• Shane Dillon

The Opportunity Cost of Owning a Car


Car ownership is as American as baseball hats. When we’re young we wear a cap to look cool or to support our favorite team. As we get older, we choose a hat that is more practical, maybe you have a hat for running or a fishing hat. Then we hit old age and our taste for baseball caps changes again. No longer do we wear a hat for style, instead, it’s worn for comfort. Just like our baseball hats, car ownership in the United States is much the same, only it’s consequences have much larger repercussions than our old dusty hats.


In life, we face a handful of important decisions that can shape our lives for decades to come. Car ownership is one of those decisions we may all face multiple times over throughout the course of a lifetime.



Most Americans acquire their first car around the age of sixteen and will most likely own a car until they die. With the average life expectancy in the United States around eighty years of age, the average American will likely own a car for around 64 years of their life and will own at least four or five cars throughout their lifetime. Car ownership is a major expense, probably the biggest after homeownership.


In this article, I am going to compare the opportunity cost of car ownership to owning a bicycle. But, first, it is important to understand the definition of opportunity cost.


Opportunity cost represents the benefits an individual, investor, or business misses out on when choosing one alternative over another. In this example of opportunity cost, we will be using the historical stock market return of 7% as the opportunity cost an individual misses out on by owning a car or bicycle.


Here is a quick comparison of the two forms of transportation.



Lifetime Car Owner:

(keep in mind this estimate takes into consideration your cheap, first car and the more expensive cars later in life):


Initial Cost (downpayment): $1,500


Monthly Payments: $488

(includes: car loan payment, insurance, gasoline, maintenance, registration)


Opportunity Cost: $7.3 million

(This is the opportunity cost if an individual would have initially invested $1,500 in an index fund, then contributed $488 a month for 64 years, returning the historical average rate of return of 7%)




Lifetime Bike Owner


Initial Cost of Bike: $500


Monthly Maintenance: $10


Opportunity Cost: $191,000

(This is the opportunity cost if an individual would have initially invested $500 in an index fund, then contributed $10 a month for 64 years, returning the historical average rate of return of 7%.)



Now let’s dig deeper and take a closer look at the numbers.



In-depth Analysis:


Average Monthly Cost of Owning a Car:

Average Monthly Payment: $250

Car Insurance: $76

Gasoline: $120

Maintenance and Repairs: $30

Registration: $12

Total Monthly Expenses: $488




Opportunity Cost of Owning a Car

(the amount of money an individual misses out on by owning a car and by not having the money invested in the stock market):


Monthly Stock Market Investment: $488

Historical Return: 7%

Years: 64

Present Value: $1,500 (downpayment)

Future Value: $7.3 million


If a person invests $1,500 (equivalent to a car down payment) at the age of sixteen, and then contributes $488 a month in the stock market for 64 years, at the age of eighty-years-old the individual will have roughly $7.3 million in their investment account. The individual contributions equal $376,284 over 64 years, meaning a profit of $6,956,704; which, comes to $7.3 million when added together.


Please keep in mind this is a conservative example of car ownership. Many people lease or buy new cars every few years and will actually spend a lot more money on car payments over the course of a lifetime. Again, this is only one example. Alternatively, an individual might possibly start off with a free car-perhaps provided by their parents, later they may purchase a used car, then maybe buy a new car, which would offer a completely different answer. Even riding a bicycle over the course of a lifetime has an opportunity cost of $191,000, which is surprising.


I can hear you all the way from California. You are probably thinking, I don’t know what I’m talking about, or there is no way owning a car over the course of a lifetime equates to missing out on millions and millions of dollars. Well, it does when you take into consideration our old friend COMPOUNDING INTEREST.


To review, let’s define compounding interest:


Compound interest or better thought of as “interest on interest.” It is interest calculated on the initial amount and contributions over a given period of time. It also includes all of the accumulated interest of previous periods of a deposit or loan. “Interest on interest” will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount. Confused yet? Here is a simple example:


Example of Compound Interest:

Year 1: $1,000 x 10% = $100...$1,000 + $100 = $1,100

Year 2: $1,100 x 10% = $110...$1,100 + $110 = $1,210

Year 3: $1,210 x 10% = $121...$1,210 + $121 = $1,331

Year 4: $1,331 x 10% = $133.10...$1,331 + $133.10 = $1,464.10


And so on for the rest of your life...


The easiest way to find the future value of an investment is by using a COMPOUND INTEREST CALCULATOR. These calculators are numerous and you can find them on the internet or download an app on your mobile phone. Be careful, they are addicting and pure motivation.


Okay, now let’s go back to our car example.


Average Car Ownership Scenario:

Opportunity Cost of Owning New Car = $488 per month or $5,856 per year.


Opportunity Cost of Average Car Ownership Using a Compound Interest Calculator:


Present Value (down payment) = $1,500

Monthly Payments = $488

Years = 64

Average Rate of Return = 7%

Future Value = $7.3 million


Here’s a year-by-year illustration, if you would have invested your money in the stock market instead of a car. Remember, a payment of $488 per month equates to $5,856 per year.



Age 16 $1,500

Age 17 $7,656

Age 18 $14,257

Age 19 $21,335

Age 20 $28,925

….

Age 30 $142,595

….

Age 40 $371,033

….

Age 50 $830,117

….

Age 60 $1,752,719

….

Age 70 $3,606,838

….

Age 80 $7,332,988



This scenario is an example of the opportunity cost of an average car owner, and it does a good job of illustrating how compounding interest grows increasingly faster the longer you keep your money invested—just take a look at how fast your money grows over the last 30 years versus the first 30 years.


If you look closely you’ll notice your money easily doubles every ten years with a rate of return of 7%, the historical market average. Therefore the Future Value of your investment will equal $7.3 million dollars...That is if you would have invested your money in the market instead of buying cars over and over throughout your lifetime.


Will you ever own a car again? A bike is how I roll!


Now let’s take a look at the most frugal scenario: Bike Ownership. If a sixteen-year-old decides owning a car is not for him/her, then a huge lifetime expense will have been eliminated. Surprisingly, even an initial payment of $500 for a bike with an estimated $10 per month in maintenance, still adds up to a lot of money.


As you can see, the more money you can stuff away into the stock market in your teenage years, the better chance you have at retiring wealthy and, maybe, earlier than expected.


Lifetime Bike Owner

  • Initial Cost of Bike: $500

  • Monthly Maintenance: $10

  • Opportunity Cost: $191,000

(This is the opportunity cost if the individual would have initially invested $500 and then contributed $10 a month into the stock market for 64 years at an average rate of return of 7%)


Opportunity Cost of Owning a Bicycle Computed with a Compounding Interest Calculator:


Present Value = $500

Monthly Payments = $10

Years = 64

Average Rate of Return = 7%

Future Value = $191,135


Here’s a year-by-year illustration, if you would have invested your money in the stock market instead of a bike:


Age 16 $500

Age 17 $660 ($10 per month, which is $120 for the year times 7%)

Age 18 $831

Age 19 $1,015

Age 20 $1,213

….

Age 30 $4,168

….

Age 40 $10,108

….

Age 50 $22,045

….

Age 60 $46,035

….

Age 70 $94,247

….

Age 79 $178,134

Age 80 $191,135



Therefore the Future Value of a similar investment in the stock market would equal around $191,135. Amazingly, you can turn a $500 investment and $10 a month in distributions into $191,135 after many years of investing. Now, can you see the power of compounding interest?


Here’s another way to think about it, riding a bike is $7.1 million dollars cheaper than driving a car.


Keep in mind, your transportation expense is one of the few expenses you have to pay every month for the rest of your life, so be conscious about what wheels you are putting on the road.


The question every teen or twenty-something year old should ask themselves is: Would you rather have a car for the rest of your life or the millions of dollars saved by never owning a car? Riding a bike is not the only other alternative. You could also choose to live closer to your work or school, so you could walk. Or, another alternative is to use public transportation.


I personally prefer the good ‘ol bicycle. By riding a bicycle on a daily basis, not only do I save money, I get the added benefit of exercise and mental fitness. As a result, I stay thin, keep my heart healthy, and not pollute the planet—all while stuffing away thousands and maybe even millions of dollars in savings. Who knows, one day, I might even achieve financial independence at a young age because I’ve decided to ride a bicycle, instead of buying new and shiny stuff all of the time.


Just remember, life is a series of decisions, and these decisions add up to tell your story. Be creative! Do what is right for you, not what everyone else is doing. You write your own script.






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