Photo by Roberto Nickson
In my mind, I always knew that buying a brand new luxury car was a terrible use of money. I obviously knew that I was making a significant monthly payment that was not only drastically depleting my current net worth by taking money out of my bank account but it also was denying me the opportunity of making money on my money.
So how much was this ‘wealth depleting’ purchase really costing me? Surprisingly I never actually sat down and figured it out until now.
It’s more than just the sticker price
So let’s break this down. I have a soft spot for a nicely engineered sport sedan so the 2019 BMW 3-series speaks to me. For the privilege of buying a 2019 BMW 3-series the sticker price is a ‘mere’ $40,250. Not bad!
So let’s see…that’s $40,250 financed over 72 months at 3.11% interest for a total out of pocket cost, just for the purchase of the car, of $44,208 dollars. That’s an immediate monthly payment of $614…ouch! Alright, I’ll buckle down and cut some other expenses out.
Maybe some rice and beans a few more times a week. Perhaps more painful, however, is a total interest cost of $3,958 over these 6 years. Whoa! A little more than I wanted to pay for a car but it’s REALLY only costing me $44,208. Not ideal but that doesn’t sound too crazy when you consider I’d be driving the car of my dreams. And anyways, I work hard for my money and I deserve it!
The REAL cost of buying a new car
Now…in other Worlds that might be the entire conversation that I’d have with myself. Yet, the REAL cost of buying that 2019 BMW hasn’t even been identified yet.
So what’s the real cost? The truth of the matter is that the cost of purchasing a car goes WAY beyond just the monthly payments you have to make in order to own it. Perhaps the biggest cost of the car is the substantial ‘Opportunity Cost Lost’ of not having those monthly payments working to build wealth. THAT…AND the out of pocket cost for the payments… is the real cost of buying a new car.
So let’s look at the real cost. First, we have the out of pocket cost of the $44,208 dollars in payments . We now have to figure out what NOT having invested that $44,208 dollars and leaving it in the market is going to cost us.
Let’s assume for ease of the math that we had all of the $44,208 available in-hand upon the termination of the car loan and we invested that entire lump sum amount in a S&P 500 Index fund. Let’s also assume that we leave this entire amount in the market over 30 years and envision that the market will have a 7% return each year for those 30 years.
So how much did we forgo by NOT investing that initial $44,208 dollars in the market for 30 years? A mind NUMBING $336,522.57 dollars! Wow! As much as compound interest can work on our behalf, it works equally against us when calculating how much money we don’t make when we don’t invest.
It’s the cost of the car AND what you don’t make in the market
So that initial 2019 BMW 3-series with a feeble little sticker price of $40,250 has cost us $44,208 of out of pocket dollars and another $336,522.57 of lost money by not investing it for a total cost of $380,730.57.
Not only is this a mind-crushing cost to own a $40,250 car but it has a total wealth-crushing effect on your potential net worth.
Now if THAT wasn’t brutal enough of an exercise, what would it cost me if I bought a brand new expensive car EVERY 6 years for the next 30 years? So if you can envision how this would work, we would perform this calculation for each of these 5 new cars (a new car every 6 years starting with a car being purchased in year 1) but for the ‘Opportunity Cost Lost’ calculation we have to take into account that each successful car would have those respective funds in the market for 6 years less than the funds for the preceding vehicle.
Just do the math
Let’s do the math…For the sake of easier math let’s just assume that BMW were to freeze the cost of their 3-series to $40,250 dollars over the next 30 years…YaHoo!! So each of these 5 cars would could us $44,208 dollars.
Let’s also assume that we would have earned 7% on that money if we had invested the amount of each car into that S&P 500 Index Fund at the end of its 6-year loan. As such, we would have spent $221,040…an AMAZING amount of money spent on vehicles just by itself. BUT…this is where it gets painful.
Had we invested the total amount of what it cost for each of those 5 cars in the next 30 years as indicated above, we would have had Car 1’s $44,208 earning 7% for 24 years, Car 2’s $44,208 earning 7% for 18 years, Car 3’s $44,208 earning 7% for 12 years, Car 4’s $44,208 earning 7% for 6 years and Car 5’s $44,208 paid off in year 30 and not able to be put into the market at that point.
The total cost of buying brand new cars over a lifetime
So what’s the damage? If invested in the S&P 500 Index Fund, the money needed to buy Car 1 would have returned $224,239.20 over 24 years; the money needed to buy Car 2 would have returned $149,420.05 over 18 years; the money needed to buy Car 3 would have returned $99,564.89 over 12 years; the money needed to buy Car 4 would have returned $66,344.29 over 6 years and the money needed to buy Car 5 would not have returned anything as the full funds spent on the car would not be available in time to be invested in the market.
So the damage? These 5 cars would cost $221,040 dollars in out of pocket costs on payments and another $539,568.43 dollars of lost returns if invested in the market for a total of $760,608.43 dollars.
Conclusion
So if you add in the cost of the initial BMW that we bought along with these 5 other BMW’s, it would cost us a net worth sucking $1,141,339 dollars! So if we were to purchase a brand new BMW every 6 years from age 29 and stop at 58, a total of 6 new cars, even assuming that the cost of these cars wouldn’t increase over time, we would forgo $265,248 in actual dollars from our pocket and another $876,091 of lost capital growth for a net worth sucking amount of $1,141,339!
Even though we may only think of the cost of a brand new car being what it costs us in car payments, the reality is that it costs us twice; the car payments AND the amount of money we lose by not taking this money and investing it in the market.
So if you’re looking at that shiny 2019 BMW 3-series, be ready for it to cost you a total of $380,730.57 dollars! And if you were to buy another 5 more brand new ones over the course of your life, you’re looking at the cost of vehicles in the amount of $1,141,339 dollars.
Now should we add in the cost of insurance, maintenance, etc.?
