The True Cost Of Car Ownership
Episode 022
Episode Guide
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The True Cost of Car Ownership: Unlocking Financial Independence Through Savvy Choices
Understanding the financial implications of car ownership is essential for anyone looking to build wealth and achieve financial independence. The strategies discussed by Jonathan Mendonsa and Brad Barrett in this episode of ChooseFI highlight how small adjustments in your car-buying habits can lead to significant long-term savings.
Reevaluate Your Car Payment Strategy
One of the most misleading aspects of car ownership is the management of monthly payments. Many individuals fall into the trap of focusing solely on what they can afford to pay each month, without considering the overall financial impact of their choices. This typical mindset can lead to poor financial decisions that jeopardize future wealth.
- Actionable Advice: Before purchasing a vehicle, calculate the total cost of ownership, including financing, insurance, maintenance, and depreciation. Avoid the “manage the payments” mentality and assess the true cost of your vehicle. An effective strategy is to limit your monthly payment based on a realistic budget while factoring in these additional costs.
The Importance of Depreciation Awareness
Cars depreciate quickly, especially new vehicles. This depreciation can cost you thousands over the vehicle's life.
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Understand Depreciation: For example, a new car's value may drop significantly within the first few years. Depending on the car model, the depreciation can average $2,500 per year for new vehicles compared to only $500 for ten-year-old cars.
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Smart Financial Choice: Opt for slightly older, reliable used cars instead of new models. Vehicles aged 5-10 years often provide substantial savings without sacrificing quality or reliability.
Investing Your Car Payment Savings
The conversation emphasizes an essential principle: the money saved from avoiding high car payments can be redirected towards investments.
- Calculate Your Investment Potential: If you decide to purchase a car with a lower price tag and save $300 a month, consider investing that amount. At an average return rate of 8%, those savings could grow substantially over time. For instance, $300 a month compounded over 30 years can amount to around $742,000—remarkably impactful for future financial health.
The Hidden Costs of Car Ownership
Many car owners overlook various expenses associated with vehicle ownership. By considering factors like insurance, gas, and maintenance, you gain a comprehensive understanding of what a car truly costs.
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Breakdown of Costs:
- Insurance: New cars often require full coverage insurance, averaging $1,200 a year, while older cars may drop to liability coverage of about $600.
- Gasoline: Fuel efficiency plays a crucial role in overall expenses. A vehicle getting 15 miles per gallon will incur significantly higher fuel costs than one getting 30 miles per gallon.
Choosing the Right Vehicle
When considering a new vehicle purchase, thoroughly research options and weigh the potential costs against benefits. Select a vehicle that aligns with both your financial goals and lifestyle needs.
- Research and Compare: Look for vehicles that have lower depreciation rates and offer reliability, such as used Honda or Toyota models. Assess local listings to find good deals on quality vehicles.
Benefits of Frugal Transportation Choices
Frugality doesn't mean compromising your lifestyle; it consists of making smarter choices that afford you freedom.
- Long-Term Mindset: Rather than succumbing to societal pressure for the latest model or brand new car, focus on what serves your financial future. Driving an older, reliable vehicle enables you to accumulate wealth and drive toward financial independence.
Final Thoughts on Car Ownership Strategies
Entering into a car purchase requires careful consideration.
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Reevaluate Your Needs: Determine whether you genuinely need a brand new vehicle or if an older, reliable car will serve your purposes just as well. Align your decision with long-term savings and investing strategies.
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Avoid the Impulse Purchase: Don’t let emotions drive your vehicle choices. Assess your financial situation stringently and make decisions that bolster your financial future rather than detract from it.
In conclusion, how you manage your car payments and ownership can significantly influence your journey to financial independence. By adopting these strategies and remaining intentional in your choices, you stand to save thousands of dollars, empowering yourself to build wealth over time.
Take control of your transportation decisions now—reevaluate your current car payment and consider how those funds can serve you better in the pursuit of financial freedom!
Do you know what your car is actually costing you each year? What about over an investing lifetime? In this episode of the ChooseFI Podcast we cover the True Cost of Car Ownership and you'll be absolutely amazed at the numbers.
[elementor-template id="143609"]Podcast Episode Summary
- ChooseFI: The Ultimate Guide to the True Cost of Car Ownership
- Your car payment is a terrible way to spend your hard earned money
- We’ll present two different perspectives: Brad will show the long-term compounded cost of buying/leasing new cars continually versus holding a car for 15 years while Jonathan is going to present the yearly cost of your car
- Brad wanted to see what it was costing someone to constantly “manage their car payments” at a set number forever by buying/leasing new cars
- This example is too conservative so a FI person would actually save even more money!
- In Brad’s example the FI person is buying a new car every 15 years. They have payments for the first 5 years and $0 car payments the final 10 years. Person B is constantly paying $300 per month. This is a 45 year study, so Person A bought 3 new cars in the 45 year period
- At the end of the 45 year period, Person A’s savings compounded to be worth $742,000 versus Person B who was constantly paying $300 per month.
- Takeaways: Don’t buy new cars and continue to drive your car as long as possible with no car payment!
- Most people can’t truly afford an expensive car and house even on a large salary. This is a true key to FI
- Astounding that $300 per month for 30 out of 45 years are ending up with $742,000 while most people don’t have anywhere near that much money after a lifetime of working and “saving.” That also shows how little money most people are saving
- Jonathan’s bad track record with buying cars in his life
The True Cost of Car Ownership Calculator
- Jonathan’s example for yearly car cost compared a new car for $30,000, a 5 year old car for $15,000, and a 10 year old car for $5,000
- Went through yearly depreciation calculation for Jonathan’s three examples
- Went through a calculation of annual opportunity cost of the year-by-year amount lost at 8% annual return if you would have invested based on these 3 examples
- Calculation of maintenance, insurance, taxes, inspections, etc.
- Also calculate the cost of gas each year depending on the type of car
- The 20 year difference from having a used car versus a new car is almost $250,000
- Jonathan’s determination is you should buy a ‘gas sipper’ that’s at least 5 or 10 years old
Listen to Brad and Jonathan's thoughts about this episode here.
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Links from the show:
How Much Does Your Car Payment Really Cost You at Richmond Savers
While You're Here
Let's Talk About Fees | Why Investment Fees Are Evil and How to Avoid Them
