afford, you can avoid that huge monthly drag on your cash flow.

3. Don’t Leverage Yourself

Some investors believe borrowing money on margin and leveraging yourself is the best way to amplify your gains. But Buffett, one of the most successful investors of all time, believes the exact opposite. Even though Berkshire Hathaway is the sixth-largest company in America, it carries essentially zero debt.

If you finance a new car purchase, you are leveraging your own financial situation, as you are putting only a small amount of equity into the car and borrowing the rest. If your down payment is too small, you run the risk of owing more on your car than it is even worth, a situation known as being “upside-down.” In that scenario, if you total your car, you might be forced to come up with additional cash to pay off your loan, even after you get your insurance proceeds.

4. Practicality Over Flashiness

Buffett’s frugality is one of the reasons he has been able to increase his wealth over time. Whereas many new car buyers get caught up in the excitement of owning a new car with all of the latest bells and whistles, Buffett takes the opposite approach. To him, a car is a utilitarian purchase, designed for the purpose of getting you from point A to point B.

Viewing it instead as some type of exciting, technological wonder you must have will likely draw you to buying much more car than you actually need. And as any basic financial literacy course will tell you, spending money on “wants” instead of “needs” will keep you from ever being truly financially secure.

This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.

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