Cars are expensive things. They can easily cripple people financially. And any early retirement plan wouldn’t be complete without optimising our cost of transport!
I was reminded of this recently, when my car rego came in the mail, with the yearly cost jumping to almost $800!
Across most of Australia, cars are not seen as optional. Instead, they’re usually deemed as a necessity. Most likely, that’s due to our sprawling suburbs and, at times, lack of convenient and cost-effective public transport.
City design issues? Or under-investment in the public transport system? I don’t know the answer to that. Maybe it’s both. But since most of us own vehicles here in Oz, let’s see how they affect our wealth. And then see what we can do about it!
Let’s use a few simple guesstimates (and some reported figures from here and here), to get a rough idea on what car ownership really costs each year…
Since my readers are a relatively savvy and (hopefully) frugal bunch, I’m not going to include loan interest in these car calculations. I’m sure I don’t have to explain to you the genius in buying a car for $40k, which ends up costing you $60k…and is not long after, worth $20k.
Simply repeating this process (as many do), is guaranteed to piss away hundreds of thousands of dollars over a lifetime!
So generally, we’re looking at close to $5,000 per year for each car a household owns.
I know we don’t think of it as spending $100 a week, just to get around. But in reality, that’s often what the numbers show. And by ignoring car loans, we’re being generous.
For those with loans the average two-car household is burning through around $17,000 or more, per year!
Certainly not frugal. And definitely not helping the average person reach financial independence anytime soon.
Obviously, the most frugal car choice is…to not use a car!
For a vehicle that isn’t used much, you may be better to sell it and use a car-sharing service like Car Next Door, for the times you do need a car. Also, there’s always the choice of using Uber for getting around, which is freeing some people from car ownership costs.
And for those that keep a big car for family holidays, that may not be necessary. You could easily just hire a large car for when you really need it. It’s no use paying the rego and upkeep for something that’s rarely used!
But for everyone else – we can keep the convenience of car ownership, without killing our chances of early retirement. Here’s some pretty simple actions we can take to minimise the damage…
With so many possible improvements to be made, there’s no excuse for spending anywhere near the reported $17,000 per year!
Look, you don’t have to do all these things. But at least look into it. It’ll actually make a bigger difference than you think.
Remember, making your living expenses lower and your savings rate higher, brings financial freedom closer, every time!
Here’s the thing: Too many people treat their car as part of their image and sense of self-worth. And in doing so, they aim for a car that will impress their friends and make them feel good about themselves.
To be honest, we need to break this ridiculous and unhealthy association. Otherwise, it’s going to follow us and control our choices throughout our lives.
This is just a weakness to be overcome. And then we can begin making strong money decisions with our future in mind, instead of trying to gain fake status and approval.
Being frugal, I thought we had contained our car costs pretty well. But the truth is, I just wasn’t thinking hard enough!
Back in the early days, we were a two-car household. And not only that, we just seemed to drive everywhere without questioning it.
After becoming more motivated about early retirement, we decided to change.
Initially, we decided to start combining small trips and errands into one outing. Next, we started doing more things that were closer to home. Things like dog walks, restaurants, beach etc.
Since we lived in a fairly amenity-rich area, this made it easier. In fact, it became more enjoyable, because we didn’t have to waste time driving to places or dealing with traffic.
We also decided to self-insure, since we had low-value cars. And we could always chip into our growing pool of investments, should something go wrong and we smash up another persons car. But these days we do have very cheap third party insurance through Budget Direct.
Looking for more improvements, my partner decided to sell her car and get a scooter. Since we were only 10 minutes from her workplace, she didn’t mind dealing with the busy roads for a short trip.
This decision made a bigger difference than we could imagine…
All up we get yearly savings of over $2,600. Also, we freed up around $6,000 of cash for investments, after selling the car.
Maybe it doesn’t sound like much. But over 10 years, with a return of 7% per year, these invested savings grow to $47,726. Not to mention, we then needed around $50,000 less savings to retire, due to our lower expenses!
So overall, the benefit becomes close to $100,000, just from this small improvement. Don’t underestimate the difference that small changes can make.
Now, this doesn’t mean you have to get a scooter. But let’s look at the difference over a 10 year period, a couple can make, by being more frugal and optimising their car costs…
I’ll start this calculation with something I never see considered.
That is, the cost of having our cash tied up in cars. It’s a hidden trap, which costs us a fortune. Since it’s not a visible expense, it gets ignored, or written off as not important.
Instead of it costing a fortune, we can learn to see it differently. And in doing so, make us a fortune!
Take a couple, each with $20,000 cars. If they each switch to cars worth $7,500 – they free up $25,000 for investment. With these savings growing at 7% per annum, this becomes $50,000 in just 10 years.
Also, their car replacement/depreciation costs are now lower, since they have less expensive cars. It’s likely their insurance is cheaper too.
Let’s say they can also shave off some of their kilometres travelled, by doing some of the simple things I mentioned earlier. According to research**, the average Aussie travels 15,000 km per year. And average running costs are mostly at least 15 cents per km.
If our couple can drive a slightly less ridiculous 10,000 km per year each, they’ll save $1,500 on running costs per year.
Now their vehicles savings look like this…
$25,000 freed-up cash. Plus, $1,500 per year. Investing these savings at a 7% return, it grows to around $70,000 after 10 years.
Remember, this is for the couple who still remains a two-car household!
Clearly, for a frugal couple who does more than tinker round the edges as we’ve done here, the savings will be even greater!
To be fair, this is only a slight optimisation. Many couples will have car loans, luxury sedans or SUV’s costing upwards of the $20k I stated in the example. So there are massive improvements to be made for many of us.
Remember, most real-life wealthy people don’t waste their money on show-pony status symbols. Instead, they focus on disciplined saving and strengthening their financial position.
Don’t be ashamed of your ride. Drive your frugal car with pride! 😉
Although in my teens I spent the first $10,000-$15,000 I ever made on my first car, I now see cars for what they really are. A tool to get from point A to point B. Nothing more.
Believe it or not, car ownership is not a requirement to human happiness. And by exercising the power of waiting, you can eventually buy any car you want (if it means that much to you). But by then, the cost will be mere pocket change.
These days, we still have the one (old) car and scooter, worth only a few thousand combined. Honestly, it’s hard to justify keeping them both.
Since most of the stuff we do is at home or close by, they don’t get used all that much. Despite this, we’re still spending close to $3k per year for the convenience. But we’re somewhat reluctant to cut the cord (keys?). So for now, they’re sticking around.
(Update: we’ve sold the scooter!)
As the cost of electric cars come down, I’ll be looking to make the switch. For a cleaner, more guilt-free form of transport.
While I haven’t mentioned it here, we gain huge health and environmental benefits from less car use. We could all do with a bit more exercise. And air pollution is now becoming an issue in many cities around the world.
There’s no magic to early retirement, frugality and having a huge savings rate. It simply comes from making slightly better choices, in every category of spending. Cars are just another one of those categories.
Make frugal car ownership the driving force behind your early retirement!
** Note – I’m using ‘cost per km’ figures from the below report to estimate savings. I chose middle-of-the-range figures. The study I found by RACQ is here.
Why deliberate spending is my favourite money management style. What it really means and how you can use it as your situation and priorities change over time.
My thoughts on ‘The Great Taking’. An idea that the masses will lose untold amounts of wealth in the next financial crash, due to a deliberate plan by mysterious figures.
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Most folk I know got a car loan as soon as they started work and decades later still have car loans. I did a quick calculation for a friend the other day to show him how much he could have if he had invested the $320 of car loan repayments into ETF’s or LICs across a 40 year working life instead of paying a car loan….close enough to $840K. Case closed.
Haha great point Phil. The never-ending car payment. It’s perpetually renewed with the latest car purchase. Just plain insanity!
It’s literally the difference between wealthy and broke.
Another thing to look into is the car sharing services like go-get to supplement a single car or no car family.
Also, you mightn’t need that big car that you use once a year for your family holiday. You may be able to downgrade and just hire a car for that week you need the extra room.
Excellent advice!
In Perth we don’t have go-get unfortunately! But it looks like a pretty good concept. I’ve updated the article with these extra points. I’m usually reluctant to add too many points as the article gets too long, since I tend to ramble. I must do some more research in this area, thanks!
I’ve been crunching the numbers for just switching to uber for trips and car hire for holidays. It’s actually pretty compelling. I fully expect it to be a no-brainer in the future with the falling cost of autonomous electric vehicles eventually being used for transport-as-a-service. Owning a car probably won’t make a lot of sense in 10-15 years.
Environmentally friendly, fitness oriented and some extra pocket money from keeping the neighbours lawn under control then this form of transportation might be just the ticket:
https://sassysweetbren.wordpress.com/2010/07/15/woman-vs-lawn-mower/bike-lawnmower/
Saturday night, about as sensible as I can be.
Nodrog
Hahaha that’s exactly what I need, now that we have a yard!
Thanks for sharing. I’m off to have a look on gumtree for one of these 😉
Mate this is all so true – I used to be a big car guy when I was younger and spent way too much money on sports cars and parts (luckily I was never dumb enough to get loans for them) but 3 years I ago I made the tough decision to sell my beloved car. My partner and I both work 10-15 mins from where we live and take public transport and we also live across the road from a shopping centre so can walk to get groceries etc. I sold my car (for much less than what I bought…) and invested the money in the stock market. I made 55% capital growth in the first 12 months thanks to some lucky stock picks and was absolutely stoked..
Since then I’ve sold most of my individual stocks and switched my focus from stock picking to dividend income via LICs but selling my car was my first step into the Stockmarket and I’m so glad I did it!
James, you just made my day!
That’s an awesome story, good job man 🙂
Have you visibly noticed the savings? Or just seems like less bills to pay? Either way, the changes you made will be having a massive and ongoing improvement on your life. A couple of my mates are car guys and I’m too scared to ask how much they spend on it!
You’re doing much better than we are on the car front – although I’m constantly re-assessing it.
Wow, that’s some lucky stock picks alright! Nice work on the LICs too. It’s much easier to outsource the stock-picking to people who, in all likelihood, will do a much better job than we will. Not to mention the time saved and freed up mental energy. Dividend income is about as easy as it gets!
Great article. Very close to my thinking I must say. I have always seen cars (especially flashy high end models with mortgage on them) as wealth destroyers. I have been driving a modest 13 year old toyota corolla with few dents/scratches for many years in spite of me earning a decent dollar amid raised eye brows from work colleagues and other acquaintances.
Our family has been in need of another car for last couple of years due to a variety of reasons. Still, we took a conscious decision of delaying that purchase leaving that amount saved for car purchase in offset account against PPOR. Eventually funneled that money into LICs this year. Plan is to delay the purchase for another year if we could.
I have car parking available at my work place but still take public transport that involves a walk of 3.5km/day round trip from station to office and vice versa. I do get ‘those looks’ from my office folks for not driving but little they understand the reason behind it. 🙂
Thanks Jaik 🙂 Appreciate you sharing. And good job, you’re making the healthier and wealthier choice!
It always amuses me when people think ‘but you have money, why don’t you buy a better car’ – to which the answer is obviously ‘why would I? this one works fine’.
I got some similar things at my work too – mine is a 17 year old commodore, with dents and hail damage! 😉
Unfortunately it’s hard to break the habit, since many people still see a car as part of their image and worry what people think of them – so they make choices based on that.
i would add to shop around to buy your spare parts second hand and learn diy repairs. older cars usually break more often. and it s fun to learn to do mechanics!
Haha good point. But I can’t write that, since I do none of that stuff myself! I’m very impatient with fiddly things and struggle to understand mechanical things! Fully support anyone who wants to try. It’s an excellent idea 🙂
I’m the laughing stock of my work. I’m the boss of the clinic, driving a beat up 11yo Prius (which cost me $8K – 2 years ago with <100K on it). My trainee nurse on less than half my wage has a brand new financed Hilux ????
Haha this stuff always makes me chuckle, and it should for you too!
That’s still a pretty new car in my book, and a far better choice since it’s more efficient and doesn’t piss out as much emissions as a Hilux!
You can seriously work at Maccas and driver a Beamer by getting a car loan, it means nothing, except a massive cost blowout over 10 years! People still equate it with being cashed up for some reason.
I used to cop some flak at my work too (drive a 18yo dented commodore) but I just smiled because having a new car meant nothing to me – but having investments and freedom meant everything!
One other advantage of driving a crappy looking car is people think you are broke so never ask for loans haha
Haha good point Rhys!
We can estimate the cost of Yearly Registration, Fuel, Insurance. But for servicing, parts replacement, we don’t know how much we have to spend. Evenly we have to pay extra for breaking traffic laws. That we have to add in our expense list. It is a good news that we can sell car parts to scrap yard to reduce the cost.
You’re right Calvin, the best we can do with maintenance is a rough guess most of the time. I’ve found that just an estimate works out reasonably accurate more often than not, when looked at over a number of years.
Hey Dave, also check out Car Next Door, it’s a cheaper option than goget and is now in Perth (plus east coast) Encourage anyone with an underutilised vehicle to join, it’s basically air bnb for cars ????
Awesome, thanks for sharing! I’m not up to speed (accidental pun, ha!) on these new firms, but great to know the options are expanding.
What percentage of net wealth to be allocated to vehicle ownership? My target is no more than 0.4%. So someone with net wealth of $1m can only afford a car up to $4k. Irrespective of income levels or leasing or financing methods. Frugal but creates discipline and a strong goal.
Hard to say Mark. It can definitely help framing it like that, but when starting out it’s inevitable that someone’s car is a decent part of their net worth, maybe even 50%. The goal would be for that to drastically reduce to maybe 1% or less over time. But then I also believe that just because net worth ramps up to $10m that doesn’t mean a $100k car is a good idea – an unnecessary purchase is still unnecessary. So I don’t really think or recommend percentage terms for this reason.
If you need to buy a car, stick with Japanese or Korean cars. They will be cheaper to buy and maintain and they are much more reliable/longevity than European counterparts. The sweet spot for price/repair cost ratio is 2-10 years after the first owner takes initial depreciation costs.
A person I recently befriended gave me a copy of “The Dog and Lemon Guide.” Despite being a car enthusiast, it challenged the way I see cars now. They have free articles on the web and for the price of a coffee you can get a comprehensive, brutally honest review before purchasing a candidate.
I’d like to add electric vehicles (EV’s) to the list for people who can’t get rid of their car for work reasons. I’m very fortunate to drive a secondhand, Japanese import Mitsubishi Minicab MiEV (cost $16,800) which costs 4cents per km to recharge at home compared to roughly 16cents per km for diesel in our Holden ute. Ongoing maintenance costs about a quarter of what petrol & diesel vehicles do, & Electric/Hybrid vehicles attract a registration discount in Queensland. A negative is that NRMA comprehensive insurance is on the high end ($1,300/year!) since very few companies offer EV insurance in these early days of the EV revolution.
Look into ‘grey imports’ as a way of purchasing a cheaper Electric/Hybrid vehicle for your family, business or community group.
Can you explain by what you mean by self insure?
My husband and I have one car, I use public transport for work. I’m an Aussie based in the UK.
Good tips that can be altered to work for the UK though.
Nice work Ally, sounds good! By self-insure, I meant rely on savings to cover for accidents. This only works if someone has a decent sized pool of savings/investments, where on average it tends to be more profitable to not have insurance, since most accidents aren’t super expensive. But it’s also a personal risk tolerance thing too. We do have third-party these days as it’s very cheap and covers for everyone’s favourite example of hitting a Ferrari 🙂