Factoring opportunity cost into major purchases?

[Ramen]

Does anyone do this? Is it a legit consideration?

Say I'm pondering buying a basic car, such as a new Toyota Corolla, for about $24,000. Edmunds.com has a True Cost to Own estimator that factors in price paid, depreciation, fuel, insurance, maintenance, repairs, and financing for five years.

But what if I pay cash and keep the car for a long time? Either way, shouldn't I consider the forgone investment gains of the initial $24,000 plus all of the cumulative costs over time?

Using this compound interest calculator:

https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator

Initial Investment

Here I plug in $24,000, the amount that I would have left invested in the market if I did not buy the car.

Monthly Contribution

Here I'm plugging in $350, about what I would expect to pay each month for fuel, parking, insurance, maintenance, and repairs. Very rough estimate.

Length of Time in Years

Here I'm saying (optimistically) 20 years because I would drive this car maybe 4,000 to 5,000 miles per year, probably even less. I'm 56 and could imagine a good car getting me to 76.

Estimated Interest Rate

For decades my portfolio has returned, on average, more than 9% per year. So here I enter 9% (optimistically) to represent what my initial cash layout plus monthly costs over time would appreciate to in 20 years if I invested the money instead of buying the car.

For simplicity, I'm leaving the "interest rate variance range" blank.

Result

At the end, I click Calculate and get almost $350,000, which is more than $17,000 per year — the "true" cost of buying a $24,000 car and driving it lightly for 20 years instead of investing the same money in the market.

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.

But someday I might need or even just want a car, yet the math above seems to indicate that I'd be better off simply taking more taxis and buses. I can do a lot of that for 17 grand a year.

Granted, there are many places where trains and buses don't go and where taxis would be impractical. I avoid those places, but again this is all hypothetical for now.

The same calculation could be done for anything — a vacation house, a camper van, a boat. I'm just curious whether any of you consider this and make decisions based on opportunity cost.

Perhaps the bigger story is that my portfolio can and will generate far more than enough to handle such an expenditure. It's just food for thought to consider major purchases this way.

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.

 

[GrayHare]

The proper comparison is the 20 year cost with a car vs 20 years without a car. For example, you did not compound the amount spent on taxis, or the portfolio impact. With those, the taxi cost might come to $10,000 per year.

 

[Texas Proud]

What are the costs of getting around without a car?


It costs a LOT more to do all the stuff that I do with my car... so no, I do not factor in all that you list...


Now, if you want to do the math on a $25K car vs a $50K car go for it...

 

[Ramen]

The proper comparison is the 20 year cost with a car vs 20 years without a car. For example, you did not compound the amount spent on taxis, or the portfolio impact. With those, the taxi cost might come to $10,000 per year.

True, if I took taxis 4,000 miles a year instead of a few dozen, there would be no contest.

What are the costs of getting around without a car?

For me, a few hundred bucks a year. If I had the car, I would do some things that I currently don't do. For now this is because I'm not all that interested in doing those things.

But if I were to change my mind and want to do them, I'm trying to get a bigger picture of what it would cost me to do those things. Then I could ask myself whether they are worth it to me. This is the core of Your Money or Your Life, which got me on the road to FIRE in the first place. That's why I'm considering opportunity cost — i.e., what else could I do with the same money.

 

[pb4uski]

Yes, opportunity costs are real. 9% is a bit much but let's go with it. That's $2,160 a year. Plus your $350/month is $4,200 a year. Plus depreciation of $1,200 a year.

Total ownership cost is $7,560/year.

If you live in the city between Uber, taxi, bus and occasional rental cars it may be cheaper to not own a car since you live in the city.

What are the components of the $350/month? How much of that is parking?

 

[FlaGator]

Don't overthink it.

If you don't need a car, or would use it on a regular basis, don't buy one.

My location and lifestyle preclude me from foregoing a car. Closest grocery store is 2.5 miles away, other shopping is 5+ miles away (WalMart), Sam's Club is 30 miles, and Costco is >100.

Plus, I like to drive - the convenience, to explore, the opportunity for conversation with a companion, the solitude when alone. And after ~1,000,000 airline miles in my career, I'm burned out on that mode of travel.

If none of those were factors for me, I probably wouldn't bother with a car - except maybe for the sheer pleasure of driving. In which case I would forego my boring SUV and buy the Porsche I always thought I wanted

 

[pb4uski]

Yeah, from what they OP wrote I assume that they live in the city and they seem to be doing fine with public transportation and taxis and might be better off just renting a car when needed vs buying a car.

 

[FLSUnFIRE]

Specifically to owning/leasing a car there is a value beyond the financial. There is a quality of life (comfort, convenience, etc) and freedom component that is hard to put a dollar value on. I could a save a lot not owning a car at all (I'm surrounded by apartments so I could probably lease out my garage as a storage unit too for a few hundred a month (especially if I subdivided the space) so lost revenue!). I can walk/bike everywhere I *have* to go to maintain myself. I could rent a car to road trip or drive farther away and use Uber etc. But I would often not if making each of those choices! The marginal cost of each individual transaction would seem too high compared to the perceived value. I wouldn't enjoy life much. Would I go to the SWFL meet up (especially the first time before I knew how awesome everyone is IRL) if I had to pay an extra $90 in marginal costs just to get there? Would I get out in nature and get the immeasurable mental and physical benefits of taking a hike a park 40 miles away if I had to pay $80 to Uber to get to the "free" park? It would be real easy to look at each of those individual choices as poor value added but in sum would in their totality it would rob me of greater cummulative value that is harder to measure in $ and ¢.



If one always applied opportunity costs to every transaction they would live a miserable life (unless their highest value is the desire to swim in their coins like Scrooge McDuck -but then there is opportunity cost of playing in the money while it's not invested!). One would spend just enough (think crappy roommates- or maybe a tent in a right of way off the highway, cheapest clothes, cheapest food (probably healthy too so just beans and rice and some veggies), to maintain earning potential. Leisure, forget it, what's the opportunity cost of Netflix and chill when you could work two hours on a WFH gig?! It's easy to fall into an optimization trap and many of us in this community tend to be optimizers. I personally have a policy that I will not sweat the costs of anything that boost my mental and physical health -owning a car would limit some of those activities and isolate me from many social activities too.

 

[Andre1969]

Every once in awhile, I'll think of opportunity cost, but with me it's usually looking back, and thinking "where would I be now financially if I hadn't bought XXX?" The major purchase I did that with was most likely the last car I bought, a 2023 Charger R/T, that I bought last September. It was around $54,000 out the door. I did finance it, but paid it off in full in 3-4 months. At one point, I know I was thinking damn, if I hadn't bought this car, my invested assets would be at a certain threshold right now. But then, not long after, my portfolio total passed that threshold anyway, and it just didn't seem to matter.

Trying to think of it right now, and how it makes me feel, that Charger just makes me feel financially neutral, for lack of a better word. I don't feel like I'm any worse off for owning the car. But, if I had never bought the car, having the extra $54K wouldn't really make me feel any better. Sure, I would have crossed that new financial threshold a few months earlier, perhaps. But, that moment of euphoria was fleeting as it was, and would have been the same, if it had occurred a bit earlier.

And, from a purely financial standpoint, I'll admit it. That Charger was a waste of money. It replaced a 2003 Regal that was aging poorly, standing on Death's Door, and working up the courage to ring the bell. So that Regal wouldn't have been long for this world, anyway. But, I also have a truck to fall back on, so I could have just junked/sold/donated the Regal, and not replaced it at all. And, soon after I bought the Charger, I deemed it "too nice" to drive regularly, so it mostly stays in the garage, and I'm mostly driving the truck anyway. It gets worse fuel economy than the Regal did, as well as the Charger, but I don't drive enough for it to really make an impact. So the Charger essentially became a high-priced toy. Still, I don't regret it one bit. Although every once in awhile, I think that if I'm going to treat the car like that, maybe I should have sprung for a Hellcat instead!

 

[old medic]

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.

Well you kinda answered your own question.... Rent a car if you need one for a trip. If I was in your shoes.... I would look for a restored classic car... Little driving and possibly increase in value.

 

[Aerides]

With Uber and Rentals, you can cover any gap where you briefly need a car for far far less than the all-in cost of ownership.

 

[mrfeh]

Not gonna argue with the thought process, but I wouldn't use 9% return per year. That seems optimistic, regardless of what has happened the last 20 years.

 

[joesxm3]

If I had bought $58,000 of TSLA stock when instead of buying my Model Y in February 2023 and waited a few months for the stock to double I could have had the car for free. Now that is opportunity cost.

 

[njhowie]

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.

That's all that is important, no need to over-think it any further.

Much of the decision is going to be dependent on where you live. On Zillow, they have their Walkability index which would come into play here. If you live in a city or close to your town center, a car may not be necessary at all. In fact, it may be more of a hassle/headache on top of the additional expenses than the benefit it provides. DD is turning 27 in a few weeks and doesn't even have a drivers license. She's lived in cities for the past 10+ years and never had the need or desire to even learn to drive. On the rare occasion she needs a car ride, Lyft and Uber are always there. Longer trips are always with public transportation which is one block from her apartment. I'd guess her transportation costs are about $2500 to $3000/year and it's a bargain in my view.

For me and DW, a car is a necessity. We live in a rural location and it's 3 miles out to the nearest main road and grocery store.

 

[mystang52]

Buying a car is not a financial transaction. One buys a car for its availability and convenience. Remember that cost of a car includes insurance. Also note potential of losing a car due to theft or damage from an accident. I'm pretty certain owning a car is more costly than not owning one. I own 2 of them, but I never did a cost calculation. I like having convenience of the cars.

 

[TickTock]

The same calculation could be done for anything — a vacation house, a camper van, a boat. I'm just curious whether any of you consider this and make decisions based on opportunity cost.

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.

But if I were to change my mind and want to do them, I'm trying to get a bigger picture of what it would cost me to do those things. Then I could ask myself whether they are worth it to me. This is the core of Your Money or Your Life, which got me on the road to FIRE in the first place. That's why I'm considering opportunity cost — i.e., what else could I do with the same money.

+1 on YMOYL. We use a similar method to evaluate spending - does the spend provide enough subjective value to us to justify it?

So we don't do formal opportunity cost analyses.

 

[Ginny]

I must have a car, as my safety as a woman is more important to me than any amount of money. Taking public transportation would put me in the sights of those who have less than me. I cannot run any more as I'm almost 70 and I do not like to be afraid.

 

[Chuckanut]

Thinking about opportunity cost is a very smart way to evaluate any purchase.

A few years ago I used to tell my friends that my old Camry parked in the driveway came with a round trip ticket to Europe every year. IOW, the money I saved by driving an older car instead of a new Acura or BMW would go a long way towards paying for a few weeks of overseas travel. I find that being more careful with spending is easier when you identify the opportunity you are giving up due to that spending.

 

[Ramen]

Thank you all for the helpful insights, as always.

I agree that 9% is optimistic, but I was going for max impact. Even 6% or 7% leads to a big number.

For me this exercise is about "blowing that dough," which is still mostly foreign to me. Last year I blew more than $3,000 on original art and nearly the same amount on other pleasures. No regrets.

But a car would be on another level, with its ongoing expenses. Thus I have slipped back into optimization mode. Hopefully not the optimization trap, but thanks for the reminder, FLSUnFIRE.

Quality if life. Honestly, I feel mine is higher without a car. Walking and biking keep me fit. Parking at my rental community alone costs $100 to $200 per month depending on the space. Parking around town or in the big city up the highway would be a headache. Much easier to take Amtrak and Uber/Lyft. Turo.com or a conventional car rental would work fine for occasional trips.

The main thing I would gain by owning a car would be convenience, the immediacy of availability. Also possibly the thrill of driving the car of my choice. A Corolla is pretty boring, but a Miata, for example, or a restored classic could be fun.

I've made more BTD progress on small things like going out to lunch, movies, museums, concerts, etc. Last summer I stopped my longtime daily practice of tracking every dollar. Now I do whatever I want each day. At the end of the month I record the total from my CC statement. So far, so good.

A modest car is a doable BTD, I think. I'm just not sure how much I really want it. The opportunity cost exercise is helping me see that I probably don't want it all that much and that the novelty could wear off pretty fast.

 

[Wile E. Coyote]

I am still driving my 2008 Acura TL. I have maintained it (including brakes and tires $1,400 per year). It drives just like the day I drove it off the lot. Planning on driving it at least another 7 years.

I buy new and drive it into the ground. You can do an opportunity cost. But, I need a vehicle, I enjoy driving and I have had to have a vehicle since I started working at 15. I accept the cost of a vehicle as part of life (and non-negotiable). I will buy my final vehicle in a few years.

 

[Sojourner]

The main thing I would gain by owning a car would be convenience, the immediacy of availability. Also possibly the thrill of driving the car of my choice. A Corolla is pretty boring, but a Miata, for example, or a restored classic could be fun.
[...]
A modest car is a doable BTD, I think. I'm just not sure how much I really want it. The opportunity cost exercise is helping me see that I probably don't want it all that much and that the novelty could wear off pretty fast.

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).

 

[sengsational]

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.

 

[Koolau]

True, if I took taxis 4,000 miles a year instead of a few dozen, there would be no contest.


For me, a few hundred bucks a year. If I had the car, I would do some things that I currently don't do. For now this is because I'm not all that interested in doing those things.

But if I were to change my mind and want to do them, I'm trying to get a bigger picture of what it would cost me to do those things. Then I could ask myself whether they are worth it to me. This is the core of Your Money or Your Life, which got me on the road to FIRE in the first place. That's why I'm considering opportunity cost — i.e., what else could I do with the same money.

I've mentioned that we have a very good bus system here. For $3/ride for the occasional ride or (IIRC maybe $200/year for unlimited senior pass) I could get rid of my car and save $1000 in tags and insurance - not even considering any depreciation and maintenance as well as fuel, etc. BUT I like the convenience enough to not worry about it. MY compromise is to buy an older vehicle (lower grade model) and run it to death. In this way, I have relatively low cost transportation but at MY convenience.

Now, if every penny were a struggle, I'd be on the bus, no problem. Since I save "enough", I'll settle for my compromise. YMMV

 

[GrayHare]

True, if I took taxis 4,000 miles a year instead of a few dozen, there would be no contest.

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.

 

[pjigar]

For country folks like us, the math is very simple: No car, no life, no access. The opportunity cost for owning a car (or 4) is "living life".