The True Cost of Vehicle Ownership
How can you save around 3/4 of a million dollars?
The numbers don’t lie my friends. In fact, the numbers are getting worse each year. According to market researcher JD Power, a well-known research company, vehicle loan amortizations have truly gone wild. Nearly three-quarters (75%) of all new vehicle loans in 2017 were for six years or longer. And to make matters worse, in 2017, eight-year vehicle loans accounted for more than 10% of all vehicle loans… yikes!
But, it gets even worse!
The Financial Consumer Agency of Canada also released a report on trends in the auto finance market in 2016. The report showed a dramatic increase in consumers who are trading in old cars for new cars with negative equity. What does negative equity mean? That means the consumer now owes more in loans than what their vehicle actually costs. JD Power reported that the average negative equity rolled into a new loan was $6,659.
How do we get out of this mess?
If we want to build wealth and enjoy the things in life that truly make us happy, we should not be taking out substantial loans on a depreciating asset (like a vehicle). It all goes back to really understanding your core values and aligning your finances decisions with those values. (Link to post about this.)
How do we calculate the true cost of a vehicle?
- Depreciation (cost of owning the vehicle)
- Although you don’t make a monthly payment for depreciation, vehicles lose value every year, which impacts your total cost. In the first year alone, vehicles can lose around 20% – 30% of their value. Over each of the next five years, according to Black Book, depreciation is between 15% and 18%.
- We generally have little control over depreciation. However, buying used vehicles and vehicles that hold their value will save you in the long run. For example, Brian Murphy Vice President of Research at Black Book Canada, reports that Toyota and Honda are the two top brands that hold their value. Be sure to do your research before shopping around. Click here for the full article.
- Finance Charges
- When you finance a vehicle, you are charged interest. This interest makes the vehicle more expensive.
- Opportunity Cost
- When you buy a vehicle, you need to trade your money for this vehicle. This means you have less money to invest in other areas of your life. For example, you have less money to invest for your retirement or early retirement.
- If you drive an average of 10,000 km a year, gas will cost around $1,300 for a compact vehicle.
- Insurance and Registration
- Maintenance and Repairs
As you can see, learning what the true cost of vehicle ownership is, and really considering how much you value driving a new vehicle, requires more than just calculating your payments and insurance.
Let’s look at some examples:
Instead of buying a new vehicle every five years and financing it, what would happen if we bought a vehicle that was five years old and kept it for ten years?
Buy a new vehicle every five years and have an expense of $11,130 per year for 40 years of driving (25 years old to 65 years old). This would cost you $445,200 over 40 years.
Buy a reliable vehicle that is five years old at a cost of approx. $12,000 (after the majority of depreciation is gone), and keep the vehicle for 10 more years. Invest the difference between the cost of Scenario #1 and Scenario #2 in a low-cost index fund. As per the chart above, this would be a savings of $5,880 ($11,130 – $5,250) per year that you can invest every year and earn approximately 6% over 40 years.
If someone did this strategy, they could have saved approximately $850,000 over 40 years. Wow!
I know what you are thinking: that doesn’t make sense, or I need a new car for safety reasons.
Here’s the good news: the majority of people are buying brand-new vehicles every 3 – 5 years, so there are lots of good quality used vehicles available to choose from. Secondly, the math above does not lie. It’s really that simple.
It is remarkable that we can save around $850,000 over 40 years just by buying a used vehicle and driving it for 10 years.
When it comes to vehicles, me and my wife have intentionally purchased older vehicles. Sure, we could afford to buy new vehicles; however, as I mentioned, we don’t value vehicles nearly as much as our time, taking vacations, and spending on our health. It all comes back to those core values for us. And, overall, we would love to become financially independent years earlier than we otherwise could over enjoying the small luxuries a brand-new vehicle may offer.
What about safety?
Safety is a key word that comes up when vehicle shopping, and rightly so. Maybe you have kids, so you think about safety even more. Well, we have two young kids as well. My toddler’s bedtime book says, “Be careful and be safe.” This is an important motto! Buying an older vehicle doesn’t mean you’re less safe or making a reckless decision.
With proper research and patience, you will be amazed at what you can find. You can find a great vehicle that will check all the boxes, including the one next to safety.
For example, when we purchased my wife’s vehicle, it was five years old. We saved over 50% on the original sticker price and it only have 25, 000 km on it. Sure, the vehicle was 5 years old, but it was barely driven. I know we missed out on the new fancy features; however, to us its totally worth it and not something we even really think about when we are driving around.
Before you make your next purchase, I encourage you to take a look at this site from JD Power that shows the most reliable vehicles in Canada per year. Start by looking at 2014 to see what the most reliable vehicles are and then go search for a well- maintained, single-owner, low km version of that vehicle.
How much is the true cost of vehicle ownership for you? What’s the total?