Opportunity Cost of Buying a New Car
Buying a car can be a large purchase and life changing. There are many factors that need to be considered when choosing a car. The two biggest considerations are; what the car looks like and the other is how much it costs. I would say that there are two more factors that are usually overlooked, miles per gallon (mpg) and the loss of being able to invest the cost of the car.
There might be a great deal on a brand new car but if it is only getting 18 mpg it could start costing $60+ everytime the tank needs to be filled. Filling the car up once per week at $60 costs $3,120 per year. This cost adds up a lot over time.
When I bought my new car, 2016 Toyota Prius, I bought a hybrid. It is a nice car but it is small and doesn’t have the appeal a sports car or SUV does but more importantly it only costs me about $20 every 10-14 days for gas, roughly $850 per year.
I had been spending lots of money on upkeep on my previous car and even though I knew I would be paying more up front, over time I would be saving money by not spending as much in gas. I was spending around $40-50 every 4-5 days with my other car.Unfortunately what I failed to recognize at the time was the opportunity cost that was staring me in the face, I can't invest as much as I would like to.
Even though I plan to keep this car at least 12+ years, I concentrated on the gas and repair savings instead of the bigger picture. My car costs me $282 per month over the life of the loan, not including insurance the phantom cost of owning a newer car. If I had decided to buy a car for $12-15,000, I would have been saving myself around $100 per month, assuming the same 0% interest, and could invest that money. If I would have taken that $100 and receive a 5% return monthly, after 6 years I would have had around $8, 500 instead of paying the company 7, 200 ($100 x 72 months).
This is important to recognize before making big purchases. I needed a better car but I didn’t need a new car.
We all want nice things but don’t be discouraged if you made the same mistake that I did. It is important to learn from the past mistakes to better our futures.
TLDR:
Buying a new car isn’t usually the best decision. It costs a lot, depreciates very quickly, and doesn’t allow that allocated capital to be invested. Consider buying a used car instead and learn from my mistake.
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