~ 8 Minute Read
I have a confession to make. I like cars. Really cool cars like Porsche 911’s and Audi R8’s. In fact I’ve always wanted to own a super cool car. Rolling down the road on a sunny day while making dudes jealous and the ladies take a second look is something I’ve daydreamed about more than once. Okay, I have a pretty silly imagination. Let’s get back to cars.
The truth is that while I dream about driving super cool cars, in reality I drive about as bland a vehicle on the road. A car so boring that I see multiple people on the road everyday with the exact same car as mine. So standard that I feel like I have higher status riding my bicycle to the coffee shop to work (haha kidding). So what’s the car? It’s a 2008 Ford Escape. I told you it was boring.
My current vehicle has a private party value of around $6,000, which means I could sell it myself for that price. If I were to trade it in I’d get even less. I paid for the car in full when I got it so I don’t have to worry about making any car payments.
Looking Rich Is Expensive
So, being someone with an itch for a sweet car, why do I continue to drive this small sized SUV that’s close to surpassing the 100k mark for mileage? The first answer is that I’m just too damn frugal to let myself buy the car of my dreams. If you know anything about personal finance you’ll know that cars are one of the worst investments you can make. And with vehicles getting more and more expensive with some car loans extending to 72 months you can see how crazy the situation truly is.
The depreciation aspect of cars is especially true for high-end vehicles that are meant to be daily drivers. I’m thinking of things like Cadillac Escalades and BMW sedans. Let’s take a look at the value of a 10 year old Escalade with 90,000 miles as an example. According to KBB, this vehicle is worth about $18,000 in the open market, and even less if you trade it in. Meanwhile, a brand spanking new Escalade will set you back a poop inducing $75,000+! While not a perfect comparison that means the 10 year old Escalade has lost an estimated $57,000 in value over the time it has been driven. You’ll easily be over $60,000 when you consider maintenance costs and the extra gas you’ll be needing to get this hog down the road.
Now I will add a small asterisk to this point as some exotic sports cars (what I’m interested in) do increase in value over time after they’ve gone through the initial depreciation curve. So if I do splurge on something like this I can (and will) rationalize my purchase, whether or not it should. But the bottom line is my daily driver will always be a car that is beneath my means.
How Much That New Car Really Costs
There’s a second reason why I have always driven cheap cars, and that is something called “opportunity cost”. For those unfamiliar, here’s the definition of opportunity cost from Investopedia:
Opportunity cost represents the benefits an individual, investor or business misses out on when choosing one alternative over another.
So, if you spend $75,000 on that new Escalade that means you are missing out on all the other things you could do with that money. With many of these alternatives allowing you to earn more money through investments or starting businesses the real cost of owning that Escalade for 10 years is much higher than the estimated $60,000 I mentioned above.
Let’s dig a bit deeper and say that instead of spending the $75,000 on the new Escalade you decide to invest that money over the same 10 year period with an average annual return on your investment being a reasonable 8%. In this scenario you’d have $161,919.37 at the end of the 10 year period. Adding in the $60,000 you would save in depreciation costs and you’ll come up with a grand total of $220,919! Now that’s a serious opportunity cost. Next time you see someone driving that hot new Escalade realize that it is costing them almost a quarter million dollars for them to feel like they are better than you. The truth is much less glamorous.
Drive Cheap, Seek Opportunities
So what do I recommend? Certainly, I don’t think it’s smart to drive a car that is so worn down that it is unsafe and frequently visiting the mechanic for costly repairs. But with cars becoming more dependable and lasting longer there’s no reason to buy a new car. I myself look for used cars that have relatively low miles (<80k), a good reputation from current owners, and something that suits my needs. While I make fun of my 2008 Ford Escape it meets all three of these requirements and I actually love it. It is super practical and has come in handy many times when we’ve needed to load or haul something. It is all I need and nothing more. Since owning the car for almost a year I’ve only had routine maintenance costs (knocking on wood).
Just like how many celebrities with the friendliest pubic personas are often the biggest a-holes, those driving these expensive vehicles are often riddled with debt and spending every dime they’ve acquired. Hey, it’s their money and they can choose to do with it what they will, but I’d personally rather have that money in the bank so that I can live comfortably and strike with confidence when I see an opportunity to grow my money.
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