How much does your car really cost?

Ever thought about what your car is really costing you? Yeah, we’re all acutely aware of how much gas has gone up and how much it hurts when we fill up, but what other costs are there?

Personally, I try to be aware of the opportunity costs of my purchasing decisions as well as the intangible benefits. So lets take a look at the opportunity costs first.

Opportunity costs are the things that you can’t do because you did something else. For example, lets say you have $25k in cash, and you decide you need to buy yourself a nice BMW with that $25k. By making that choice, you’ve passed up the option to invest that $25k and make some kind of return on it. From what I’ve read, the long-term gain from the stock market has been about 10% per year. Not every year obviously, but on average over the long-term.

So in 20 years that $25k would have been approximately $168k. (Open a spreadsheet and add 10% to $25k, compounded for 20 years). And where is the BMW after those 20 years? My guess is that it’s long gone to the junkyard. But even if its not, it’s definitely not worth the $25k you originally paid for it. Maybe $2k at this point? So that BMW actually cost you $166k at the least.

Now that’s really the best of the scenarios here. Imagine, losing $166k is the BEST scenario! Not many of us has $25k just lying around waiting to buy a car. Most people finance it and get a loan. So what happens then? Well, now you are paying interest on the loan AND not gaining any return on the money. So not only do you lose the $166k, but you also lose the returns you could have made on the interest you paid. But what else?

If you own a car out right with no loan, then you don’t have to carry comprehensive and collision insurance. And if the car is cheap enough that you can replace it if you had to (like if you got in a wreck), you shouldn’t carry comp/collision. But if you have a loan, the bank will make you carry insurance on the car to protect their investment. So that’s another thing you are paying for that could have been earning you returns.

Another hidden cost is the sales tax. Since it’s based on the value of the car, it will be very high for high priced cars. And even worse, it’s gone the minute you buy the car. You can’t turn around and sell the car to get it back. It’s gone forever, along with any return you could have earned on it.

And lastly, we already touched on it, but you have a hidden cost of depreciation. The car is worth less and less every year, so you’re losing money just by owning it.

So what’s the alternative? Buy a cheaper car. Like something for less than $3k.

Why?

First, it will hold its value. A car bought for $2k can usually be sold again next year for $2k. That knocks out the depreciation problem. It also dodges the problem of appearance at resale. A $2k car is assumed to be valued for its functionality, rather than its appearance. It doesn’t have to look perfect and can have a few scrapes. Where as a more expensive car is expected to look nice, and body and paint work can be very expensive. And an added benefit is that you don’t have to be continually concerned that someone will ding your car.

Second, $2k is a small enough sum that you can likely scrape it together without having to take out a loan, or at worst a loan that you can pay off fast. Which means you can avoid paying for comp/collision insurance (you still need liability) because you can afford to replace the car out of pocket if something happens to it.

Third, $2k is a small enough amount that you aren’t passing up massive amounts of future money by tying it up in the car. (Although it is still sizeable at $13k after 20 years.)

Fourth, $2k is small enough that you won’t lose large amounts to sales tax.

So what’s the intangible benefit of buying a high priced car? I can think of two. The first is an ego boost. The second is for appearances. But I personally get a bigger ego boost from seeing my investments grow. And I find that people who are impressed by appearances alone have little value beyond their own appearance.

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4 thoughts on “How much does your car really cost?”

  1. Hi, just found your website —It's Wonderful!! But, I just finished reading your "How much does your car really cost?" article, and I think you failed to mention an important inducement for buying a new car, which is that used cars come with other people's problems. Friends of mine who have purchased used cars find that the cars spend a lot of time in the repair shop, as opposed to those who have purchased new cars. Cars get old, like people, in a way, and they get ailments.

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  2. Sunsign1,Thanks for the compliment on the website. Much appreciated.I can see your point. My way of trying to get around this has been to have a mechanic check out the car before I buy it. This service usually costs $100. I've used Lemon Busters a few times and they seem to be pretty good as I haven't then had any problems with those cars. And the cars have lasted about 6 to 7 years after I bought them. Actually after 6 years, I sold one of them for $1.5k and originally paid $2.5k for it.But let's say that your choice is between a $2k car and a $15k car (price for a new 2007 Honda Civic, according to http://www.honda.com). If the $2k car breaks down every year to the point of uselessness, to where you have to get a different car, or to where the repair is more than the cost of the car, you could still go 7.5 years before you spent as much as on the honda. And that doesn't count any of the returns you could have earned on the remaining (15k – 2k) $13k in that time. At 10%, after 7.5 years, the amount invested doubles. So you would have about $26k at that point.And if its too much inconvenience to be without a car when it breaks down, buy 2. They are cheap at $2k and its highly unlikely that they will both be broken down at the same time. Also, this allows you to buy something that can help with moving things, like a truck.

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  3. Don't forget the lost wages you may accumulate when you are unable to arrive to work on time and your boss fires you. Even if you aren't fired you still have a loss in productivity. While your article makes perfect financial sense, a 2k car doesn't bode well for a wife and kids which may get stranded on a dark highway all alone and afraid. Peace of mind is a valuable investment too.

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  4. Assuming I do the due diligence and have it checked out by a mechanic first, and then get regular 3 month oil changes, I haven't found a cheap car to be any less reliable than a new car. Actually I trust an older car more than a newer car because it has proved itself and its parts.I suspect some newer cars might be engineered to fail after a certain life span to encourage you to buy a new one. Generally right after the warranty period is up.Also, as I mentioned in a previous comment, if being without a car is a big issue, just buy two since they are so cheap.I agree that peace of mind is a very valuable investment, but I find the peace of mind I get from a cell phone to be cheaper and more valuable.

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