Your Quarter Million Dollar Car: The Real Cost of Car Ownership

You may wonder why I would write an article about the costs of car ownership, as that would imply that owning a car is a decision rather than an inevitability. And this is America, after all! Everyone needs a car, right? How else are you going to get around? It’s impossible to live without one!

…Except in a lot of places, it’s really not. I live in a city with decent transit options, and have lived car-free for over 5 years. I don’t miss my car one bit. You know why? Because that car would have cost me $250,000 over its lifetime. So I sold it.

How could it cost so much, you ask? It was only an $18,000 Honda Fit, after all. But as it turns out, all the costs of car ownership really add up over time! Here’s the cold, hard math:

• Down payment: $6,000
• Loan payments: $2,600 per year (for 5 years at 4% APR)
• Downtown parking: $2,400 per year
• Average gas costs: $2,000 per year
• Insurance: $1,200 per year
• Registration/fees: $400 per year
• Average maintenance costs: $400 per year
• Total: $9,000 per year (or $6,400 after loan is paid off)

Yowza, that’s a lot of money! It might not seem like much at the time because the costs are spread out into dozens of smaller payments throughout the year, but they really add up! The above numbers are a mix of my actual costs and costs for the average American, since I didn’t actually own my car for long enough to get good numbers on everything before I sold it. Yes, I bought my first car and realized the mistake shortly after. Sue me.

Anyway, let’s estimate the life of the car to be 20 years. To see what the car really costs, we can’t simply add up all of the yearly costs and multiply by 20. Rather, we need to compare against what we could have done with the money instead. In my case, I would be spending more money on trains, buses, taxis, and occasional car rentals. For me, that would be about $2000 per year in transit costs (including regular commuting) as well as about $1000 per year in local car rentals and taxis. Then the rest of the money gets invested in the stock market for 20 years, growing at about 8% per year. Let’s see how much that would be!

I’ll be using this compound interest calculator to see how my investment would grow. Let’s do the first 5 years in a separate calculation, since the yearly car costs would be higher due to the loan payments. My “principal” would be $6,000, since that’s what my down payment was. My yearly costs for the first 5 years would also be $6,000 (i.e. $9,000 in car-owner costs minus $3,000 for transit/rental costs). We’ll enter that in the calculator as $500 monthly. Plugging that in, along with an 8% interest rate and compounding 12 times per year, I see that I would have about $46,000 in investments!

Now let’s do the final 15 years. We enter $46,000 as the principal, since that’s what we’re starting with during this time period. We’ll change the annual addition to $3,400 ($283.33 per month) since the loan payments are no longer a factor. Now we see that after 15 years, the investment will be almost exactly $250,000. Holy cow! THAT is the real cost of owning a car.

You may love your car, but do you really love it to the tune of $250,000?

Granted, all of the above costs were estimates. It’s quite possible for one’s costs to be lower than this if they bought a cheaper car, drove it less, had free parking available, etc. But many people actually spend way more than this on their cars. In fact, the average new car purchase price in America is nearly $50,000! It would be interesting to see how much one of those would cost over 20 years, but I’ll leave that as an exercise for the reader. 🙂

Anyway, we’ve now calculated the real cost of owning a car. Now what do you do if you don’t want to pay it? Obviously, there are lots of levers you can pull to reduce the total costs of car ownership. In fact, we have an entire article on that here:

How to Save Money on Your Car

But honestly, the best move is to simply go car-free.

But what if I need my car?

Granted, going car-free really isn’t an option for many people, such as those with mobility issues or who live in areas with no transit options (and too much sprawl to walk or bike). But there’s so many people out there who just assume that they need a car… when they really don’t. I’d bet that at least 50% of the population could make it work if they put some thought into it!

And yes, you do have to put thought into it. If you chose your current house based on the assumption that you would use a car to get everywhere, then of course you’re most likely going to still need that car. But consider this: what if you choose your next apartment or house based on the assumption of walking, biking, or using transit to get around 99% of the time?

I’ve been doing exactly this for over a decade. In fact, I’ve never lived in a place where I really needed a car! When choosing a house or apartment to rent, I always choose one that is close to transit for commuting, and within walking distance of a grocery store.

But what if transit options suck in your city? Or what if you just really hate taking the bus? Well guess what: you can just use the savings from going car-free to move closer to your job! You might even be able to get within walking distance, thereby making your commute entirely free! Even if the rent is higher, you’ll probably still come out ahead, because cars really are just so damn expensive. In fact, let’s check the math on that.

How much extra can you spend on rent in order to go car-free? As it turns out… quite a lot! Let’s go back to those yearly car costs of $6,000 and add about $1,000 to account for the cost of the car itself. Next, let’s add back most of the transit costs since our commute is now free, and chances are that we can probably walk to a lot of other places too now, like the grocery store.

You’re now saving a grand total of about $8,500 per year by going car-free and walking to work. That means you can spend an extra $700 per month on housing and still break even! That might not sound like much, but if you’re splitting your rent with roommates, that could potentially double how much you can spend on housing. And of course, if you spend less than that, you’re still saving money, while also gaining the emotional and physical benefits of walking a lot more. It’s a win-win!

And if $700 isn’t enough to get within walking distance of your job, you could also consider biking! It barely costs anything, while greatly increasing your maximum commuting range. You could even consider an electric bike to make the commute a little easier, and you’d still be saving gobs of money.

Yeah but I really do need a car

Luckily, there are still some levers you could pull. Maybe you’re a 2 or 3 car household, but you could really get by with just 1 or 2. Maybe you’re considering getting a new car after 5 or 10 years, but you could simply extend that timeline out to 15 or 20 years. You don’t have to go 100% car-free to save money on your car purchases, you just have to make them less frequent.

You could save nearly $1,000,000 over your lifetime just by buying cars half as often.

Suppose you are considering whether to buy a new car to replace your old one. Suppose your current one is already paid off, isn’t costing much in maintenance, and still has 10 years of good life in it. How much will that upgrade cost you?

We’ll assume the new car is just a flat fee of $25,000 to make the math easy here. Let’s bust out the compound interest calculator again! You can see that if you had spent that $25k on investments instead, it could be worth about $55,000 after 10 years! That means you could save $30,000 simply by keeping your old car for an extra 10 years.

Even if $30,000 doesn’t seem like a lot to you in the grand scheme of things, consider that over time, that money can continue to grow due to investments. If you made a habit of this and bought, say, 3 cars over your lifetime instead of 6 cars, then you can really see how this affects your savings. Suppose you’re 80, and you bought new cars at ages 20, 40, and 60 (as opposed to 20, 30, 40, 50, 60, and 70). Our baseline for frequent car buying will be $0 in savings, whereas the frugal car buying scenario gets $30,000 in savings at 40, another $30,000 at 60, and the full $55,000 at 80 (we’re assuming that you’re too old to drive at age 80, so you don’t actually buy a new car at this point; you just reap the savings from not having bought one at 70). $30k invested for 40 years + $30k invested for 20 years + $55k = $931,000 saved over your lifetime, simply by buying new cars half as often.

Conclusion

Give these ideas some serious thought. You may love your car, but do you really love it to the tune of $250,000? Or even more if you let it keep growing over your lifetime? Consider what you could do with all of those savings!

Yeah, there are some cons. But there are a lot of pros too!

Cons:

• It can take longer to get around (but not always, as a subway can often beat cars when there’s traffic)
• You need to keep transit options in mind when choosing where to live
• You need to rent or borrow a car sometimes, e.g. to go hiking, transport large items, etc.
• You need to carry your groceries home by hand
  • Though honestly, if you live close to the grocery store, you can just go more often and get fewer things each time. It’s no problem if you have a decent backpack. And then you don’t have to plan out your meals weeks in advance! For me, this is actually a pro rather than a con.

Pros:

• Your risk of being involved in a car accident goes down to almost zero! Pretty significant, since driving is one of the most dangerous activities that most people perform on a regular basis
• If you’re taking transit, you can just read or watch videos or something (instead of driving)
• If you’re walking or biking, you’re getting more exercise and outside time, which are things that pretty much all Americans need more of. It’s good for your mental health!
• No more road rage or dealing with traffic! Again, excellent for your mental health
• You don’t have to worry about car maintenance, shoveling your driveway, getting your windows broken, getting your catalytic converter stolen, getting gas, etc.
• Again, you can save so much money!

And remember that if you’re curious about the car-free lifestyle, you don’t actually have to switch over all at once! If transit/walking/biking to somewhere happens to be an option for you where you currently live, try it out occasionally! Get a taste of what life is like without a car. You might discover that it’s not so bad!

And if you currently live somewhere where you do really need your car for everything… well, just consider somewhere more conveniently located next time you move. Maybe your car-free lifestyle will find you some day. 🙂