Factoring opportunity cost into major purchases?

[FLSUnFIRE]

I know someone with a bike and an airplane but no car. I think that's pretty cool. I'm one step too far removed to have been offered a flight (yet?) but some of my friends have flown down to Key West for the day with him -the ultimate designated driver.

 

[Aiming_4_55]

If you are considering BTD, better added cost of insurance. For a new(er) car, you would need full coverage.

 

[Ramen]

If you're only going a few dozen taxi miles per year, why even bother doing the calculations? Obviously that's cheaper than owning a car. By asking here, we figured you had a legit comparison and thus a serious question.

Why respond to a thread if you don't have something helpful to add? Read my previous posts. I'm considering a "blow that dough" for a possible lifestyle change. This would mean more than a few taxi rides per year. Also, the thread is about opportunity costs. The car expense is just one example.

 

[TickTock]

Quality if life. Honestly, I feel mine is higher without a car.

I think you have already made that decision.

You gave several other examples of BTD, so it's not like your sitting on top of a pile of money, unhappy but unwilling to spend it. BTD on stuff that increases your quality of life rather than decreasing it.

 

[Andre1969]

One thing you might want to try, to get a glimpse of what it would be like to have a car, is try renting one for a week, maybe two if they let you? You wouldn't get the full experience, as you wouldn't have to worry about long-term maintenance/repair, getting insurance (although definitely get rental car insurance!) and so on, but it might still give you a feel as to whether it feels liberating or not to have one.

It will be kind of expensive, a few hundred bucks at least. But that's nothing compared to what buying a car outright would cost you.

 

[Koolau]

One thing I haven't seen mentioned that might be a good compromise or "middle ground" is buying a used scooter or moped. They get excellent gas mileage, are much cheaper to own and maintain compared to even the cheapest, most basic cars, and they are incredibly fun to drive! I could see myself switching from car to moped/scooter at some point if my lifestyle allowed for fairly short, in-town driving trips only (no highway driving).

We have way too many deaths and serious injuries on mo-peds here for me to even consider one. They are cool and fun, but really dangerous. I'll pay the extra and put more metal around myself - opportunity costs or not. YMMV, of course.

 

[Koolau]

I've always thought my car should have a cost meter on the dashboard. Most people, if they think about cost at all, just include fuel expense. If the meter included insurance, taxes, depreciation, maintenance, that single destination trip is going to be eye -popping, and the Uber fare won't seem so bad.

But it's the "freedom" of being able to hop in and go without an obvious incremental additional expense.

It would be easy for us to live with one car, but it ain't happening. For us, just not enough to be saved on transportation.

You can estimate cost-per-mile on Edmonds site, IIRC. But, of course, it's so dependent on a lot of variables. Each additional mile should actually cost a bit less as you are quickly (and then more slowly) absorbing the fixed costs.

Imagine that you buy a new car and a pool of 4 or 5 people use it constantly (not sure why, but bear with me.) If driving freeways/interstates, such a car could easily be driven 1200 miles/day. In one year, you would add as much as 400,000+ miles to the odometer. Because you would never age out anything (all the rubber - except tires and belts) would still be good in a year, for instance) so your costs would be (fixed: insurance and tags) and mileage proportional (fuel, maintenance, depreciation.)

Yeah, at years end, your new car is likely worn out and near worthless, but your cost per mile would be the very minimum possible.

More likely, you drive 3,000 to 20,000 miles/year. That makes a huge difference in cost per mile due to the fixed costs being divided by such a wide rage of miles. So the cost-per-mile calculation is problematic at best. In hind-sight, you could figure it but going forward, you'd need a lot of estimates.

Still, a good concept to understand what your car costs you vs Uber/cab/bus/bike etc. Of course, that's probably moot unless you can delete one car from your garage by using alternate transportation. Still, YMMV.

 

[brydanger]

This is all hypothetical. I have not owned a car in more than a decade, and each time I get to thinking about having one again, the numbers scare me away. I don't need a car, as I live centrally and walk most places. Last year I spent about $300 on local buses, trains, and taxis.

I guess it comes down to whether I'd rather have the freedom (and the hassles) of a car, or have the money in the graveyard when I'm gone.

I think the real question is whether you should have a spreadsheet to show the minutes/hours you'd have back (to spend on things you enjoy) if you weren't busy running spreadsheets for the cost of things you don't want or need.

At the end of the day it just comes down to wants/needs or what you choose is the best way to live your best life. You worked hard to make that savings - now make sure you're happy/enjoying the fruits of that labor!

 

[HI Bill]

When considering a major purchase (now FIRED for 3 years), I consider this the lost value of annual withdrawals in today's $ by multiplying my WR (now at 6%) by the cost of the purchase.

Example. I purchased a $60K sports car last year. If I had left the $ invested, I'd potentially be able to spend 6%*$60K, or $3600 annually extra in perpetuity.
Ouch. But my desire for the car (and my increasing portfolio) left me comfortable enough to buy it now, essentially paying cash. YOLO, and I'm not getting any younger! Blow that Dough (within reason)!

 

[pjigar]

We have way too many deaths and serious injuries on mo-peds here for me to even consider one. They are cool and fun, but really dangerous. I'll pay the extra and put more metal around myself - opportunity costs or not. YMMV, of course.

+1. Been there, done that. Never buy anything with 2 wheels for regular use. Of course they are fun but best to not drive 2-wheelers around other cars. Disclaimer: I have a motor cycle but I only drive on country roads with limited car traffic. My DS has a tail bike he rides on our property. Like I said, fun.

 

[W2R]

I don't seem to make major purchases unless they are necessary. For example my last major purchase was having my roof replaced due to getting big puddles in my house every time it rained, despite lesser repairs. Had I not done that, my washer and dryer would have rusted out by now, and I'd have to spend several thousand on new ones (plus installation, plus drywall, and so on).

I guess often there is more that affects the financial outcome of these decisions than just opportunity cost, unless of course the decision is fairly frivolous to begin with IMO. Just one more thing to think about.

 

[Chuckanut]

When considering a major purchase (now FIRED for 3 years), I consider this the lost value of annual withdrawals in today's $ by multiplying my WR (now at 6%) by the cost of the purchase.

Example. I purchased a $60K sports car last year. If I had left the $ invested, I'd potentially be able to spend 6%*$60K, or $3600 annually extra in perpetuity.
Ouch. But my desire for the car (and my increasing portfolio) left me comfortable enough to buy it now, essentially paying cash. YOLO, and I'm not getting any younger! Blow that Dough (within reason)!

My guess is that you also mentally considered the cost in remaining years and health. The next few years have a greater value for some purposes than those farther out. We may not think of it like an economist would, but I do think most of us take that into consideration. Otherwise why not save, save save, become a fabulously wealthy multi-100-millionaire and then party like heck from age 80?

 

[Koolau]

When considering a major purchase (now FIRED for 3 years), I consider this the lost value of annual withdrawals in today's $ by multiplying my WR (now at 6%) by the cost of the purchase.

Example. I purchased a $60K sports car last year. If I had left the $ invested, I'd potentially be able to spend 6%*$60K, or $3600 annually extra in perpetuity.
Ouch. But my desire for the car (and my increasing portfolio) left me comfortable enough to buy it now, essentially paying cash. YOLO, and I'm not getting any younger! Blow that Dough (within reason)!

Yeah, moderation in everything - including moderation.

 

[jollystomper]

"Opportunity cost" analysis for major purchases? It gives me a headache . My retirement was based on not having to do this sort of analysis. Rather, I just decide if it is something I want and, if something material, am willing to maintain.

For our anniversary trip to France last year, I certainly could have done the travel and lodging at a third of the cost, and what I saved would certainly have grown to more by the end of the year... but the luxury experience was well worth spending the money, future "lost growth of money" be d*mmed .

To the OP, if you are thinking about a car, as others have mentioned, just rent one periodically, even at times you do not need it, just to determine if the "experience" is worth it.

 

[Teacher Terry]

My car costs me 165/month total for all costs. I can’t use Uber for that amount of money, our bus service sucks and I can go anywhere whenever I feel like it so definitely worth the cost to me.

 

[OldShooter]

Investing in forks and spoons is a losing proposition. You can eat with your hands.

 

[TheWizard]

One of the advantages of being a high income retiree is that you can spend as the need/want arises without overanalyzing it.
I ordered a new Mustang convertible last July to replace my '08 one. I tend to keep my vehicles for a while so that works out fine. I suppose I could have bought a more expensive German car for 2x the cost of a Ford. But I didn't happen to feel like doing that

At some point, I'll probably replace my 2016 F-150 with a new one, but I'm in no rush...

 

[TheWizard]

"Opportunity cost" analysis for major purchases? It gives me a headache . My retirement was based on not having to do this sort of analysis. Rather, I just decide if it is something I want and, if something material, am willing to maintain...

Well stated...

 

[Closet_Gamer]

Opportunity costs are real and should be considered, particularly for large purchases.

But there is also an opportunity cost to not enjoying life. I didn’t grow up on a situation where we took vacations or anything really resembling them. We went to an amusement park one day each summer. No problem, that was our situation, but it gave me a narrow view of life.

Early in our marriage DW got me to go on a few trips. Thank God she did. It laid a foundational of purposeful investment in life experiences, particularly with our kids. As we had some more financial freedom I indulged my fondness of nice cars.

I don’t know how much more money I would have if we didn’t do all those things. Whatever it is, I would not trade those experiences for that pile of money. And those nice cars made me smile a bit everyday.

You can’t have everything in life so choices are necessary, but don’t underestimate the lost opportunity of not enjoying life.

 

[Chuckanut]

Investing in forks and spoons is a losing proposition. You can eat with your hands.

A lot of the world does eat with their fingers.

In the USA the opportunity cost of eating with your hands may be not being invited to dinner parties or just a back yard BBQ by your friends.

 

[Koolau]

A lot of the world does eat with their fingers.

In the USA the opportunity cost of eating with your hands may be not being invited to dinner parties or just a back yard BBQ by your friends.

A large portion of the world COULD eat with utensils but chooses not to. They find the use of them to be disgusting because (though thoroughly washed) they have been in other peoples mouths before. Culture trumps most anything else.

 

[RetiredHappy]

We just wrote a couple of checks amounting to $200K over the past 3 years to contractors to renovate bathrooms and add a garage. If we factor in opportunity cost, we would never do it. If you can afford it, just spend and not over think it.

For us, having a car is a must. We used to buy a new car every 3 years. We are now starting our 5th year on our car, with 35K miles. We were going to trade in for a new model last year but stock market was not good to us so we delayed a year. Now we are looking at replacing our car in 2025 or 2026 to get 6 years out of it. I guess we are thinking of opportunity cost after all. There are alot of nice to haves and we prioritize our spendings.

 

[Koolau]

We just wrote a couple of checks amounting to $200K over the past 3 years to contractors to renovate bathrooms and add a garage. If we factor in opportunity cost, we would never do it. If you can afford it, just spend and not over think it.

For us, having a car is a must. We used to buy a new car every 3 years. We are now starting our 5th year on our car, with 35K miles. We were going to trade in for a new model last year but stock market was not good to us so we delayed a year. Now we are looking at replacing our car in 2025 or 2026 to get 6 years out of it. I guess we are thinking of opportunity cost after all. There are alot of nice to haves and we prioritize our spendings.

Back when cars were reliable for 75K to 100K, and I drove 25K/year, I could see a new car every 3 years. Today, my 12 and 24 year old cars are sufficiently reliable for my needs. To me, it's not so much about opportunity costs but about alternate uses of the money (not investment, per se.) YMMV

 

[TheWizard]

We just wrote a couple of checks amounting to $200K over the past 3 years to contractors to renovate bathrooms and add a garage. If we factor in opportunity cost, we would never do it. If you can afford it, just spend and not over think it.

For us, having a car is a must. We used to buy a new car every 3 years. We are now starting our 5th year on our car, with 35K miles. We were going to trade in for a new model last year but stock market was not good to us so we delayed a year. Now we are looking at replacing our car in 2025 or 2026 to get 6 years out of it. I guess we are thinking of opportunity cost after all. There are alot of nice to haves and we prioritize our spendings.

Three years is a bit sudden for me.
But then, as a single person, I keep two vehicles in my stable in retirement.

Since I have a negative withdrawal rate nowadays, this so-called Opportunity Cost is of minimal concern...

 

[WhenIsItTime]

I did in my profession when evaluating proposed investments of the company's money. If I had to do this kind of financial analysis to evaluate a personal purchase, then I probably wouldn't being pursuing it anyway. Furthermore, choose not to spend my free-time this way.