Learn why new cars can be a deterrent to your wealth and what opportunity cost means.

Maybe you like cars or you just want a new car.

Perhaps you want to buy a new car because it’s for safety (too many miles), or status (need it for your job/image), or change of objective (had a child), etc.

Whatever your reasons for a new car, re-think it because cars are one of the largest deterrents to your wealth.

Take a doctor who grosses $1 million a year, but has virtually no wealth accumulated.

How does that happen?

Moves from house to house. Buys a new car every 3 years.

I’ve talked about the cost of moving - commissions, loan fees, remodeling to sell, remodeling after purchase, etc.

Buying homes and cars too frequently can be deterrents to your wealth.

For now, let’s just focus on the car.

He HAD to have a new BMW 650i. MSRP is $99,000.

Let’s look at the true cost over time, which is what would the money be worth if you had invested it?

We call that Opportunity Cost.

What is the depreciation on the car?

According to edmunds.com, depreciation on a BMW 650i is:

1. $10,168
2. $5,837
3. $4,987
4. $4,249
5. $3,627

Total in 5 years = $28,868

Mind you, this is happening every 5 years and total depreciation is $29,000. Let’s call it an even $30,000 for ease of math.

Over 5 years it’s $30,000 in depreciation.

Let’s take the $6,000 depreciation, which he is getting nothing for, and see what it would amount to in 20 years after being invested in the stock market.

On average, the stock market over the long term will compound at about 10% per year.

We’ll take $6000 per year, invested at 10% for 20 years.

Remember, this is money that is the depreciation on his car, not money he will ever see go through his fingers. It’s lost forever, like making a bad investment every 5 years and your investment is worth less.

What is the opportunity cost if he had invested the $6,000 per year instead?

Guess.

So $6,000 x 10% x 20 years = $418,380. Can you believe it?

Do you see why cars are one of the largest deterrents to your wealth?

According to Kelley Blue Book, average price of a car was $36,270 in January 2018. New-car prices have increased by $1,360 (up 3.9 percent) from January 2017.

Looking at edmunds.com, if you bought a car for $29,873, the minute you drive it off the lot, you’ve lost $2,559!

By the end of year 1 you’ve lost $5,687, year 2 another $3,607, year 3 another $3,173, year 4 another $2,813 and by year 5 another $2,524.

Guess what the total depreciation is over 5 years? $17,804 or a 60% loss!

According to edmunds.co, a new car loses 11% the minute you leave the lot, during the first 5 years loses 15% to 25% each year. After 5 years the car is worth 37% of what you paid for it at the dealership.

Let’s say you invested the $17,804 or $3,560 per year.

Invested for 20 years at 10% is $248,238.

Invested for 30 years at 10% is $706,278.

Remember, you’re not shelling out cash, this is money slipping through your fingers!

These are the kinds of things that make a difference to your wealth. It’s the choices you make. Does that make sense?

Hopefully you agree that new cars are not helping your wealth. What can you do?

Here’s 5 things for you to do:

Buy gently used cars in mint condition with low miles. That way a lot of the depreciation is already gone.

2. Don’t buy new cars until you have achieved your financial goals. Until then, it’s not a good investment and the opportunity cost is too high.

3. Buy buy cars that are too expensive. Put a limit on how much you spend.

4. Listen to Be Wealthy & Smart podcast #10 about cars that last for 250,000 miles.

5. Beware of cars that are coming from the Houston flood! There are thousands of damaged cars from Houston that will hit the auction blocks. Most used cars will be fine. Make sure your dealer didn’t buy the car at an auction. It’s better to know who the previous owner was and where they lived. Do your due diligence before you buy.