Today I’m talking about car ownership.
Specifically, I’m sharing:
- The Total Lifetime Cost of Owning a Car
- How Buying New Can Cost the Same as Buying Used
- Why Leasing a Car Isn’t Always the Wrong Decision
I also let you in on a little secret about my personal approach to car ownership. 😲
If you want to better understand the true cost of owning a car (and hear my public confession!), today’s episode is for you.
How to Listen to Today’s Episode:
Episode Links & Resources:
Buying vs Leasing: The True Cost of Owning a Car
Taylor Schulte: Welcome to the Stay Wealthy Podcast. I'm your host Taylor Schulte, and I have a confession to make, I lease my car. In fact, I've leased three different cars over the last 10 years, and my wife, she leases her car as well.
Now, before my friend, an occasional guest host of the show, Jeremy Schneider, shows up at my house with a spreadsheet to show me how bad of a financial decision this is. Let me try and defend myself and share a little bit more about my thinking today.
First, to preface this entire episode, one of the most common phrases you've likely heard me say on this podcast over the years is that when it comes to financial decisions, there's the textbook answer, and then there's your answer. And as long as your answer doesn't put your financial plan in jeopardy, I typically don't have a problem with it.
Well, I might be able to use an even bigger spreadsheet than Jeremy to prove that leasing a car is the textbook answer. I'm okay. Bowing out of this debate and just saying that even if the numbers don't crunch, I'm still very happy and confident with our decision. And before I share my rationale behind that decision, let's start by reviewing some statistics on the true cost of owning a car.
An important thing to keep in mind when it comes to understanding the lifetime cost of a car, according to Jesse Kramer, email@example.com, who is that certain car expenses compare like apples and oranges. For example, how can we judge grandma who drives to the grocery store one time per week against a commuter who drives a hundred miles per day? Or how do we compare cost per mile like gas and oil changes against cost per time, like yearly registration and inspections?
Well, thankfully, we have data to help us make these comparisons, and we have people like Jesse who are kind enough to comb through it all and help create a single consistent metric for evaluating the cost of a car.
The first two assumptions that he had to make were how long people own their car for and how far people drove each year on average through a number of different sources. He determined that the average lifetime of a car is 15 years, and on average, people drive 13,500 miles per year, or 202,500 total miles over the 15-year life cycle of a car.
Taking it a step further, he determined that there are six major costs when it comes to owning a car; purchase and depreciation costs, financing costs, maintenance and repair, fuel registration and inspection costs, and insurance.
I will link to his entire article and the show notes, which you can find by going to youstaywealthy.com/120 if you wanna geek out on all the numbers and charts for each of those different categories.
But to keep it simple and summarize for everyone here today, he determined that on average, the total cost to own and drive a $30,000 car over its 15-year life is $91,200 or 45 cents per mile. The biggest expense is likely no surprise, and that is depreciation, which came in at almost 15 cents per mile, or one third of the total cost of car ownership.
On average, a new car depreciates by 11% the minute that you drive it off the lot, it then depreciates another 10% of its original value per year for the next five years, and then it starts to slow down from there. Really quick, going back to his estimate of 45 cents per mile, you might know that the government's current mileage reimbursement rate is 56 cents per mile, so perhaps Jesse's estimates were a little low, or the government is taking into consideration that not everyone drives an average car either way, somewhere between 45 cents and 56 cents seems to be a reliable number to lean on, at least as a starting point.
One of the most surprising conclusions from Jesse's long, long form analysis was that the cost of buying a used car is on average the same as buying a new car to make the math simple and the variable is consistent.
In his analysis, he looked at a brand new Subaru Outback with a few extra upgrades that sells for $30,000, the same $30,000 he used in the example to determine the total cost of owning a $30,000 car, which again, he came in at about $91,000 over 15 years.
So to compare and contrast, he found a three-year-old Subaru Outback with 40,500 miles, selling for $23,000. After crunching all of the numbers, which are detailed out in the article that I'm linking to, again, if you wanna get into the weeds, he concluded that driving this used Subaru car from 40,500 miles through the end of its life at 202,500 miles, which again is the average lifetime of a car, it would cost about $49,000.
So with the total cost of $49,000 in his hands, he then added back the initial cost of the car, which again was $23,000 to arrive at a grand total cost of owning this used Subaru Outback of $72,000. Now, since we're only able to drive this car for 161,000 miles, again, that's 202,500, the total miles of a car the lifetime of a car minus the 40,500 that's already been driven. Remember, you bought this car used, we essentially just divide 72,500 by 161,000 miles, and we arrive at a total cost per mile of 45 cents, which is the exact same cost of buying a new car.
Now, I know every used car has its own story, and there are a of variables and assumptions that you can play around with and make, but he just suggests that on average, new cars and used cars cost about the same over their entire life, that the market solves for inefficiencies and prices actually end up properly balancing out more than anything.
And I really wanna highlight this. He suggests that this is the starting point for the new versus used car debate. In other words, let's just start with the assumption that on average, the cost of buying a new car versus a used car are likely gonna be very similar over the lifetime of a car. From there, you then might be able to make some educated and informed decisions in order to find a better deal and put yourself in the best possible position to reduce the total cost of owning that car.
But in the end, nothing is guaranteed. We don't have a crystal ball. There are a lot of unknowns about the future of that car that nobody can predict, and even the smartest auto purchase based on the nerdiest analysis can backfire on us, which leads us all the way back to where I started today's episode.
One of the biggest reasons that I prefer leasing to buying is that it reduces my risk of large and unplanned maintenance costs. Ie. bad luck, and given where I'm at in my life right now, being a busy business owner with a wife and three little kids, it's just not the cost of the maintenance, but also the cost of my time. It might be time away from my work and my clients, which is quantifiable or time away from my family, which is hard to put a price tag on right now.
Let's not forget that it's also a giant burden to my wife who's driving three kids around all day to deal with car troubles. Having a safe, reliable car is really important to her right now. And knowing that if there was an issue, that the dealership would literally swap her car out while it's being fixed that's once again just a benefit that's hard to quantify.
In case you're wondering, Jesse does put some numbers to leasing versus buying in his article, and he concludes that leasing costs about 5 cents per mile or 11% more on average than buying.
In other words, the textbook financial answer is probably not to lease your car, which probably isn't a huge surprise to anyone listening along with reducing our risk of large unplanned maintenance costs and taking us away from work and family, which more than makes up for that 11% in my opinion.
There are five other reasons why I'm okay paying 11% more to lease my car.
Number one with three kids and a dog. Our leased cars take a beating over their three-year time with us. I'm able to sleep a little bit better at night and maybe more importantly, give my kids a little bit more grace knowing that the standard wear and tear on this car will be the dealership's problem at the end of the lease and not mine.
Number two, prior to three kids, four different homes and countless changes to our work commutes, we weren't exactly sure what was around the corner and what our auto needs were gonna be year over year. It's proven to be a nice benefit to know that one of our cars would always be at the end of a lease in a short period of time and we would be able to make a change.
In fact, this came in handy last year when one of our leases came due around the time that Covid hit and I was working from home. We didn't need two cars at the time given this new unforeseen situation that we were in, so we only had one car for most of the year, which saved us a good chunk of money. The third reason is that the car industry is changing rapidly and it's hard for anyone to know what the value of the car will be in three years.
If the value of our leased car unexpectedly drops because of a new model or better technology, law changes, abundant inventories a troubled economy, etc., it's the lender's problem at the end of the lease, not ours. And if the value is unexpectedly higher, well, we maintain the option to buy the car and sell it privately at a profit, not a bad deal.
The fourth reason is a little selfish. I'm a tech nerd and I find value and enjoyment from having the latest and greatest technology inside of my car and outside some of this technology also, I could argue makes driving safer something that's more important to us than ever at this stage of life with three little ones.
And then lastly, reinvesting money back into my business and saving for our next home are two things that are really important to us right now here in the short term.
Because of that, I do value having low monthly lease payments that are built into our monthly cash flow, then staring at tens of thousands of dollars stuck inside of depreciating assets sitting in our driveway. While those five reasons I know are tough to quantify and maybe don't agree with some of them, I'm more than happy paying an extra 5 cents per mile, or let's just say that Jesse's math is way off and it's 10 cents per mile. I'm more than happy paying an extra 10 cents per mile right now to reap those benefits.
Leasing is not for everyone, and it might not be the textbook answer, but it's our answer. It matches up with our family's needs and goals right now, and it's not coming anywhere close to jeopardizing our financial plan.
I hope this, this goes without saying, but, but please don't take any of this as advice and be sure to crunch all the numbers and make the best decision for you and your family when it comes to buying or leasing a car.
Once again, the links and resources from today's episode can be found by going to youstaywealthy.com/120.
Thank you as always for listening, and I'll see you back here next week.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.