People swear by their preferred method for buying a vehicle.
“I always lease my car because I get the latest models and have no repair costs.”
“I always purchase a used car and drive it into the ground because it saves me a fortune.”
“I buy a new car every 5 years because I want to be economical but don’t want to drive a clunker.”
Each of these approaches is based on people’s personal preferences. Are you striving for reliability, lowest cost, least repairs (headaches), or something else? But hearing these various opinions has caused me to question my own approach. Am I leaving money on the table? Am I driving a clunker when I easily could afford not to?
To understand the true costs of a vehicle, I sharpened my pencil and ran the numbers over a 40-year period. My analysis takes typical depreciation rates, trade-in values, and repair and maintenance expenses into account. All numbers are in today’s dollars. The cost of gasoline is not included. I didn’t include lease costs because residual values and other factors make the calculations too variable.
With this simple table, you can easily grasp the true cost of your vehicle and compare it to another car-buying option. Here are a few important takeaways:
1. Vehicle purchases make a big difference to your net worth over a long period of time. If you buy a slightly used Honda Accord, which today costs about $30,000, drive it for 8 years, and repeat that process over 40 years, you’ll spend about $180,000. As an alternative, if you buy a slightly used GMC Denali, which costs around $80,000, every 4 years, you’ll spend about $486,000 over that same 40-year period. The difference is about $306,000 that could be tucked away in your retirement account — growing in value all the while.
2. Financially speaking, the difference between trading in a vehicle every 4 years instead of every 8 years is minimal. Having reliability for your vehicle isn’t all that expensive. Vehicles are expensive to maintain once they hit about 75,000 miles — which normally occurs after around 5 years of owning a vehicle. For example, if you purchase a $30,000 vehicle every 4 years, instead of every 8 years, my calculations show you’ll only save about $14,000 over 40 years. If you want reliability, it’s best to hold a vehicle for about 4 years, and then sell it and buy another almost new car.
3. Leasing vehicles is expensive over the long-haul. Leasing is great if you enjoy the convenience of driving the latest model vehicle and don’t want to deal with much maintenance. But it’s the most expensive option, partly because you’re driving the vehicle when it depreciates the most, during the first 2 to 3 years.
I hope this helps you figure out what type of vehicle is right for you. If you have specific questions about your own financial planning situation, ask Tilly!