First, let's talk sticker price. Your average new car costs north of $30k. This makes the traditional 20-4-10 rule seem anachronistic, sort of like your grandpa's stories about paying for school with a job at the five-and-dime (whatever that is). For a $32k car ($35k with taxes and fees) you're looking at a recommended $7k down, with $28k financed. Let's call the loan a four-year at a solid interest rate of 3%.

The Cost Comparison series is by-the-numbers look at two different options for various discretionary financial decisions. The format follows the Wyse approach: collect basic data, make educated assumptions, and be honest about the true cost of ownership. Like all of our content, every article is completely original and exclusive. To kick the series off, we're going to look at a topic dear to my heart: commuting by bicycle vs commuting by car. My chariot of choice is an electric pedal assist, so let's go with that.

Before you purchase your next ride, wise up to these factors, two of which almost no-one measures. You might still get some wheels, but perhaps not the ones you expected.

On the other hand, a decent electric bicycle runs anywhere from $2-4k. And speaking of running, many electric bicycles can go 40+ miles on a charge, so hold off on the “not with my commute” argument. Let's account for the elements by throwing in $500 for top-of-the-line wet or cold-weather gear, and call our up-front cost $3,500, which we pay off on day one.

Assumptions

When it comes to large assets, many financially savvy folks “misunderestimate” the true cost of ownership, usually by failing to account for some cost element. We attempt to correct for this at WW by modeling our advice and our calculators to make a reasonable estimate of ongoing costs, as well as opportunity cost (more on that later). For the car, our principal & interest payment is about $620. Adding in insurance, gas, licensing plus a modest yearly maintenance, takes us to an effective monthly cost of $330 for the life of the car.

Let's run the numbers on that electric-assist bike. You didn't finance, so that part is easy. Conservatively, keeping the battery topped will run you about $1.50 per month. Convinced yet? Adding in regular tune-ups and a modest increase in your personal-injury insurance (via either home-owners or renters) ups the total monthly cost to somewhere in the neighborhood of $25.

Opportunity Cost

At WalletWyse one of our missions is to educate our readers that expenditures are only part of a financial decision. Any significant purchase (think four figures or more) is also moving funds from the interest-earning assets side of your balance sheet to the liabilities side. The loss return on those assets is the Opportunity Cost, which we'll call the “OC”. If a good investment is the ghost of Christmas future, the OC is the ghost of Christmas past. It's the trip you should have taken, the girl or boy you could have dated but never asked out... okay, you get the point.

The 10-year OC for that 32k car is about $30k dollars. That's about the amount the down payment, loan payments, and the ongoing costs would earn in an index fund over the same period. The bicycle's 10-year OC is approximately $5k. In other words, investing the money you'd spend over the lifetime of the car would generate almost enough profit to buy the car with cash, and still have your original investment left over. Ever wonder why the rich get richer?

Bonus Section - Utility

Utility is not a purely financial consideration, so let's keep this section short. Utility, in economic terms, is the usefulness or enjoyment a consumer gets from her purchase. It's also where even the most level-headed of us can quickly veer off course, since the imagined utility of a 400 horsepower roadster can't really be topped by anything with pedals. The bicycle, however, does have certain utility benefits that a car will never have, including built-in exercise, the freedom from traffic-related stress, and the benefit of more time outdoors. Ultimately, you'll need to do your own math, but be sure to consider the long-term enjoyment as well as the short-term rush of your purchase.

Total Cost of Ownership

At this point it's time to run the numbers. To calculate the total cost of ownership, we add up the initial payment, the sum of the monthly operating costs, as well as the opportunity cost for the two vehicles, then subtracted out the respective resale values assuming a standard depreciation over ten years. Ready? The total cost of ownership for the car is about $90k. The bike comes in a hair above $10k.

For those of us who go for the bike, the question becomes what to do with that $80k spread. You could go and buy a roadster. My recommendation? Invest the difference and retire a couple of years earlier. Then buy the roadster.

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The Cost Comparison series is by-the-numbers look at different discretionary financial decisions. The format follows the Wyse approach: collect basic data, make educated assumptions, and be honest about the true cost of ownership. Like all of our content, every article is completely original and exclusive.

