Buying an Expensive Car is a Mistake: Here’s Why

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According to the Wall Street Journal, Americans reached a new record in 2015 for new car sales. All in all, over 17.5 million new cars were purchased in 2015, with a total purchase price of $570 billion being spent on new cars.

$570 billion!

What’s Wrong with Expensive Cars?

So what’s so bad about buying a new or expensive car? Gas prices are low. The economy is recovering nicely, according to the experts. Why shouldn’t people be spending their money on expensive automobiles?

I’m going to share some statistics with you today that will answer that question. At the end of the article, you might still believe that it’s perfectly acceptable for the average consumer to spend their money on an expensive vehicle. Or, you might see the true danger in buying expensive cars.

But before you make up your mind, let’s talk about how much the average expensive car really costs.

The True Cost of a New Car

According to the report mentioned above, the average cost of a new car purchased last year was $34,428.

The 2014 statistics on car loans show a similarly startling story, according to USA Today.

  • Average car payment? $482
  • Average interest rate on a car loan? 4.56%
  • Average car loan dollar amount? $28,381

So what’s wrong with buying expensive cars? Why is it considered to be a mistake by the people who can most afford it: the wealthy?

According to Thomas Stanley’s The Millionaire Next Door, the average price that millionaires spend for their cars is $34,000.

Given their net worth, why is it that most millionaires choose to spend so little on their vehicles?

Likely because they understand the problem of lost opportunity cost. What is opportunity cost? Let me explain.

What is Opportunity Cost?

When you buy a new car according to today’s statistics, you’re not just spending the average price of $34,428.  If you take out a loan with an average rate of 4.56%, with an average loan term of 67 months (assuming you put 20% down), in reality you are paying $38,134 for the car.

If you put zero down (an “attractive” deal that many dealerships are offering these days), you’ll pay a total $39,062 for the car. But the nearly $5,000 in interest is not all you’ve lost.

Let’s assume for a moment that you chose instead to spend $5,000 in cash on a quality used car and chose to put the $583 a month you would’ve spent on your new car payment (assuming you put zero down on the car) into a mutual fund instead.

According to Investopedia, the average return on the S&P since its inception is 10%. However, for the purposes of this exercise let’s be conservative and use a 7% rate of return.

If, instead of spending $39,062 for that car with a 67-month loan, the buyer had instead put that money into the stock market each month, at the end of 67 months he or she would have a whopping $52,799 in the bank.

So not only did the new car buyer lose the $39,062 he or she spent on the car, they also lost the $52,799 they would’ve earned from investing that money into the stock market instead.

So we take that $39,062, plus that $52,799, minus the $5,000 they would have spent on the quality used car, and we arrive at the opportunity cost of the vehicle. The answer?

$86,861

So, in essence, that new car just cost the buyer over $86,000. And what’s worse is that by the end of the 67 months, that new and shiny $34,000 car will be worth well under what they paid for it.

What’s Your “Why”?

So if you’re considering buying a new car, you have to ask yourself one question.

“Is this $34,000 car really worth $86,000 of my money?”

The answer to that question will depend largely on your “why”.

Most all people have a dream of having more liquid cash in their possession. So the question becomes “Why do you want to have more money?”

Is it to buy more stuff? Or is it to buy more freedom?

Would you rather have a new car? Or would you rather not be tied to your job?

Is living a paycheck-to-paycheck lifestyle okay? Or would the peace of not owning anybody a dime trump the paycheck-to-paycheck lifestyle?

Only you can answer that question. Everyone has different goals and dreams. But in three years of living in the world of online personal finance blogs, I’ve never yet seen anyone say things like:

  • “I like not having any extra cash.”
  • “I like being stressed and worried about whether or not I’ll be able to pay the bills.” 
  • “I like not having any extra money set aside and then freaking out when the water heater goes out.”
  • “I like not knowing whether or not I’ll ever be able to retire.”

Those statements are a reality for 76% of Americans. And part of the reason why so many Americans live paycheck-to-paycheck is that they fall for the lie of the “affordable payment”. They fall for the draw of the “new and shiny” and forget about the possibility of the shiny future of financial freedom.

A Better Way

But there’s a certain peace of mind that comes with not owing money to any bank or credit card company. There’s a freedom that comes with having your money be your own instead of having to dole it out to lenders each month.

There’s a certain relief that comes when you know that your money is yours to do what you want with.

If you’re ready to buck the paycheck-to-paycheck lifestyle and start living a life of financial freedom, check out our Debt Free in 18 Months course. This online course will help you develop your own personal financial game plan for getting rid of your consumer debt in a short period of time.

What do you think: Is buying an expensive car worth the money? 


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16 COMMENTS

16 responses to “Buying an Expensive Car is a Mistake: Here’s Why”

  1. Tony says:

    How ironic. An ad for a new car was at the bottom of the column. Or is that opportunity cost?

    • Laurie @thefrugalfarmer says:

      LOL, that’s Adsense for you. 🙂

    • Deacon Hayes says:

      Haha. That is too funny. They can try to sell you a new car all they want, but if we are doing our job right, you will be convinced and not click on the ad. 😉

  2. Funny about Money says:

    Wait, what! You mean I can’t have that Mazerati?

    I’ve found if you pay for a new car in cash (which you can manage, once you’re out of debt — just put the amount of today’s debt payments in savings each month…) and then drive the car until it falls apart like the Minister’s One-Hoss Shay, it’s pretty cost-effective.

    Most modern cars will run at least 15 years, assuming you keep up the maintenance and drive more or less sanely. Over 15 years, a $30,000 car, paid in cash, will cost you $2,000 a year. That’s just $167 a month. Even adding in the occasional repair job, it’s a heckuva lot cheaper than car payments. You got to enjoy it while it was new. You know exactly what’s happened to it and how it’s been maintained. And it’s YOURS.

    • Deacon Hayes says:

      That’s an interesting point. I would say that the cost is far greater than the $167/month. Once the warranty is up, then you are faced with paying for 100% of the repairs. That, plus the higher cost of insurance and registration costs tend to make it more cost-effective to buy a used car. I think the challenge is that most people don’t buy a $30,000 car with cash. They finance it and pay interest as well. Why not put that money toward appreciating assets and buy a vehicle for half the price? Just my two cents.

    • Todd DiMaria says:

      Most modern cars last about 10 years, not 15, unless you buy a Japanese car. Also, many Toyotas and Hondas will last for 20+ years if taken care of.

      • Deacon says:

        That’s not necessarily true. I know plenty of people with American made vehicles that are well over 10 years old. As you pointed out, if they are well cared for, they will last if not, they may not even make 10 years.

  3. Brendan Barrett says:

    I’m glad I was able to pay cash for my car, but looking back I might have been fine purchasing even less car and kept more in savings. With the average car payment being over $400, it doesn’t surprise me that a $500 bill from the mechanic or $1,000 ER bill puts people in the red. Too many of us are flying to close to the sun. If only living like the Jones’ was so darn appealing… :/

    Anyway, this is a great post! Thanks for sharing!

    • Deacon Hayes says:

      I am with you. I would much rather have a $500 repair once or twice a year than a $400 car payment every month. Also, the savings from cheaper registration and lower insurance costs is also a plus when buying a used car over an expensive one. 🙂

  4. Vanna Lindholm says:

    Wow, I never thought that way. But having a nice, expensive car is reason to be wealthy. What to chose? Maybe I will wait on a new purchase and listen your advice for a year or two.

    • Deacon Hayes says:

      Once you become wealthy, than you can afford to buy an expensive car. Until then, you are better off buying a used reliable car with cash. If you buy a car that is older than five years, chances are it has already taken most of the depreciation and therefore will lose a lot less in value. When you are building wealth, you want to spend more of your hard-earned money buying more appreciating assets like stocks, real estate, etc.

  5. Ace says:

    I’m sure it’s well meaning, but the math is completely wrong. You doubled the cost. If you start with $39,062 in the bank, it could either end up as 0 in the bank and a car, or $52,799 and no car. You don’t add them. It’s just that $52k figure, not the $91-$5=$86k figure you stated in the article.

    • Eli says:

      The writer is assuming that you don’t start with anything in the bank, and rather make monthly payments either into a car or a mutual fund. At the end of 67 months, you either have a gain of $52K (monthly payments into the mutual fund) or have spent $39K (monthly payments into a car), for a net difference of $91K. Assuming the (now 67 month old) car would fetch about $10K, your total cost of spending that monthly payment on a car vs. a mutual fund is about $80K.

      • Flek says:

        You’re ignoring one important fact. In one case, you drive a brand new car for 6 years of your limited life expectancy as a human being on this planet vs …well, nothing. Just saving money for the future when you are older and inflation will eat your saved money.
        You can eat rotten apples your whole life and save the good ones for tomorrow…it’s your choice. But remember, enjoying a new car in your 30’s is not the same as enjoying your new car in your 50.’s Life experience is not invariant to your age.
        Using this logic, you can also be even smarter and save this way for 50 years and you will be a millionaire at 80! Then you can finally start enjoying your life, don’t you think?

  6. Steffen says:

    I paid $28K for a Honda CRV 11 years ago. I recently had to put a couple thousand into it, but up until now the maintenance has been cheap. AT “only” 125K miles, I plan on driving it another 5-7 years. None of the cars on this list will last 10 years without a TON of upkeep, and Kia car parts are pretty expensive.

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