In American culture, we view the car as an extension of the driver. We expect a person’s car to mirror their economic or social status. We take great pride in the vehicles we drive, and I see very little wrong with that. However, I want you to think about how large of a value would you place on that pride? If someone offered you $10,000 to drive a more modest car, would you do it? What if they offered you $25,000? How about $50,000? What if I told you that you had the opportunity to essentially make this type of offer to your future-self in the form of a decision today?
Leasing or buying a car that is unnecessarily expensive can have an adverse impact on your progress to financial freedom. I am hyper-aware of this fact and it’s the impetus behind my vehicle choice. Keep reading to find out how much a car might actually cost you.
The Hidden Cost of a Car
While having a vehicle at your disposal can be convenient, it certainly comes at a cost. There are a whole slew of expenses associated with having a car (to see a breakdown of our monthly automotive expenses, check out this previous post about our budget). Since the amount everyone pays for fuel, car insurance, and maintenance is going to vary, we’ll ignore these costs. For the sake of simplicity, let’s only look at the monthly payments required to buy a car to evaluate the hidden cost (although the numbers would be different for leasing a car, the thought-process is similar). As I’m sure you’ve heard anecdotally, buying a brand-new car probably isn’t typically the greatest financial decision, so all the figures I’m referencing will be related to used vehicles.
According to USA Today, the average used vehicle listing price was about $21,500 during July, 2020. Based on data from Edmunds, the average down payment amount for a used car was about 11%. Taking this data into consideration, that means the average amount financed on a used car purchase is about $19,000 ($21,500 x 89%). Assuming that the vehicle is financed over a 60-month period at a 2.99% interest rate (the rate currently being offered by our credit union, Michigan State University Federal Credit Union), the monthly payment would come out to about $340 per month. On a monthly basis, $340 might sound like a reasonable amount for a car payment. On the other hand, what would happen if you could save that entire amount and invest it instead? Buckle up, the result might shock you.
If we assume that you can invest $340 a month and earn an average annual return of 7% for a 60-month period, you would have $24,342 at the end of those 60 months. Would having an extra $24,000 in your investment account five years from now be enough to entice you to purchase a less expensive vehicle? Before you answer, let me sweeten the deal. If that money were to continue to grow at 7% per year for an additional 15 years, that $24,342 would turn into $67,160. This is assuming you don’t add another nickel to your account. The power of compound interest, the process where your money makes money, does all the work.
My Vehicle Choice
The reason I drive a rusty 2003 Buick Regal is almost entirely financially motivated. I bought the car for $2,100 about three and a half years ago. After sales tax, some minor repairs and new tires, my total cost was about $3,000. The only reason that I was looking for a car in the first place was because the lease that my parents had provided for me was about to end and it was time for me to purchase my first vehicle on my own. I had been searching for a vehicle for about a week when I spotted the Regal. It was being sold by a private seller on Craigslist and I decided to pull the trigger after taking it for a short test drive. It isn’t a perfect car by any means, and I get a lot of grief from my family and Nicole (my wife), but it gets the job done!
Would I like to be turning heads on the freeway as I cruise by in a sleek sports car? Absolutely! However, the frugal side of me just won’t allow it right now. My Buick provides all the utility expected from a car: it safely and efficiently gets me where I need to go. I recognize that by driving an inexpensive vehicle now, entirely new opportunities become available to us and our future children. The accumulated savings may even make up a portion of the down payment on our dream home one day! When I look at the decision from this perspective, it is without a doubt worth the sacrifice. By understanding the long-term implications of the decision, we are setting ourselves up for success.
I recognize that driving a less expensive vehicle might not work for everyone’s situation and I’m not recommending everyone should. Some people experience great joy from their vehicles. Others may need to maintain a professional appearance to appease their clients while some jobs might require a particular type of vehicle (it’s hard to plow snow with a sedan). I’m only trying to drive home the fact that there are often times when we can make do with less. Sometimes we get lured in by the shiny bells and whistles of a product when the bare-bones model would have worked just fine. Going forward, I simply ask that you try to be cognizant that every decision you make has tradeoffs, either implied or explicit.
If you have any questions about this post or if there is a topic you would like to see written about, use the Your Thoughts page to connect with me.
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