When I stop to think about the insane volume of sensational car/truck/van/suv/mover-from-point-A-to-point-B advertising, it absolutely amazes me, and the profound effect it has had on the minds of so many people, and in such a short amount of time is nothing short of baffling.
I think back to my first vehicle: the year would have been 1993 (damnit, that’s 20 years ago!), the car would have been a 1979 Datsun B210 that I paid $350 for. The car lasted (me) about a year, and was still running when I sold it to someone else for $250, only because my neighbour was selling a Mazda 626 for $1000 that seemed like it had a lot more life left in it. Since then, I’ve gone through 8 or 9 different cars (another Datsun 210 – which was eventually traded for U2 concert tickets!, a VW Beetle, an Acura, a Valiant, a VW Van, a BMW, a Subaru), some earning a similar level of social status as the first, others earning a little more, but none costing me more than $7000. Every single car I’ve ever owned, I paid cash for it.
My car story is a little bit laughable to most, but back when I started with that B210, it was a lot closer to what normal people did than the car “buying” of today. No one leased a car (I still barely even understand what that actually means); people purchased their cars. Sometimes if they were older and felt they deserved more but weren’t good at saving, they would take out a car loan from the bank to buy a car, and then pay the loan off after 3 or maybe 5 years. After the loan was paid off, they owned the car, and would try to maintain it as well as possible because they wanted the car they worked so hard for to last a long time before they had to do it all over again. There were so many well-traveled cars and trucks on the road due to this behaviour that some cities and states put into place systems for controlling the pollution coming from there being so many older models on the road.
Move ahead to today which brings us to the point of this post: that is no longer even remotely how it is done. In case you don’t agree, 2013 is slated to be the last year for Vancouver’s Aircare program, simply due to the fact that the vast majority of vehicles driven in and around the city are practically brand new, and thus the program has become a waste of resources to continue supporting.
The cost of driving a fancy new car or truck
Two of the people I know that drive new vehicles and would tell me how much they pay said around $500/mo and $600/mo respectively. I know some people pay a little less, and I know some people pay a lot more. But lets use $500/mo for our example as I feel like that’s about what I hear most commonly coming from the radio guy yelling at me every 5 minutes or so. Oh and another thing that’s changed, it takes 7 years (or more) to pay that off nowadays (if you ever do), so we will use that as our base time.
[open Compound Interest Calculator window and punch in a few numbers]
So if a person were to take that $500/mo and instead invest it somewhere where they get 6.5% return per year, after the 7 years were up, they would have $57,000 sitting in their bank account. Add in the cost of around $600/year one must pay for extra insurance (ie. “collision” in ICBC terms) to own one of these fancy machines, and you’re looking at around $63,000 in your account after only 7 years of not driving a pretty car.
But instead of saving that money, and earning additional money from investing, the person actually spent $42,000 ($500/mo for 7 years) on the truck, plus $4200 on insurance ($600/yr for 7 years), so $48,200. Add back the value of the 7 year old truck at the end of the 7 year term (a quick glance at Craigslist, and I see a 2006 GMC Sierra costs somewhere in the neighbourhood of $7000), that’s a net loss of $41,200.
And so at the end of 7 years, the person has spent around $41,000 where they could have instead earned $63,000 with that money. A net difference of $104,000 in reality. Ouch.
Note the very important point here: there is a doubling effect of spending money, instead of saving and investing it. That will definitely have to be the topic of a post coming in the near future.
Now lets say a person were my age (call it, 35), and were wanting to retire by age 55 (I’m shooting for something closer to 40, myself). Keeping that $63K invested for an additional 13 years after the initial 7 years, they would have amassed $146,000 in their account. Just for not driving a fancy car for 7 years from age 35 to 42. There is no magic here, just some basic maths.
Just for fun, lets see what a person who spent $500/mo every month for 20 years could have had, had they not got swept up in the leasing whirlpool (it’s not silly to think about, it’s actually very common): $300,000 saved, instead of $120,000 spent, or a net difference of $420,000.
Those are some big, big numbers, and the average schmuck has to work for many, many, many years to save up that kind of dosh.
The cost of driving an old car
We just bought the mother-in-law’s 2002 Subaru Impreza for $2000 back in May. I had to spend $700 on front brakes since then, only because we let it sit for 4 months, and apparently that’s really bad for the calipers. Overall it’s a fairly solid car I think; it has just over 200K kms on it, mostly highway miles as it lived in Creston for the past 10 years. I’d be willing to bet that I will be able to get it up to 300K kms before we have to retire her, hopefully lasting at least the next 5 years, and I would expect to have to drop no more than around $2K per year in maintenance, but hopefully more like $1K. Time will tell.
So lets take the worst case scenario of $2000/yr on maintenance every year, plus the initial $2000 investment, we’ll call it over a 7 year term just for consistency with the new car (perhaps I will have to switch to a different old car before then, but that just means adding $2000 to the total… no biggy really), drop that into an account that earns 6.5%… the money spent on the old car could have made $22,200 if saved and invested. Calculate the net difference between that and what we instead spent, and we’re looking at an effective cost of $38,200 over the 7 years. A heck of a lot less than the $104,000 calculated above, and I do believe I’m over-estimating those maintenance costs as well.
If you’re interested in how it goes, bookmark this post and check back periodically, or leave a comment and click on the “Notify me of follow-up comments via email” link below, and I will comment on this post every time I have to spend money on it. I guarantee it will be a LOT less than the cost of a new Subaru.
But I can’t drive an older car because they’re unreliable!
First off, older cars are not as unreliable as you probably think. Yes, they break down more often than new cars, but not all breakdowns are so severe that you’ve gone and bunged up the bridge during rush hour. In fact, very few are. In my 20 years of driving older cars, not once have I been stranded at the side of the highway so bad that I had to call a tow truck. Although I will admit, I have been stranded at the side of the highway, and I’ve had to call tow trucks :) But I would say that has happened maybe 5 or 6 times over the years, an inconvenience I’m very willing to live with since we’re talking about hundreds of thousands of dollars here.
Tell me, what do you do that’s so important that you can’t be inconvenienced every 3 or 4 years to save yourself a few hundred thousand dollars over your lifetime? Really though, leave a comment below if you think you have an argument for that!
But older cars end up costing the same due to maintenance!
Absolutely not true. The cost of driving a new car or truck, ($500/mo + $600/yr in our example) is WAY more than a person would ever spend on maintaining an older car. The worst maintenance years I’ve ever had (probably while owning the Valiant) I would say might have totaled half that during the worst year. So three major ordeals in one year. Average that with the good maintenance years, and it doesn’t even come close.
But new cars have such high safety ratings!
Turn off your TV, please. The world is not nearly as dangerous as you think.
But I don’t want to drive a piece of crap like you do!
Well, first off, I don’t actually like driving pieces of crap (in fact one of my favorite TV shows is Top Gear… I would love to take a Ferrari for a burn around town one of these days!), I just understand everything I’ve just said very, very well, and I don’t feel like working an additional decade or more of my life to keep up with the status quo. On the other hand, the Noble Anarchist takes great pleasure in doing the opposite of everyone else, and if you all start driving crappy old cars, I’m going to have to start driving a new car I guess. And I can’t afford that. So… err… forget about everything I just said I suppose…
From A to B and Nothing More
That is what cars do – they take you from point A to point B. That is what they’ve always done and what they continue to do today. Nothing else. Buying a new one is easily the biggest loss of money you will ever endure, so don’t do it. If you have to own a car at all, do yourself a favour and buy an old one so that you can retire 10+ years earlier than you initially thought!