While I Was Hiking

Thoughts & Musings From The Trail

Menu Close

Opportunity Cost and Your New Car

Buying a new car or truck does not make you an adult. Having a brand new car is not a box you need to check when you get a new or first job. We are quick to congratulate people for doing so, but what if they put themselves in a poor financial situation to mark off this mythical checkbox?

Like with everything in life, our purchases and choices have opportunity costs. You spend more here you have less to spend somewhere else. You spend more time here you often get less time over there. Cars are no different. The intention of this article is not to judge your new car. Its to make you question it. After all, it’s just a car.

Maybe you get immense joy from the car and you’re happy to have a high car payment. Maybe you feel completely fulfilled every time you sit down in it and start er’ up. Maybe you do know what you’re doing and this is your rich life. Can you really afford a car if you’re paying more than $450/month?

What about that other stuff in your life you say you want to have or do? Like that awesome membership to a CrossFit or rock climbing gym, health food and supplements, higher quality wine, more golf on the weekends, flights to see family, vacations, a course you want to take, a career coach, lessons for guitar, etc. You only have so many dollars to spend on the things you want. Are you sure you want to tie up a substantial amount of money on a depreciating “asset”?

I ask you to be real with yourself. Isn’t the purpose of a car to get you from point A to point B safely? Isn’t your life’s purpose to enjoy the f*ck out of it?

Here are a few more thoughts around the consequences of buying a new, overly expensive car or truck to “treat yo’self” after landing that new job.

Just a few more Questions

Did you know, that consumers have a total of $1.2 trillion in outstanding auto loans? The average car payment for a new vehicle is $554, and the average for a used car is $391 per month. That is straight insane. Just because everyone else is doing it doesn’t mean you have to.

Have you really thought about how you will spend the majority of your time in this car? How far will you drive it each day and for what purpose? Do you have a lot of stuff to haul every day or are you recalling the few times it was inconvenient when you didn’t? Are you consistently planning on taking rough dirt roads to get to trails or you did you do that once and reason you’d do it more if you had this vehicle?

And we haven’t even gotten into the thick of it. Are you buying new? What extras? Are you leasing? These things add up and create more liability over time. Cars are just that, liabilities. Driving is one of the riskiest things we can do as humans. Nobody is void of this risk.

Enough of the questions, let’s look at a scenario. I really like scenarios.

Example Scenario

Let’s say I’m a 26-year-old and I just got a great job. As I’ve seen many around me do, I decide to upgrade my car. I’ve always kind of liked Honda CRV’s. They seem to be exactly what I’m looking for. Decent ground clearance for adventures, more space than a car, decent gas mileage. A fine choice for an SUV, you say. Let’s say I want to buy this new.

Fortunately, it’s reasonably priced with an MSRP price between $24,450 – $34,250. And that’s reasonable compared to new trucks. Given that I want power windows, but not too much like a sunroof of course, I found one at $25,000. I have great credit and based on the average 2019 rates for car loans, I locked in 3.6% APR over 60 months.

Why 60 months? Because Experian (the internet) is telling me that for new-car buyers with credit scores of 781 to 850, the average new-car loan term is around 63 months. Because I want to be “normal”, I accept this number from the dealership and march forward.

opportunity cost and your new car
APR % for new cars

As for the down payment, my grand scheme is to pay as little as possible and trade in my used car. Keep in mind that my current car has about 125k miles and runs fine at the moment. But of course, the car has got some “issues” and a bunch of maintenance costs that are now due.

The dealership says they’ll give me $2k. Screw it, I say, good enough. I, of course, want the quick cash and little hassle. And because they told me I could afford it with just that much!

Maybe your car is worth more. But again, that isn’t the point. Rather, it’s the high monthly payment and total price of the car. Especially if you’re still in debt.

The Monthly Payment

For my new car, I determine that I can afford $445/month so I’ll gladly pay it! After all, this is all normal up to this point.

opportunity cost and your new car
Rough car payment estimator

Reality sets in. For the next 60 months or 5 years, I’ll be paying a monthly payment of $445 on this car. Keep in mind, that’s not the true cost. I can’t forget the yearly registration (broken down by month), insurance, hidden fees, unexpected expenses, etc., all of which adds up to a total of about $600/month, possibly more.

But never mind all of that for now (including maintenance and insurance) because my current car would have some of these costs as well. Are you following me?

Side note: Do people read the fine print anymore on all of this or by the time they do they’re too far into the process?

So let’s play the opportunity cost game with just the $445/month number with two of the other boring routes you could take instead.

Option 1: Saving your “would be” payment in a high yield savings account

The first scenario I want to show is the opportunity cost of driving your perfectly fine vehicle over the next 5 years, assuming the maintenance costs are reasonable. Instead of spending $445 monthly car payment, let’s say you straight up save it in an online bank with an interest rate of 1.80% (I use Discover for savings). The picture shows a snapshot from this scenario I ran from NerdWallet.

You’d have approximately $29,214 in 5 years in your high yield savings account

Instead of paying your new car payment, you could use this savings as a “would-be” payment in side savings account that helps you fund your next car, maintain your current one, and do all of that other hood rat stuff you want to. Hell, you could buy a car outright at that point.

Its cliche as hell to tell someone to save it instead. That’s probably what everyone would say. But the exercise is good for remembering the numbers and seeing the benefits of planning ahead.

Option 2: YOU COULD INVEST It

Of course, I have to be that guy who plays on investing scenarios. You saw my last article right? What if you only put that money in the stock market, into let’s say a Vanguard Roth IRA and completely stopped at the 5-year mark. How much would you have at that point? About $33k.

opportunity cost of a car
The “would be” $445 monthly payment into a Roth IRA

It gets better though. Now watch what happens if you completely stop at that point, completely forget about it, and never put another dollar letting it grow from there for the next 29 years.

opportunity cost of a car
What happens to that savings if you just let it sit for 29 years

Guys. You would have $234k of completely tax-free money. All for 5 years of delayed gratification.

Option 3: Adopt the This AND That Mindset

I like to encourage the “this AND that” more than the “this OR that” mindset in my life. Applied here, you might split the strategy, half paid to each with this “would be” payment. For ease of the argument, you’d have about roughly half of the savings in this 5 year time and a bit less in your investment account in the long term. Still great.

Take this a step further. Think of the multiple choices you listed above that make you happier than investing or saving that you could combine together? You could try thinking more about how you could incorporate the “this AND that” mindset rather than “this OR that?”

Do I even dare go into the amazing other ways you could spend this money? I challenge you to do just this. Make a list of all of the epic things you would like to have or do in your life. Then, use the $445/month on your “would be” new car to split it between items.

Ah yes, The point!

The takeaways are that delayed gratification will make you rich and you are not the car you drive. You are meant to do way more with your amazing life than be stuck paying for a brand new car you can barely (or think you can) afford. Get creative.

If your car runs fine and you have no car payment, what more could you ask for? Think about your budget. Think of what else you could do with this money? Yes, of course, you need a reliable car but until you are out of debt and doing well financially you probably don’t need a brand new, current-year model.

Too often, we look at whether or not we can afford things by the monthly payment rather than the opportunity cost, interest over time, etc. Maybe you buy a used car that looks great, drives great, and do something better with the rest of your money. Cars are cars.

Think more about the opportunity cost to everything in life. Delay gratification and make wiser financial decisions that light you up instead. Your amazing, rich life is at stake.