New vs. Used: The $1.3 Million Decision
You may enjoy owning new vehicles, but driving slightly used vehicles is financially much smarter
(Watch the video summary here)
Owning a brand-new car feels fantastic—who doesn’t love the smell, the cutting-edge technology, and the satisfaction of pulling up in a shiny new ride that exudes achievement? Yet, when it comes to the long-term financial impact, choosing a new car over a used one could cost you significantly more than you likely imagine.
Our annual analysis reveals that opting for a new car every three years, compared to driving a well-maintained, slightly used vehicle, could result in a staggering opportunity loss of over $1.3 million by retirement. The numbers are shocking: choosing a used car isn’t just a financially savvy decision—it’s potentially a wealth-building strategy.
Breaking Down the Numbers
We analyzed two scenarios:
1. **Person A** buys a brand-new car every three years and sells it right when the warranty expires. They do this partially as they fear high unexpected repairs bills, and partially because they just like new cars.
2. **Person B** purchases each of Person A’s used vehicles when they reach three years old, then drives each car for a full ten years more before repeating this cycle until retirement. When each car is sold, it is 13 years old. This car has now only reached middle age, as the average car in the US is 12.6 years old.
If Person B invests the savings—approximately $250 per month during the period of the loan and $750 per month during the periods when the loan is paid off—into an S&P 500 Index Fund and allows it to compound over 40 years, the results are astonishing. By retirement, Person B would have accumulated $1,291,000 simply by choosing slightly older vehicles.
Why New Isn’t Necessarily Better
We understand the appeal of a new car. However, it’s crucial to remember that cars are not investments; they are depreciating assets. In fact, the average new vehicle loses nearly 42% of its value within the first three years. While the allure of driving the latest model is strong, it’s a decision that could impact your financial future significantly.
If you’re still leaning towards a new car, consider the following common objections:
“I Deserve a New Car After Working So Hard!”
Yes, you do deserve nice things—but do you deserve to sacrifice a million dollars in future wealth for the thrill of a new car? Remember, our plan only works because some people are willing to absorb that initial depreciation hit. If that’s you, thank you for making it possible for others to grow their wealth by purchasing your depreciated assets.
“New Cars are Safer and More Reliable.”
While newer cars may have the latest safety features, the reality is that safe driving habits and good vehicle maintenance play a much bigger role in overall safety. Data from the Insurance Institute for Highway Safety (IIHS) even suggests that older vehicles can, in some cases, have lower fatality rates compared to newer models. Don’t assume newer is always safer—drive responsibly and keep up with maintenance, and you’ll enjoy peace of mind in a used vehicle.
“I’m a Car Enthusiast. I Want the Latest and Greatest!”
If you love cars, consider owning a reliable daily driver and indulging in a classic or performance car that’s less susceptible to depreciation. Many enthusiasts find just as much joy in a well-maintained older model as they would in a brand-new vehicle, and with significantly less financial risk.
“I Don’t Ever Want a Large, Unexpected Repair Bill”
Our analysis accounts for the increasing maintenance costs as a vehicle ages. Conservatively, new car maintenance is $300/yr and can grow to $1000/yr by age 13. However, if you’re ever faced with an unexpected $7,000 transmission repair, you can simply withdraw the necessary funds from your automotive brokerage account. Which, by age 42, could have over $250,000 in savings. This way, you can cover the repair comfortably and continue to self-insure, just as many financially independent individuals do.
“But Inflation will Minimize the Impact when I Retire”
We have adjusted the analysis to be reflective of today’s dollars. Unadjusted for inflation, the actual account value will be $2.61M.
How to Make it Work
Ready to create your own million-dollar portfolio? Start by buying used and then, most importantly, investing the difference. Open an online brokerage account, set up automatic contributions with the money you’re saving each month, and let compound interest do the heavy lifting. It’s a simple plan, but one that requires discipline and a commitment to long-term wealth-building.
Conclusion
Making the switch to used cars isn’t just about saving money today—it’s about setting yourself up for a financially secure future. If you’re willing to step away from the allure of “new car smell” and focus on the bigger picture, the potential payoff is tremendous.
When you see your neighbors driving new cars while you’re behind the wheel of a reliable used vehicle, remember this article. A quick glance at your growing brokerage account should be enough to keep any envy at bay.
Don’t let your friends or fast-talking salesperson fool you. For those looking to get the most out of every dollar, and who wouldn’t want an extra million by retirement, used is the way to go..
Key Assumptions Behind The Analysis:
- Average New Vehicle Price (2024): $48,401
- Average 3-Year-Old Vehicle Price: $27,800 (58% of original value)
- Investment Return Rate (S&P 500): 7.998% annually, 30YR average, adjusted for inflation and dividends reinvested
- Retirement Age: 62 years
- Annual License + Maintenance + Repairs (new car): $850
- Annual License + Maintenance + Repairs (used car): $1010
- Vehicle Sales Tax: 5% (varies by state and country)
- Loan Interest Rates: 5% for new cars, 10% for used cars
- Ownership Timeline: 3 years for new vehicles, 10 years for used
- Initial Age of First New Car Purchase: 22 years
KEYWORDS:
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A lot to take in here, good information to have when thinking about your next car/truck purchase
Great article, thanks for sharing!
This was a very interesting read for me, great job taking something complex and explaining it in such a clear simple way.
Absolutely loved this article! It really hits home the financial realities of owning a new car versus a used one. I used to think that the excitement of driving a brand-new car was worth the extra cost, but this analysis really opened my eyes to the long-term implications. The comparison between Person A and Person B is compelling; it’s staggering to think that by simply choosing a well-maintained used vehicle and investing the savings, I could be setting myself up for such significant wealth in the future. Plus, the point about cars being depreciating assets is something I hadn't fully grasped before. I’ve often heard the arguments for new cars—safety, reliability, and that wonderful new car smell—but this article does a great job of dismantling those myths. I especially appreciate the suggestion for car enthusiasts to consider a reliable daily driver while still enjoying a classic or performance car. That’s a smart way to balance passion with practicality. Overall, this article has inspired me to rethink my next vehicle purchase and focus more on my financial future.