Should I Buy a New Car or Invest My Money Instead?

Is that shiny new dream car eyeing you up from across the dealership? It might feel like it is, but really it’s just eyeing up your wallet.

Investing will provide you much higher returns on your money than purchasing a car. Within only five years, your car will depreciate by around 60% of its original value. Conversely, if you were to invest your money, you could easily purchase a reliable used car by leveraging the gains from your investments alone.

The opportunity cost of purchasing a new car could cost you tens of thousands of dollars in investment gains. Don’t make that mistake with your finances, and read on to learn what to do instead.

Should I Buy a Car or Invest?

Contrary to popular belief, cars aren’t investments. In fact, they begin to depreciate in value the minute that you drive them off of the lot. Investing, on the other hand, is meant to produce positive returns on your money over time. Not every investment will do so, but when compared to the average depreciation of the value of a car over the course of five years there’s no question as to whether you should purchase a new car or invest your money.

Not only that, but America’s wealthiest persons rarely, if ever, purchase expensive cars. Many millionaires purchase reliable used vehicles, and most (75% according to Phd’s Thomas J. Stanley and William D. Danko) aren’t driving the current model. They typically don’t spend more than $60,000 for their most expensive car purchases – most don’t spend more than $30,000 either – and instead manage their money in wiser ways.

If you were to purchase a new car for $40,000, it would depreciate in value by around 15-25% each year for the first five years of ownership. Assuming it depreciates on the lower end (15%), your shiny new car would be worth around $17,748 by year five.

Conversely, if you were to take that $40,000 and invest it in the stock market (assuming an average annual return of 7%), you would have $56,102 after only five years.

When comparing the two, you’d find that your car (if viewed as an investment) would have lost $22,252 in value. That’s a decrease in value by over 55%! Meanwhile, your investments would have increased by $16,102! The difference in value is a staggering $38,354 – nearly the cost of the initial investment.

The same principle applies no matter your starting number, even if you purchased a car for much less than $40,000. Though the differential would be less if your initial investment was $20,000 ($19,177 instead of $38,354), your car value would still decrease at a similar rate (-55%) after five years.

Should I Purchase a Used Car?

When compared to purchasing a new car, buying a reliable used vehicle will almost always make more financial sense. If you prepare for the purchase of a used car by saving and investing your money over the course of several years, the gains from your investments should be able to cover the cost of a reliable used vehicle.

Continuing our initial $40,000 car example from above, we’ll find that the gains from investing this money would be enough to purchase a $5,000 used vehicle after only 2 years ($5,796 investment gains).

When Should I Start Investing?

The best time to begin investing is several years before your need for a car arises. Now, life may happen and you may need to purchase a new car after an accident or other loss, but you should already have your emergency funds available for emergencies that may require it. Purchasing a vehicle otherwise is a typically foreseeable expense.

If you wanted to have a car to drive as a new college graduate just entering the workforce, simply plan ahead. If you were to invest $500 every year (savings of about $40/month) in an investment that received an annual return of around 7%, you’d have $2,875 by the time you graduated. That’s exactly enough for the lowest cost reliable used car.

On the other hand, if you were able to set aside a little more money during your college years, say $1,000 each year ($83/month) to invest, you’d have $5,751 to spend on a very practical (and reliable) used car by the time you graduate.

Summary

If you’re looking to begin investing, it’s wisest to put your money in something that won’t lose you 55% in your first five years, promising never to make it back. Said more clearly, don’t ‘invest’ in the purchase of a new car. Invest your money instead in something reliable (like index funds where you can expect around 7% returns annually) that can grow your money over time.

If you invest wisely, the gains from your investments may be able to fund the purchase of a reliable used vehicle in only a few years. To begin investing wisely, you’ll need to have some money on hand to invest. Begin getting a hold of your costs by budgeting, and finding out which budget is best or easiest for you. From there, increase your savings rate to spend money on the things you need and that provide you with the most happiness in life.

Whether just starting your climb to financial independence or if you’re halfway up the mountain, check out these tips from early retirees to inspire you. From there, keep climbing until you reach the peak.

We’re here for you, and will see you at the top.

Climb on, FinBase.