Bobservations: Decision of Discipline
Recently, my oldest daughter’s car needed some major repair work. The check engine light was on, it was idling rough, and its get up and go seems to have got up and went. As we suspected, it needed a valve job. The repair cost was almost equal to the amount we paid for the vehicle. Since we know nothing lasts forever, not even a Toyota, it was time to determine if it was worth repairing. Dreaming of buying a new car is so much fun. I started thinking about the improved technology that comes with new cars; the improved gas mileage, the new car smell, and no more repairs. It is so enticing. I started thinking that someone else may be in this same situation, and that’s why I want to share the three considerations I shared with my daughter, depreciation, the total cost of ownership, and the opportunity cost when making big decisions.
Depreciation
Depreciation is the decrease in the value of an asset. According to a 2017 Nerdwallet article, the value of most cars decrease around 20% to 30% by the end of the first year, and by year 5, most cars lose 60% of the initial value. That means if you bought a new Ford for $49,000, in five years the value of the vehicle would only be $19,600.
Total Cost of Ownership
Some of you may be thinking, yeah, but at least those pesky and expensive repair bills will go away if I buy a new car. That is true, but that is not the only cost to consider and why it is necessary to calculate the total cost of ownership of a vehicle. Let’s make a 5-year comparison of a new car vs. a pre-owned one.
I used the Edmunds TCO calculator
| Category | New 2021 Ford Expedition XLT Purchase Price $49,025 | My 2001 Ford Expedition Purchase Price $2,000 (yes, that’s how much I paid for my Expedition 5 years ago.) |
|---|---|---|
| Insurance | $6,907 | $1,500 |
| Maintenance | $5,076 | $1,000 |
| Repairs | $1,071 | $3,500 |
| Taxes and Fees | $7,056 | $250 |
| Financing | $12,246 | $0 |
| Depreciation | $32,886 | $0 |
| Fuel | $14,932 | $14,932 |
| Total Cost of Ownership over 5 years | $80,174 | $21,182 |
Opportunity Cost
I know that some of you are still not convinced, and you think buying a new car is a good investment. Maybe you have the cash to pay for it, giving you negotiating power on the price, and it eliminates the finances charges. What is the harm in doing that? Nothing if you can afford it. But, before you do that, consider the opportunity cost. Opportunity cost is an economic term used to describe the loss of potential gain when you select one of two options. By now, you know that when I say you can afford something, it means you can pay cash for it – having enough to put down and making monthly payments does not mean you can afford something. Assuming you can pay $49,025 cash for a new car, what is the opportunity cost? The difference between my $2,000 car and a $49,000 new car is $47,000. If you invested that $47,000 in a mutual fund for ten years, that has a 10% return, it will turn into about $127,000. Having $47,000 in cash provides you with the opportunity to buy a new car that will depreciate about 60% in 5 years. Or you can let someone else buy a new car and take the depreciation, then buy their car used car and invest the difference.
The Decision
My daughter and I agree that it is best to spend the money on the repairs and continue driving her Toyota. I know the temptation to buy a new car is powerful. We both felt the pull. I also know she exercised discipline to become debt-free. That type of freedom allows her to add a line item to her zero-based budget for her next car. She does not need to drive her current car forever, but it makes sense for now.
As I watched the events of her decision-making unfold, I thought about Hebrews 12:11. The author says, “No discipline is enjoyable while it is happening–it’s painful! But afterward, there will be a peaceful harvest of right living for those who are trained in this way.” Experiencing unpleasant circumstances does not mean God is punishing you or that He has abandoned you. Sometimes it is simply an opportunity to grow, and in time, we get to see the benefits of that discipline.
How is God using a circumstance in your life to train you up?
Amen to that Bob! Great article & the comparison brought it home. I’m going to forward the article to my sons. Thank you! 🙏
Hi Genie,
Thanks for reading the post and for the kind words. I hope your sons are as positive about this information as you are. :^)
Great advice Bob!!
If only that new car smell wasn’t so intoxicating!
I know, right?!
Well done. The article illustrates a real life scenario with resolution based on sound information and not feelings.
Hi Will,
Sometimes getting the emotion out of a financial decision, like buying a car, is hard to do, but it’s so worth it.
Thanks for the comment.
Great article, but boy, do I have questions:
1 – why would fuel costs be the same? New cars are more fuel efficient.
2 – if you paid cash, there would be no finance charge.
3 – insurance of only $1,500 for three years on the old car?
4 – why is the depreciation added to the overall cost?
5 – what is the difference between maintenance and repairs?
Don’t you love me reading your articles.
Hi Patricia,
Thank you for always reading my posts and commenting. And thank you for asking questions. I’ll address them as you asked them:
1 – why would fuel costs be the same? New cars are more fuel-efficient.
I used the edmunds.com total cost of ownership tool to compare the total cost of ownership of a new car (Ford Expedition) to my car. Because I don’t drive much, my actual gas cost over five years was less than the Edmunds estimate. So in fairness, I made them equal. I considered removing this comparison, but it’s such a small fraction of the total cost of ownership I left it in. Plus it shows that it should be a factor when looking at buying a car.
2 – if you paid cash, there would be no finance charge.
I agree. The edmunds.com total cost of ownership assumes that most people do not pay cash for a new vehicle and factors in the finance charges. However, in the opportunity cost section of the post, I wanted to stress the importance of paying cash (I hate debt!) when making purchases and that if you have that much cash, there might be better ways to use that cash.
3 – insurance of only $1,500 for three years on the old car?
I have been with my insurance carrier for a very long time; I have not been in an accident, have no tickets, and combine my home and auto insurance to get better rates. Because my car is so old and worth so little, I don’t need full coverage. Here’s a good article from Forbes on when to drop certain types of coverage. (https://www.forbes.com/advisor/car-insurance/drop-collision-comprehensive/)
4 – why is the depreciation added to the overall cost?
Some assets increase in value, some decrease in value. Most cars decrease in value at a high rate. Either way, it’s a factor in the total cost of ownership.
5 – what is the difference between maintenance and repairs?
Another good question. Things like oil changes, filter changes, and replacing wiper blades fall under the maintenance category, where fixing a transmission would fall under repairs.
My overall desire for this post was to show that when your car breaks down, there are several options, and buying a new car is the most expensive of these options.
Agree. Thank you for taking the time to respond.