Car Cost Savings

Its easy to fall into what I call the "If only I had 20 % more trap". We are continually bombarded with advertisements aimed at selling us on the idea that having more is better. We are told, at great expense, that if we buy a newer car or a faster computer or whatever, this will magically bring us instant happiness.

For a long time I have always driven an older car as a main family car, and our second car was older yet! I find that most everyone I know has always driven newer cars than me. This includes young adults and grandmothers. I have never had a car let me down when I was away from home. I'm not a mechanic, I just know how to do a few simple things.

I have been motivated by the savings between owning a newer and old car. Consider the following example.

The largest cost of a newer car is the depreciation. A new car depreciates 30 percent in the first year and 20 percent for every year thereafter. For example, a $30,000 vehicle depreciates $9,000 or $25 per day during the first year. If we add in a sum for opportunity cost (lost investment dollars) or the cost of a car loan, at a rate of 4 percent, this comes to an additional $3.25 per day. A total of $28.25 per day.

Now to be fair, we need to subtract the cost of a less expensive car alternative. I will use $15,000 for a used car about 5 years old. Depreciation at 20 percent is $3,000 per year or $8 per day. Opportunity cost at 4 % adds $600 per year or $1.65 per day for a total of $9.86 per day. I will also throw in $500 for maintenance over and above the cost of maintenance for a new car, another $1.37 per day bringing the total to $11.25 per day.

The incremental cost for owning a new car in the first year is then about $28-$11 or $17.00 dollars per day. Now this difference drops off each year if you keep the car for many years. Its more extreme if you lease a car and change every few years.

To put this into in a more meaningful perspective, what if you saved only $10 per day on average for 25 years during your working career? How much would you have at retirement?

That $10 per day comes to $3,650.00 saved each year. If you earned 5 % per year on this savings it would grow to $174,000.00. That's not a bad lump sum payment for forgoing the benefits of owning a new car. You don't have to drive a wreck, just something mid-range. You can think of it as creating your own retirement allowance.

Reference: Future Value of an Annuity

Driving an older car can save you money today, get you to retirement sooner, and reduce your expenses during retirement.