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Have you ever tallied up what it costs to own a car? I don’t mean on a year-to-year basis, but the total cost of owning a car over a lifetime? According to the American Automobile Association (AAA) it costs \$8,876 per year to own and operate an average car. Now if you add that up over 50 years, it comes to \$443,800, based on current dollars.

But I don’t think that tells the whole story. In fact, we can understand just about everything related to money by examining the financial ramifications of owning a car.

So let’s look at the cost of owning a car from a different angle:

## The Opportunity Cost of Owing a Car

For this exercise, we’re going to look at a single aspect of owing a car: the cost of investing money in the purchase of a series of cars over a lifetime, versus investing an equivalent amount in a diversified investment portfolio comprised primarily of stocks.

Let’s begin by establishing a base line. We’ll assume that an individual pays \$20,000 for a car at age 25. She pays cash. Five years later she sells the car for 50% of what she paid and buys another \$20,000 car. She repeats this process until she buys her 10th car at age 70. We’ll assume she sells her last car for \$10,000 at age 75 and her children drive her where she needs to go thereafter. (At least I hope my kids start driving me around if I make it to 75!)

To keep it simple, we’re going to ignore inflation entirely – we’ll assume that the purchase price of a car will remain at \$20,000 for the next 50 years. We‘ll also ignore operating costs, the kind that AAA focuses on in their calculation – insurance, maintenance, repairs, fuel, interest on a car loan and Christmas tree air fresheners to hang from the rear view mirror.

How much do these cars cost our financial freedom fighter? At one level the math is easy. The first car costs \$20,000. Each car thereafter costs \$10,000 (\$20,000 less the proceeds from selling the previous car for \$10,000). Add up the 10 purchases, and we arrive at \$110,000 (that’s \$20,000 for the first car, plus 9 cars thereafter at \$10,000 each).

Spending \$110,000 over a lifetime to keep yourself in a late model car seems like a reasonable trade-off – until you consider the alternative. That’s where the opportunity cost of investing in cars gets more than a bit frightening.

## The Cost of Owing a Car When Measured By Lost Investment Income

What if, instead of buying cars, she invested the money. How much would she have by the time she reached 75 assuming she invested the same money at an 8% average annual investment return?

Here’s a breakdown of the results:

Car #1: \$20,000 invested for 50 years (age 25 to 75): \$938,032.25 (That’s one expensive car!)

Car #2: \$10,000 invested for 45 years (age 30 to 75): \$319,204.49 (Amazing how just 5 years and \$10,000 can change the result)

Car #3: \$10,000 invested for 40 years (age 35 to 75): \$217,245.21

Car #4: \$10,000 invested for 35 years (age 40 to 75): \$147,853.44

Car #5: \$10,000 invested for 30 years (age 45 to 75): \$100,626.57

Car #6: \$10,000 invested for 25 years (age 50 to 75): \$68,484.75

Car #7: \$10,000 invested for 20 years (age 55 to 75): \$46,609.57

Car #8: \$10,000 invested for 15 years (age 60 to 75): \$31,721.69

Car #9: \$10,000 invested for 10 years (age 65 to 75): \$21,589.25

Car #10: \$10,000 invested for 5 years (age 70 to 75): \$14,693.28

Total Opportunity Cost Over a Lifetime of Car Purchases: \$1,906,060.52

I triple-checked the math. Trust me, it’s correct. Buying a car every five years under the assumptions outlined above will cost over \$1.9 million in missed opportunities to build wealth over a lifetime.

Now, imagine a couple buying two cars every five years! I said this would be frightening.

## It’s Ugly Even When You Use More Conservative Assumptions

The opportunity cost is still impressive, even if you make the assumptions more moderate. Let’s look at some alternative scenarios.

Alternative Scenario #1 – Keep each car for 10 years

Rather than assuming that you will buy a new car every five years, let’s crunch the numbers under the assumption that you will do so only every 10 years. We’ll assume that at the end of each decade the car is worth just \$5,000. How do the numbers stack up?

Car #1: \$20,000 invested for 50 years (age 25 to 75): \$938,032.25 (That’s still one expensive car!)

Car #2: \$15,000 invested for 40 years (age 35 to 75): \$325,867.82

Car #3: \$15,000 invested for 30 years (age 45 to 75): \$150,939.85

Car #4: \$15,000 invested for 20 years (age 55 to 75): \$69,914.36

Car #5: \$15,000 invested for 10 years (age 65 to 75): \$32,383.87

Total Opportunity Cost Over a Lifetime of Car Purchases: 1,517,138.16

You will save nearly \$400,000 if you can get 10 years out of each car rather than five, but you’re still looking at an opportunity cost of over \$1.5 million.

Let’s keep going.

Alternative Scenario #2 – Keep each car for 15 years

Let’s take it one step further. Let’s assume our fearless freedom fighter drives each car 15 years, after which it has no resale value:

Car #1: \$20,000 invested for 50 years (age 25 to 75): \$938,032.25 (That’s still one expensive car!)

Car #2: \$20,000 invested for 35 years (age 40 to 75): \$295,706.89

Car #3: \$20,000 invested for 20 years (age 55 to 75): \$93,219.14

Car #4: \$20,000 invested for 5 years (age 70 to 75): \$29,386.56

Total Opportunity Cost Over a Lifetime of Car Purchases: \$1,356,344.84

Now we’ve saved more than \$500,000. If you think driving the same car for 15 years is crazy, my wife’s car is 13 years old and our mini van is 10 years old. We have no plans to sell either.

One final set of numbers.

Alternative Scenario #3 – Each car costs \$15,000 and she keeps it for 15 years

So far we’ve assumed the purchase of a \$20,000 new car. Let’s instead assume she buys a \$15,000 car and drives it for 15 years before buying a new one.

Car #1: \$15,000 invested for 50 years (age 25 to 75): \$703,524.19

Car #2: \$15,000 invested for 35 years (age 40 to 75): \$221,780.16

Car #3: \$15,000 invested for 20 years (age 55 to 75): \$69,914.36

Car #4: \$15,000 invested for 5 years (age 70 to 75): \$22,039.92

Total Opportunity Cost Over a Lifetime of Car Purchases: \$1,017,258.63

That cuts the opportunity cost by almost half from our first scenario, but she’s still  looking at an opportunity cost that’s well above \$1 million.

At this point you may have some objections with my assumptions. First and foremost, you may be thinking it’s unrealistic to go without a car. Maybe it is, maybe it’s not. I’ll leave that to you. Remember, I’m just here to show you the numbers.  If you think it’s not possible, however, listen to the podcast below. I interview Alan Steinborn from RealMoneyLife.com. With the exception of a three year period, he hasn’t owned a car since President Clinton was in office.

No matter how you crunch the numbers, if you can find a way to eliminate owning a car, or owning fewer cars, or even driving them longer, there’s a big pot of gold waiting at the end of this rainbow.

### Author Bio

Total Articles: 1082
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Yikes! I’m glad I sold my car once I moved to NYC!

Rob Berger says:

Nice!

Doug Keith says:

I’m not sure I see the point here. You could do the same thing with what we spend for food (also several thousand dollars per year for a typical family), housing (more thousands per year), medical care (\$\$\$), or whatever. \$1000 spent today could have been many times that amount 50 years from now. So what? We need food, we need shelter, we need transportation. And moving to NYC doesn’t really solve the problem; car expenses are replaced with subway, bus, and taxi fare.

Rob Berger says:

Doug, the point is to consider the long term in making financial decisions. You are absolutely correct that we can do the same thing for other purchases, and we should. I chose cars because it’s a major purchase that by itself can have a huge impact on our wealth.

RJ Balch says:

Doug,

I find the point actually very helpful in illustrating a great point. Surely many of us cannot go without a car. I work 30 minutes from my house and couldn’t work and make a living without one. So, for me, this exercise Rob has done illustrates a couple important points.

First, the length of time you own a car (let’s call it “auto turnover” to give it an ugly, yet delicious sounding name) is important. If your auto turnover is frequent, it negatively impacts your wealth in the long run in a significant way.

Second, the price you pay for each car matters. This emphasizes the point made by many personal finance experts – buy used!

And third, when you combine extended auto turnover (yum) and lower priced vehicles, you significantly increase your future wealth.

So the point isn’t to not buy a car, it’s to think about car ownership and the implications of your decision making around auto turnover and the price you originally pay for that scrumptious, four-wheeled delight.

Hope this helps. Writing this made me hungry. Off to eat something.

RJ

Rob Berger says:

Amen!

sam says:

Great episode, Rob!

My one complaint is that you did not include inflation into these calculations. I know you mentioned that you were trying to keep things simple, but I think it’s very misleading to report values 50 years from now and don’t take into account inflation.

Just as you mentioned in the podcast, humans aren’t good at projecting the impact of compounding interest. But that applies equally to the impact of inflation! \$1.9M 50 years from now will feel like only \$706,000 with even a very low 2% inflation rate! (That’s just the simple calculation of dividing \$1.9M by (1+.02)^50, not the more complicated spreadsheet calculation of buying cars every 5 years and including inflation in those values.)

I have a simple rule that I follow: if a future-value projection does not include inflation (and preferably taxes), I just ignore the projection. It’s too hard to wrap my brain around what \$1M will feel like in half a century.

Rob Berger says:

Sam, fair enough. Of course, we would need to increase the cost of future cars, so the actually savings would be a bit higher than simply reducing the result by 2%.

rabih says:

I live in england where public transport is a viable option for many. However car ownership offers convenience that is difficult to match specially when living outside big cities. You are right to point out that the long term costs for having this convenience is not always fully appreciated.
Keep up the great show.

Jacob says:

What this leaves out is the cost of repairs on a older car plus insurance costs. I often face is it worth putting new breaks or what ever on my 10 year old car when it’s worth only 2500 in resale. There is also the cost of a car loan if you don’t pay cash which most people don’t. Then you have the option of buying something like a Prius when it doesn’t loose as much of its value. For me it’s too over whelming and I just end up staying in my car which probably isn’t the right choice.

Rob Berger says:

Jacob, nice points. Keep in mind, however, that while older cards do require more maintenance, newer cars cost more to insure. Insurance on a car costing \$2,500 is a lost less than on a new car costing \$20,000. There are trade offs.

Dale Degagne says:

Let me make sure I’m picking up what you’re laying down.

Cost of Routine Expenses (necessary or choice) over time create huge loss of opportunity.

Said another way – the best way to reach any major financial goal quickly is to start by evaluating and hopefully reducing, your living expenses.

As for people saying they “Need” their cars, I would challenge you by saying that you need your car, in order to support a choice that you have already made.

ie – you want to live 30 minutes from work with no transit, thus you need a car. Move closer to work and you don’t need a car. Of course that could mean more in rent/mortgage costs, but my point is that almost all needs are based on wants, which makes them a want.

What say you?

Rob Berger says:

Spot on.

Abraham says:

The whole point to the article was to examine opportunity costs of owning a car. As you aptly mentioned, not owning a car leads to many other expenses such as higher rent to live closer and/or public transport fees as well as delivery fees for things you can take with you on a bus. All this must be subtracted from the cost of owning a car before we calculate the opportunity cost of not investing your money. His \$2 million opportunity cost is completely bogus when you look at ALL the opportunity costs.

Tony says:

What about the cost of not having a job because you have no car? What about if you love cars and they are your passion. Clearly cars aren’t the authors passion, but he shouldn’t assume everyone lives his mediocre life.

Andrew says:

If I buy a car, or lease it for that matter, with a low to zero cost of financing, e.g. 0-2%, put nothing down, and invest the money I would have tied up in the car in a diversified portfolio yielding 5-7% then doesn’t that dramatically reduce my cost of ownership? Similarly, If I choose a very long snort period, say 6 years, then I reduce my “equity build” to 16% a year allowing me to keep more of my money invested longer.

Your article boils down to buy cheaper stuff overlayed with a grossly simplified analysis.

Tom says:

Although I agree that owning a car comes with an opportunity cost, so does not owning a car. Many jobs require people to own reliable cars (pizza delivery driver, marketer, district retail manager, lawyer that goes to court in more than one jurisdiction, a doctor that practices in multiple facilities, etc), and for some jobs (Uber driver, private courier, etc.) they are absolutely essential. Cars also give us more freedom when it comes to our social lives – visiting friends and family, dating, etc. If you choose to not own a car, you are possibly limiting both your career options and your social options. For those who are set and secure in their careers, and who do not have a personal or professional need for a car, I guess your article makes sense. But I don’t know many people like that.

Jon says:

I agree with the overall point, but I think you are missing some relevant costs. Transportation costs as an alternative to owning a vehicle such as public transport. I don’t know the statistics on this but it’s important in determining the opportunity costs.

Todd says:

Interesting. One wonders how developed that 75 year old is, with all their money. What opprtunities passed them by over time due to not having the convenience of a car? What decisions were made that were the result of their transportation choice? How did it affect other areas of their life? It is intriguing and would be good fodder for an Econ class, for sure. Thanks for sharing.

Todd says:

Oh, one more thing – I heard somewhere that 95% of planet earth does NOT own a car. Startling!