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Bruce,
Knowing when to give up on a car is unfortunately an art more than a science. In mathematical terms, you're trying to find the lowest-cost intersection of four curves, only one of which you have a reasonably exact idea of.
1- Feeling. Do you still like the vehicle, or would you feel much better having another/a new car? If you don't, or don't trust it, or otherwise feel uncomfortable with it, get rid of it. Life's too short to spend significant chunks of your time in a vehicle you don't like.
2- depreciation. As the vehicle gets older, your yearly depreciation decreases. A new $40K Volvo may in 1, 2, 3 and 4 years depreciate to $30K, $25K, $20K, and $15K. That's $25K depreciation in 4 years, or about $6.25K/year. After keeping it another 4 years it may only be worth $5K, but that's only $2.5K/year. Your friend may be partly right that after 5 years a car is worth fairly little compared to the new price, but if you look at how much depreciation you take per year keeping it is obviously the better bet. Put the money you save in a savings account, use some of it to pay for repairs, and after doing it twice you've almost saved yourself the price of a brand new car (assuming it won't need too many expensive repairs, which is where the "art" part comes in - I'll get back to that).
2b- Contributing factors may be fuel costs, insurance, taxation (some states/countries tax based upon current or initial value), financing costs (will you be paying for that new car in cash that might've earned interrest, or will you be leasing/financing it and actually pay interrest on it?), parts prices and availability (could you get parts from the PnP or would you need to pay dealer or specialist prices?), labor price and availability.
3- maintenance. As cars age, maintenance increases. How much maintenance is highly variable, depending on initial build quality, usage and previous care and maintenance. The "art" (knowledge, instinct, whatever) is trying to forecast how much maintenance a particular vehicle will need. If you have an older vehicle that needs work, try to figure out what would be needed to make it an enjoyable, reliable vehicle again. You have made a good list of what needs to be done. Now ask yourself if, after doing that work, you would be able to enjoy that vehicle for a few more years or if you'ld be sinking more money into it every few months.
4- what would it cost to replace it not with a new vehicle but a similar vehicle? In other words, would you be better off buying another 240 instead, or maybe even upgrade to a 940? Here again that "art" comes in. First estimate what the resale value of your current vehicle would be, and what the replacement vehicle would cost. Then figure out how much you'ld need to invest in the replacement vehicle. In my experience, every used vehicle needs work, unless you're in the high priced "Volvo selected used car" or similar range, and even then...
Now for the calculating.
1 is basically a boolean variable, yes/no. Don't like the car anymore, ditch it.
2 you can research. Look at dealer lists, your local newspaper, KBB, Edmunds, ebay...
2b you can calculate.
3 is where you'll need to take a long, objective look at your particular vehicle, and do some good estimating. It's a gamble, but with much better odds than Vegas. Do the same calculation for a new car. It'll still need service, new tires, the occasional brake job, etc.
4 is again an estimate. Take a look at some vehicles you might be interrested in, and try to do the same calculation as for (3).
Just do the math over a 16 year period, assuming you buy a new car at the beginning:
4yr: 1 new car, $40K. 3 tradeins, $75K. remaining value: $15K. Cost: $100K.
8yr: 1 new car, $40K. 1 tradein, $35K. Extra maintenance: $ 10K. remaining value: $5K. Cost: $80K
For the really ambitious:
16yr: 1 new car, $40K. Extra maintenance: $15K. remaining value: 0. Cost: $55K
Congratulations, you've just saved yourself a new car and a holiday in europe.
Remember, new vehicles need maintenance as well.
Especially if you do a lot of your own work $5K is a lot of maintenance, and for older cars it'll be easier and cheaper to get replacement parts at the PnP.
Prices/values are examples picked to make for easy math. Do the price research in your own market.
The above is only taking into account depreciation and maintenance.
Mileage depends on your usage pattern. Let's do some more math.
Assume gas is $2/gal (in a few years it will be, and we're taking a long term view here). Assume usage of 21K mi/yr. Assume old 240 returns 21 mpg, assume new Volvo returns 28mpg.
Old volvo 21K mi/21mpg=1000gal. 1000gal*$2=$2000/yr
New volvo 21K mi/31mpg=677gal. 677gal*$2=$1354/yr
saving $2000-$1354=$646
16yr cost $646*16=$10336
Not being a US resident and not knowing in which state you live I won't touch on issues like insurance, taxation and financing, but if you're doing the comprehensive math, take those into account as well.
Now this is all very nice and theoretical, but how to actually put this in easy to understand math?
You've obviously got a computer or you wouldn't be on brickboard. Spreadsheets being my favorite tool that's what I advise, I suppose you could do the same with a word table.
First create a column listing all the classes of costs: depreciation, fuel, maintenance, tax, insurance, financing, ...
The create a column each for your current car and a few potential replacement cars (or replacement car strategies if you're into long term planning like in the example above), and fill them in, based upon your location, usage and the time you plan to keep cars or your planning window (you may only want to answer the question "should I keep this car another two years?"). This is where you use the data you calculated earlier in 2, 2b, 3 and 4. Now sum them and look at the total costs for each.
Again, this is the financial side of things. If you were completely rational, and reasonably spot-on with your predictions, that would be all that's needed.
About the two approaches: From the above it'll be obvious that I'm a firm believer in the "fix it and use it forever" school of thought. Even if it isn't you who's using it forever, a well maintained vehicle is, in my opinion, more pleasant and certainly safer to drive and will have a higher resale value. Yes, it will cost some money and time to either fix it or see to having it fixed. For a certain class of vehicles the "drive it into the ground" school of thought is indeed the cheapest, with the obvious drawbacks that you'll always be driving clapped-out end-of-life vehicles, and that you'll say goodbye to each and every vehicle as it is carted away behind a towtruck. That time may not be at home on a friday night with all weekend to find a new vehicle. It could also be on sunday evening just as you're driving back home through rural south-dakota on a sunday evening, having to be back at work 500 miles and 9 hours from now, or in the middle of Death Valley NP with all the family and three weeks holiday luggage in the back. I prefer to part company with vehicles on my terms, at a time of my choosing, as they're driven away under their own power by their new owner, or driven into my barn to be parted out under their own power.
However, in the end, many people decide on point 1. They want the "reliability" of a new(er) car, or the feel-good factor, or just get bored with a car after some years, or decide they actually like that old car quite a lot and keep it. I'm not saying that that is good or bad, just that you shouldn't discount that factor. You might be a lot cheaper off keeping that old car and doing an hour of work on it every month, but if you hate doing that you're not making yourself any happier. Your partner might be much happier with a new(er) vehicle, and domestic bliss also has its value. On the other hand you might buy a new vehicle and have lots of problems with it. God knows the web and car mags are full of dealer/new car horror stories. Or you might just plain not like newer cars, plenty of die-hard 240, 700 and 900 fans around who truly prefer those over the newer breed of Volvos (or other cars). I guess what I'm trying to say is that if it makes you happy, it doesn't matter what you do or if it may cost a bit more than the economically most sensible choice. Life's here to enjoy, you can't drive a bank statement to work or take it for a spin around town "just because".
This has become even longer than I intended. I certain hope I've managed to explain my thoughts clearly, the brickboard format doesn't lend itself to doing a temporary save and coming back a bit later and reviewing before comitting the message to the public forum.
As a final note, on the matter of full restorations, the trick is being very methodical about disassembly. Go to officemax and buy a large box of ziplock bags, some permanent marker, a few rolls of packaging rope and a couple of sturdy notebooks. For every item you take off, make a note/sketch how it was mounted, including all washers/lockwires/electrical connections/etc. Then remove it, putting it in a ziplock back together with all its associated hardware, and clearly label it with those permanent markers. If it's too large to fit in the ziplock bag, put the hardware in the ziplock bag and tie it to the item. Make a list of what needs to be fixed/replaced. Once you've picked the entire car clean, you can fix rust, sandblast, paint, whatever. Meanwhile you can send major items you need to contract out off to the various contractors (transmission shop, engine shop, machine shop to press bushings, etc). Once you've got everything back, and done all the shopping you wrote down during disassembly, you start at the back of your notebook and put it all back together again, cleaning/repairing/lubricating each item. Some people prefer to do that cleaning/repairing lubricating as they part out the car or in a batch while the engine and body are shipped off, that doesn't make much difference. Once you're back at the beginning of your notebook and no more bags remain, you're done. This, by the way, is the basic recipe for any restauration, be it a car, boat airplane, clock or anything else.
It helps, but is not absolutely neccesary, if you have some experience with that type of vehicle. If it's a vehicle that's cheap to obtain as a parts car, parting one out first also helps. Not only will it net you a large pile of spare parts, it will also teach you how everything fits together. Breaking a couple of clips or trim pieces on a parts car isn't nearly as annoying as doing the same on the car you're restoring. The volvo parts book/fiches are very nice to have around and not all that expensive compared to what a full restauration will cost. Highly recommended.
Bram.
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