Keeping a new car in the driveway may cost a teensy bit more than you think. Does your car cost you millions?

I Like My Car and I Can Afford It – Why Should I Care?

Before we start getting into the nitty-gritty, let me tell you why I’m writing this: this site is about making effective personal financial decisions. You can’t make a proper decision without first understanding both the costs and the benefits of each option. Transportation is typically the second highest category in a family’s budget right behind housing. We all know that cars are expensive. Luckily, the largest spending categories are the biggest opportunities to find savings.

I know that life is not all about saving money. We need to live a little, too. Personally, I look at a car as a way to get from point A to point B safely. Nothing more. But there are plenty of ways I indulge that may not be your cup of tea. To each his own. If you live for your car, and it’s not preventing you from reaching your high priority financial goals, by all means, enjoy it. Still, I suggest reading to the end of this post to ensure you still believe the value you get from your vehicle is worth the cost.

Meet Bernie

My alter ego Bernie (named such because he likes to burn money) graduated from university debt free in 2005 with a respected job at a prestigious company. Healthy paychecks (for a 22-year-old) were rolling in and burning a hole in his pocket.

He worked hard in college to qualify for this job. Obviously, he deserves to buy a brand new SUV, a Ford Explorer, perhaps? After all, he needs to get himself around and show the world his success. He also plans to take it on a ski trip a couple of times a year. On those trips, he may even have to drive a bit in the snow so he “needs” four-wheel drive. He saved up for a few months after graduating and used all his savings to buy his dream car in January 2006. He’s too young to worry about saving for retirement right now anyway. (Note the sarcasm: starting to save for retirement when you’re young is essential).

The Upgrades

Now it’s 2011. After five years, the 2006 Explorer is finally paid off. BUT, it’s lost the new car smell. It still gets Bernie everywhere he needs to go and guzzles gas like a champ. The great news is…Bernie got promoted. He’s a manager now. One of his colleagues that he manages just bought the 2011 Explorer fully equipped; it has voice-activated controls and even a butt warmer!

When you’re a successful manager – you can’t live without a way to warm your tush on a cold day. Bernie trades up to the current model. He doesn’t consider this upgrade lifestyle inflation because he had a new one five years ago. He’s just getting back to where he belongs and driving what he deserves. He can afford the payments without a problem as long as he does not put too much into retirement savings.

By 2016 he’s paid off the last SUV. Ford Motor Company and their genius innovation team upgraded the new model Explorer with some sort of device that makes it easier to park. Bernie has never failed to park his car before so clearly, this feature is not really necessary. He wants it anyway – along with the new car smell – so he upgrades one more time to the 2016 version.

Let’s pause there. By the end of 2017. Bernie’s 34 years old. He’d been driving and paying for an SUV for the last 12 years.

How Much Did He Spend?

According to AAA’s Your Driving Costs survey, the cost of a 2006 SUV driven for 15,000 miles was $9,805 annually for five years. The costs in the study include fuel, repairs, maintenance, tires, insurance, license, registration, taxes, depreciation and finance charges. Over that five-year term, Bernie spent $49,025 for his SUV. He’s OK with it though because he’s progressing in his career and he was able to “afford” the payments. He never considered how much money he needed to save to retire.

Per the updated survey, a 2011 SUV driven for 15,000 miles cost $11,239 annually for five years. Over that five-year term, Bernie spent $56,195 for his SUV. He’s OK with it though because his bottom warmed up about 5 minutes quicker with his new butt warmer.

Per the updated survey, a 2016 SUV driven for 15,000 miles is $10,255 annually for five years. Over the first two years, Bernie spent $20,510 for his SUV. He’s OK with this cost because it’s easier to park than his last one and at least the cost of gas went down.

Over the past 12 years, Bernie has spent $125,730 on his transportation.

What Was The Alternative?

Just because Bernie spent $126K over 12 years doesn’t mean he could have saved that full amount.

But it could have been possible. Just for fun, let’s say Bernie lived walking distance to work for the same cost and quality home than he lives in today with his long commute. Let’s also say that those road trips he had planned never really panned out. Bernie liked skiing in the Rockies instead of the East Coast so he ended up flying for his vacations. Based on this (a reach I know, just bear with me) the $126K he spent could have been avoided by living closer to work and not having a car. At the very least, he could have saved a bunch of money with some different decisions.

At the end of this post, I’m going to talk about a variety of ways to save on car costs so stick with me because it’s obviously not an all or nothing decision.

At least $126K Is Not Millions!

Not so fast. There’s one more cost we haven’t yet considered: his opportunity cost. You see, had Bernie saved and invested that money instead of spending it, he’d have way more than $126K today. In fact, assuming his investments grew at 8% compounded annually he’d have $197K. A nice step up from what he’d spent but it’s not double or anything.

Now here’s where the beauty of saving and compound interest comes in. Unlike when you spend money and it disappears, your invested savings keep growing until you need it. Even after assuming no incremental spending on his vehicles after the first 12 years, that $197K would have continued to grow. Imagine Bernie invested with an 8% annual return instead of spending it on his vehicles for the first 12 years of his professional life. By the time Bernie is 65 he would have an extra $2,138,567.

To be clear, driving a new car every 12 years from ages 23-34 cost age 65 Bernie $2,138,567. That’s some serious coin, even if you love your car.

The amount does not consider the impact of any transportation choices made by Bernie between ages 35 and 65. As you can imagine, those decisions will have a huge impact on his potential retirement savings as well.

Average Retirement Savings

According to Investopedia, The average sixty-something has an estimated median of $172,000 in the bank. That’s a far cry from the $2,138,567 Bernie would have if he invested the money he spent on a car in his youth. That’s why I’m writing this article. I want you to be a millionaire by age 65, not living out your retirement years exclusively on social security.

Wants vs. Needs

Before your next vehicle purchase (or to reevaluate your current situation) I encourage you to list out everything you need in your car. For example, let’s say your school system doesn’t have bus transportation and you need to drive your five kids to school each day. You need a car with at least six seats. You don’t need it to be brand new. You don’t need it to have leather seats. You don’t need a back seat TV screen. I think you get the point. You may want those extras, but you don’t need them.

Once you have your list of needs, look up how much it would cost for a vehicle that meets them with nothing extra. Maybe a 10-year-old minivan with 80K miles meets your needs. Still, you may want the bells and whistles for a new large SUV. Price that out, too. Include estimated maintenance costs for both.

Now that you know the costs for what you need and what you want, you are in a position to decide if it’s worth paying for all or some of the “wants.” Only you can decide if they are worth it to you.

Are you financially independent or well on your way to being so? Can you fit the cost of the car you want into your budget? Do you prefer the extra features over using that money for a different purpose? All the power to you. Go get it and enjoy your nice things. You’ve worked hard and saved and should enjoy the fruits of your labor.

On the other hand, if you don’t have any savings for an emergency nor have you started funding your retirement accounts, maybe you should seriously consider buying a vehicle closer to what you need and not what you want. You can get that dream car later once you’re wealthy.

Most of us fall somewhere in between these examples. We need to find that balance between living with some luxuries today and saving for our future goals.

How To Save on Transportation

There may be transportation choices you can make to save huge, life-changing amounts of money. Many of these choices won’t even have a significant impact on your enjoyment of life.

Don’t Own a Car

Live close to your work or within public transportation distance and don’t own a car. This works great in a big city when public transportation, car service and using your own two legs can get you anywhere you need to go. Very few of us want to live our life without a vehicle. Still, as demonstrated above, the savings could have huge consequences.

Become a One Car Family

There are a few ways to do this, but sharing a car with a spouse or roommate would cut costs significantly. My wife and I have been sharing a car for more than ten years now and I can count on one hand the number of times it really became an inconvenience.

Buy Used Cars

Car depreciation is the decrease in a car’s value as it is used or as time passes. In short, the older the car and the more miles it has, the less it’s worth. New cars depreciate crazy fast. They become worth much less after the first couple of years of ownership. A new car becomes significantly less valuable the second you drive it out of the dealership. Yet, those first few years a new car is driven represents only a small portion of its useful life. If you buy a car after this initial period of accelerated depreciation, it will lower your overall costs significantly.

Low Maintenance = Big Savings

Some cars are reliable. Others are not. Some cost a boatload to maintain. Others cost a canoe load. Is that a thing? Your Mechanic put out a study of The Most and Least Expensive Cars to Maintain. BMW’s cost the most to maintain at $17,800 while Toyota’s came in as the least expensive brand costing $5,500 over 10 years. When you choose your car, the purchase price is not the only cost that matters. Make sure you consider the maintenance, too.

Don’t Give Up On Your Car

Drive your car until it dies or when it’s repair cost is more than the car’s value. These days cars are built very well. In the Consumer Reports article titled Make Your Car Last 200,000 Miles they say, “Now, almost any car can make it well into six-figure territory with proper care.”

By delaying a replacement as long as possible, you will continue to save and save. This is especially true when compared to the alternative of selling a useful vehicle for chump change and replacing it with an expensive new one.

Drive Smaller Economical Cars

Gas mileage matters. Remember my alter ego Bernie loved his large SUV even though he was only one person. It’s not just the cost of the vehicle that upped his costs. The big, powerful cars use more gas per mile, too. Bernie hardly ever drove his SUV in the snow because he preferred to fly to the mountains instead.

Oh and guess what – it’s your tires, not all wheel drive that gives you safety in the snow. In his post titled All Wheel Drive Does Not Make You Safer, Mr. Money Mustache says “88% of all-wheel-drive vehicle purchases were wasted, because the drivers could have achieved better performance at lower cost in a front-wheeler with snow tires.”

If you ever spend time around people who drive in the snow often, they will tell you that the tires let you safely drive in the snow. I’ve been fine in my Altima through countless ski trips with “Mud and Snow” tires and no four-wheel drive.

Buy, Don’t Lease

Remember the list of wants and needs above? Leasing a vehicle may be the primary example of a want and not a need. Typically, a lease lets you borrow a new car for the first few (expensive) years of its life. Then you have to give it back when it still works perfectly and is just starting to become more affordable. When you lease a new car, you absorb the years of the largest depreciation for the car. You don’t avoid costs by leasing. Payments basically account for the vehicle’s depreciation, the financing costs, and the dealer’s profit.

Leasing new cars is a move designed to easily have a premium product all the time. You get a new car every few years and don’t have to hassle with selling it when you upgrade. This is the definition of a want. It’s clearly not a necessity. Making this choice is fine if you are willing to spend more on the “luxury of leasing” while on track to accomplish your goals. Still, it’s important that you know that leasing new cars is a luxury for the wealthy and a terrible tool for becoming wealthy.

So, What Are You Going to Do?

Now that you know the potential cost of that fancy new car, what’s your transportation plan? I’d love to hear how you’ve hacked your transport to save. If this post opened your eyes a bit to the high costs of driving new cars, let me know.