Buying a car? What new DOs should know before splurging on a set of wheels

Medical students and residents toil for years, learning their profession and delaying gratification. So, it’s no surprise that many newly minted DOs can’t wait to spend a buck or two.

“New doctors have a lot of pent-up consumption, so it’s natural that they would want to splurge a little,” says Chris Chen, a certified financial planner with Insight Financial Strategists in Waltham, Massachusetts.

A sparkling new luxury car often tops the list. Not only can a set of hot wheels feel like a well-earned reward, but it also serves as a status symbol, a visible sign that you’ve finally “made it.”

But giving into temptation and plunking down a wad of cash on a BMW or a Lexus can be a terrible financial mistake, Chen says.

“I never recommend that a new DO or MD buy a luxury anything in the early years,” he says.

During a doctor’s first few years on the job, spending opportunities often arrive in quick succession–from marriage and kids, to a monthly payment on a new house, Chen says. In addition, most doctors also carry a lot of debt from their years in medical school.

“The first order of business has to be to reduce the debt–maybe not eliminate, but at least reduce,” Chen says.

For that reason, Chen typically advises new doctors to keep the car they used in residency a bit longer whenever possible.

“It’s important that people have priorities, and a luxury car has to be at the bottom,” he says.

A smarter way to buy a car

New DOs who need a car should settle for something more modest, Chen says. Other financial advisers agree.

“There are happy mediums between an economical car and a luxury car,” says Alexander Koury, a certified financial planner and wealth advisor for ValuesQuest in Phoenix, Arizona. “Your decision does not have to be all or nothing.”

If you’re determined to buy a luxury car, consider one that is not brand new, says Adam Kozak, a certified financial planner at KPL Financial Group in Eastchester, New York.

“I recommend they buy a 2- to 3-year-old luxury car off-lease or from a car rental company,” Kozak says. He says such cars typically cost about 30 percent less than a new car. Plus, you avoid the significant depreciation a car experiences in the first year after it leaves the car lot.

Leasing a car also can make sense for some new doctors, especially those who like the “new car” feel and prefer to update every few years.

However, before leasing, have a good gauge of how many miles you drive annually. Leases typically come with mileage limits of around 15,000 miles over two or three years. Exceed the limit, and you’ll end up paying extra fees.

If you work as a contractor or have your own solo practice, some of the costs associated with buying or leasing a car might be tax-deductible. Sit down with a tax professional to find out which options apply to you.

Avoiding the siren song of luxury

Of course, some new doctors just can’t help being drawn in by the siren song of a brand-new luxury vehicle. However, rushing out to buy a flashy set of wheels can establish a bad pattern of overspending that can haunt a doctor for years to come.

Koury has been working with one doctor for more than a decade who had a lot of student debt upon leaving school, but bought a luxury car and expensive house soon after beginning to practice. Those decisions have hurt the doctor financially.

“He is no better off today than he was when he started working,” Koury says. He adds that the situation is common among doctors. “He thought a big salary would solve his problems,” he says.

Allan Katz, a certified financial planner and founder of Comprehensive Wealth Management Group in Staten Island, New York, encourages physicians to initially focus on making a significant dent in their debt load before looking down the road to buying a luxury vehicle.

Until then, Katz advises new doctors to keep things in proper perspective.

“In reality, nobody really cares what car you drive,” Katz says. “When patients come to your office, the last thing they are thinking about is the cars in the parking lot.”

3 tips for buying a new car

While most financial advice steers new doctors with heavy student debt away from spending lavishly on a car, the lure of a new car can be strong. If you decide to buy new, here are three tips to help you shop wisely.

Determine your budget: Before you set your sights on a specific car, make sure you can afford it. The personal finance website Bankrate suggests that your monthly car expenses (including loan, fuel and car insurance) should not exceed 25 percent of your monthly household income. When calculating the cost of your new car, don’t forget to include state taxes, license and fees, which vary by state.

Secure financing in advance: Before you even step foot in the dealership, make sure to set up a loan in advance from a bank or credit union. This allows you to compare it to what the dealership offers. Since dealers often receive a fee or commission on the auto loans they facilitate, it pays to shop around for the best financing option.

True cost of ownership: Knowing your new car’s operating cost over time can save you money in the long run. It might be easy to figure out what a car costs initially, but you also need to calculate the price of insurance, maintenance, repairs and fuel. Both Kelley Blue Book and Edmunds offer 5-year cost-to-own calculators.

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