Why Not to Buy a New Car – and What to Do Instead

Very frequently, the first thing young adults do when they get their driver’s license is buy their first car. This gives them some mobility, independence, and the feeling of freedom. What could be wrong with that? Not much, at least in the emotional sense and in reaching the next level of maturity. But what about in the financial sense? You may not be at the age and stage of life where you’re just getting your driver’s license, but the same financial principles apply to any young adult. Keep reading to see how foregoing your next vehicle purchase could be worth millions of dollars!

If you were to buy a new vehicle for around $50,000, you could get a decent quality vehicle of almost any model that suits your lifestyle, but nothing extravagant. In fact, this is the Kelley Blue Book average cost of a new car in America today. Let’s assume this is your choice but you don’t have the funds to buy it in cash, so you finance the purchase at a 5% annualized rate over a five-year term. In this situation, let’s determine the costs over the first five years, and then the second five years (don’t worry if you don’t want to concentrate enough to follow this math, it’s only the end results that must be understood).

Your initial downpayment will be about 20%, so that’s $10,000. Then tax will be added, which averages 6% across all States, so there’s another $3,000. Your monthly payments will be $755 per month, and included in that will be interest payments that add up to $5,300 over the 5-year term. Your vehicle cost will therefore be $50,000 (price) + $3,000 (tax) + $5,300 (interest) = $58,300. During those first five years the vehicle will have dropped to half its original value so the residual value of this car at the five-year mark will be about $25,000 according to Kelly Blue Book.

Your financial losses so far will therefore be $33,300. Assuming the monthly payments go away after 5 years, and that during the second 5 years the vehicle will only depreciate by ½ its residual value, your additional loses will only be another $12,500. The net result in this example is that you spent $58,300, and ten years later you have a car that’s worth $12,500, so you have lost $45,800, which averages $4,580 per year.

That’s a significant amount in most peoples’ budgets but it’s just the tip of the iceberg. Ask anyone who has owned a vehicle and they will tell you that these number are nowhere near the total cost of owning and operating a vehicle. Every year, insurance averages $2,500, gas averages $5,000, maintenance averages $800, and repairs average $650. Over the first 5 years this adds another $8,300 per year (assuming repairs are covered under warranty). Over the next 5 years the combined extra costs average $8,950 per year. Parking is additional, and can be very significant if the car is used for commuting to work and your employer doesn’t provide free parking. Clearly it is less expensive to keep a car for ten years or longer, but during those first ten years, a $50,000 vehicle will actually cost you about $132,000 when operating costs are included.

As you can see, the cost of vehicle ownership is very high, and the majority comes from operating costs and the hidden cost of depreciation. Unfortunately, there is yet another devastating cost that almost nobody considers; it’s called opportunity cost, and it is far greater than all the rest combined. Opportunity cost refers to the financial gains you could have made by putting the same amount of money into investments instead of spending them on a vehicle with its operating costs and depreciation, resulting in negligible value after five to ten years. This opportunity cost should be added to the total cost of vehicle ownership to determine its true overall cost. I’ll demonstrate the math, but again, don’t worry too much if you don’t follow every step, it’s the end result that is shocking.

In our example of the new, $50,000 vehicle, we determined that it would actually cost about $132,000 to own and operate for ten years. What financial opportunity could be gained by finding a way to avoid making this purchase?

Even if we just take the $132,000 and divide it equally between the ten years (which is more conservative than the actual purchase because the down-payment and tax is paid up-front), that’s $13,200 per year, or $1,100 per month. A 10-year investment of $1,100 per month, growing at a rate of 10% per year on average, produces a return-on-investment of about $99,000. The total costs of owning and operating that $50,000 car, including opportunity cost, are therefore more like $231,000. This means that if you could live without that new car, and committed to putting the equivalent purchase and operating amounts into your investment account instead, 10 years later you would be $231,000 richer ($132,000 saved plus $99,000 earned) without costing you a nickel more than purchasing that new car. But we’re not done yet; not even close…

If, at that point, you made no additional investment, just foregoing this one vehicle purchase and choosing to invest the funds instead, it should now be earning you an extra $23,000 per year. That sounds pretty good, but how is this for shock and awe: If that $231,000 were left to compound for the subsequent 30 years at a 10% compounded annual growth rate (CAGR) it would become over $4 million! And if you kept contributing the equivalent costs of owning and operating an average new car every ten years, estimated at $13,200 per year, your portfolio value after 40 years (assuming age 25 to 65) would be over $6.4 million! This doesn’t even include the inflation factors that would inevitably make the alternative use of these funds increase dramatically over that 40-year timespan (all the vehicle purchases and operating expenses), all of which could be avoided if you didn’t own those vehicles.

The question you have to ask yourself is this, would you rather own an average new car every ten years or have $6.4 million extra at retirement?

The point is that owning and operating vehicles is full of hidden costs and opportunity costs that will never be shown in the flashy commercials. Eliminating them is therefore one of the greatest strategies for increasing your foundational wealth, and it is a massive increase!

This one lifestyle choice could completely pay for a lavish retirement. Of course, it only works in your favor if you actually invest the amounts you would otherwise have used to purchase and operate vehicles.

You may believe there is some social stigma attached to riding public transit to work, but that sensation can be more than offset by the knowledge that your strategy will net millions of dollars in value over the span of your career. And heck, once you’ve got millions of dollars working for you, go ahead and buy a really nice car if you want to.

I have owned numerous expensive SUVs, trucks, and luxury cars in my lifetime. I wish so strongly that I had made the effort to calculate my total cost of ownership decades ago. Now that I am financially independent and can afford pretty much any vehicle I want, I drive an inexpensive, simple, old, reliable, Toyota. To learn specific strategies and techniques that are sure to generate millions of dollars for your family, visit www.newbornnestegg.com. For a few dollars you can purchase the book that provides all the details. It presents a simple, step-by-step formula that takes just one hour to set up and automate. From then on it turns pocket change into millions of dollars passively. The younger you are the more powerful the formula, and you will never be younger than you are today.