Costs Comparison of Financing a New, Used, and Lease Car

In the United States, a majority owns a car and drives to work.  In the world of early retirement, there's a fiercely debated topic of buying cars.  The FIRE (Financially Independent Retire Early) community heavily believes that buying used cars is a must.  That is not always the case.  A new car has it's advantages.  This is my counterpoint.

Here are my assumptions.  The average car will last 200,000 miles or approximately 12 years.*   My personal car is a Hyundai Sonata.  I'm using the 2017 and 2018 models in my example.  The lease terms are $2,399 down, and $209 per month for 36 months.  The approximate cost of buying a new Hyundai Sonata is $20,000.  With financing, the price drops to $19,000 with $0 down over 72 months.  A used 2017 Hyundai Sonata with 100,000 miles, or half its life remaining, is estimated at $9,000 on kbb.com and edmunds.com.  For the used car loan, I'll be using lightstream.com percentage rate of 2.5% with the same 72 month term and 10% ($900) down.  Around 90% of vehicles are bought with financing, so this initial example will focus on financing a car.  I'm picking 2017/2018 models for a similar ownership experience.

Over the course of 12 years, the graph below shows the expense of each situation.  The new car is owned through out the 12 years.  The used car is bought and sold twice.  The lease car is leased four times.  These initial examples 

*With a cash option, the price drops to $18,000.  

Figure 1 - The Expenses of Buying New, Buying Used, and Leasing a Car over 12 years.

In this case, the leased car costs the most because the leased car has minimal responsibility and maintains the feeling of a new car.  Leasing a car is a terrible financial decision.  From this point, I'll focus on the new and used cars.  Figure 1 does not factor in the costs of maintenance.  Figure 2 takes numbers from Consumer Reports and estimates the cost per month over the 12 year life of a vehicle.  The used car's average maintenance is higher because it maintenance costs are higher for older vehicles.

Figure 2 - Car maintenance cost over 12 years.

Figure 3 combines the curves from Figure 1 and Figure 2 and shows the cost of ownership minus the regular, shared expenses like gas and oil.  

Figure 3 - Car expenses including maintenance cost over 12 years.

Factoring in maintenance and a longevity of 12 years, used cars cost more to own than new cars.  The break even point is 10.5 years.  However, this graph does not incorporate earnings interest from the money saved throughout the experiment.  Figure 4 shows investing the cost difference of ownership and investing that amount in the stock market with an inflation adjusted return of 7%.

Figure 4 - Investing the savings between New and Used car expenses.

The big advantage in buying a used car is cash now.  A used car will always be cheaper and the different can be save and socked away like the FIRE community loves.  Over the 12 years, the cash saved on the used car becomes an extra $2,400 due to compounding interest.  The new car saves money later in its life, but the amount saved totals only $200.  Figure 5 shows the cost of ownership when including the earnings from investment.

Figure 5 - Cost of ownership when including the earnings from investment.

Over the course of 12 years, the costs are almost exactly the same with both outcomes costing approximately $23,560 plus or minus $5.  Looking long term, the financial difference between a new and used car is negligible.  So, what are the advantages and disadvantages in this scenario?

The New Good

The new car is, well, new.  You're the first one to drive it and make it yours.  You get the look, smell, and feel of a new car.  History of the car is known.  All the sensory inputs, error codes, quirks, maintenance can be observed, recorded, and remembered.  Defects are covered under the warranty.  Thus, a new car should be more reliable in terms of consistency.  You only have to buy a car once every 12 years.

The Used Good

The used car has already been driven for 100,000 miles, it's been through a break-in period, so it's probably not a lemon.  The reliability statistics are available for that model, so it's possible to avoid a lemon or a dud.  Negotiating on a used car is likely easier with an added opportunity to possibly make more cash from each deal.  The used car gives you cash on hand to deal with unexpected expenses.  [Unexpected Expenses]

The New Bad

It could be a time-consuming lemon.  There could be a systemic problem with that model or model year that lingers.  If an accident totals the new car, the insurance may not cover the entire cost of the car due to rapid depreciation.  That's why gap insurance exists.  The payoff period is 10.5 years when the average age of ownership is 6.5 years.  Most people are impulsive and lack frugality, so this may not be the case for the FIRE community.  However, the unpredictability of driving makes the used car more desirable since it can be replaced more readily with less financial loss.

The Used Bad

The car may also be a lemon and it will be less reliable.  Used cars are more likely to have major repairs or failures.  There may be no warranty or a costly warranty.  If there is no warranty, the lemon hurts in time, energy, and cost.  Subtle problems may be hidden since someone else has owned it.  The history is not known and the sounds, quirks, and smells might be a direct result of that person.  An inspection would be needed in this case to vouch for the car's quality.  Another used car will be needed in the 12 year time frame.  Time will be lost in searching, negotiating, and buying the next car.  

*The U.S. Department of Transportation states the average mileage per year for men is 16,500.

Starting College

Starting College

This article is about my finances through the first few years of college.  The summer leading up to college, I worked two jobs as a cashier at Target and Hollywood Video.  Working as a cashier at Target was my least favorite job for a variety of reasons.    [Working at Target]  Hollywood Video had a much more relaxed and like-minded atmosphere for the same pay ($6.25 / hour).  Plus, the free movie rentals were great.  Those part time jobs added about $100-$150 a week to my wallet.  The cash was much needed since the cost of college was and still is exorbitant.  [College Debt]

Heading into college, my bank account started at around $2,000.  A lot of my expenses were covered: tuition, room, board, books, supplies, and a school debit card.  So, stretching out $2,000 over the next nine months was not an issue.  At a burn rate of $100 a month, I sailed through freshman year without having to beg for money or work a part time job.  Cash at the end of freshman year: $1,000.

I deliberately failed to mention the cost of tuition.  In our culture, talking about money is generally frowned upon.  My parents promised to cover almost all the expenses related to schooling.  They valued education greatly and promoted college as a time to enjoy myself socially and intellectually.  They covered costs so that I could focus on school and enjoy myself.  At that time, I could not comprehend the cost of college.  Even with a partial scholarship, the amount was unfathomable at around $20,000 a year.  I could never make that working part time - or even full time at my summer jobs.  If I had worked part time, the remaining balance would've been rolled into a, still, massive loan. I might not have made it through school without their assistance.  I probably would have avoided school without their guidance.  Thanks, Mom and Dad!

Sophomore year was more difficult on the wallet.  My summer job at Pizza Hut paid better than the previous summer.  The waiter and delivery driver positions, while not being consistent, averaged around $10-12 an hour including tips.  I enjoyed my time there while padding my wallet to about $3,000.  Sophomore year was a touch more expensive than freshman year.  The difference in cost can be attributed to living away from the dorms, not using the standard meal plan, having a more solidified group of friends, and thoroughly enjoying myself.  $20,000 a year was well worth that experience.  I finished that year with less than $1,000 left in my account, which compares to the previous summer's start.  The expectations were a little bit different for this summer though.  The college I attended required a certain number of credits as an intern.  This particular summer, I found an internship in Florida and spent almost all my money getting to Florida.  Financially, this pivotal moment, was also well worth it.  My first full time job at ~$14/hr or ~$560/week, earned me about $6,000 that summer.

There was a realization in that first full-time internship.  A livable wage was attainable even before graduation.  The jobs were also fundamentally different than physical labor or minimum wage job types.  Contributing intellectually, instead of physically, kept me mentally, socially engaged, and driven to complete my degree.  I also had extra money for the first time in my life and had made a small step towards gaining my financial independence.  Junior year of college focused my energy and goals while simultaneously contributing to one of the peak points of my life.

College Debt

Due my early salary and the charity of my parents, college debt never loomed over my head.  The moment my first post-college paycheck posted, that debt disappeared.  A lot of my friends were not so fortunate.  Almost ten years later, their sizable debt still looms.  Graduating in a recession with a less profitable degree did not help their situation.  Let's talk about being saddled with college debt.

Most high school graduates have never managed finances.  It's not part of the typical high school curriculum.   They probably do not grasp the gravity of accepting $10,000 to $100,000 in college debt.  It could be the largest debt that they ever accrue all while being unaware of the consequences.  The scientific community believes that maturity occurs somewhere in the the mid 20s, a few years after graduating college.   In many ways, the lending community is feasting on the ill-prepared college bound masses with inflated tuition.

There are three distinct options when choosing colleges: in state public, out of state public, and private universities.  Their average yearly tuition and fees for 2017 are about $10,000; $25,000; and $34,000 respectively.  After four years, the total cost of education will be about $40,000; $100,000; and $136,000.  Let's assume that the whole amount is rolled into a loan.  Federal college loans do not accrue interest until six months after graduation.  Federal direct loans for undergrads have an interest rate of 3.76% and a repayment period of 10 years.  For each $10,000 of debt, $100 is due per month.  Taking the previously mentioned values for each college type, a graduate could be expected to pay $400; $1,000; or $1,360 per month.

Depending on the degree and an imminent career job, that payment may be reasonable.  An average graduate earns $4,200 pre-tax salary per month.  After tax, the take home pay is about $3,300 per month.  So, the loan repayments could range from 12% to 41% of post-tax salary.  That amount of money is akin to a mortgage payment.  This is the paradox of college graduates in their 20s.  For those who are above or near the average salary, the debt load is manageable in time.  For the rest, the college investment payoff horizon is a decade away.  Owning a home or buying a new car will not likely be in reach.  Certain degrees are, financially, not worth it.  With those degrees, half of college graduates don't find a job in their field.  The salary is also less than desired.  Humanities degrees are a poor investment.  The starting salary is about $30,000 a year with take home pay around $24,000 or $2,000 a month.  After housing, utilities, and college loan payments, the outlook is bleak.  Here's a graph of the comparison of a minimum wage worker, and two types of college graduates.

On the graph, a minimum wage high school graduate looks like a good short term option.  The minimum wager beats the earnings of the poor degree for about 12 years.  That's a long time for a payoff.  Most people are probably not thinking 12 years ahead.  Imagine being a young 20 something and envisioning your mid-30s self writing that final check.  That's not a sexy financial vision for the new graduate.  On the positive side, the STEM degree payoff is only 6 years and has a much larger income potential.  STEM (Science, Technology, Engineering, and Math) degrees start around $70,000.  They provide the needed return on investment to justify the expenses of college.

The STEM route is not for everyone.  Personally, I followed this route because it suited my personality.  I never weighed the financial pros and cons of different degrees.  Plotting life based purely on financial decisions seems logical, but life is not a mathematical equation.  People are complex and varied.  Let your drive lead you.  If another avenue appears, analyze it and determine what's best for you.  The key is to try to be aware of the possibilities and repercussions, so that the outcomes are more predictable.  I hope this article helps you along the way.  If you are wondering what other avenues are available to high school graduates, there's an article for that.  [College Alternatives - Coming Soon!]

The Little Saver

Grade School

I doubt that any one is financially inclined in grade school.  There might be some tendencies leading a child to become money-minded.  I'm certain I have at least one of those tendencies and I believe its' roots started in my youth.  When I was about 6, my parents started giving my sister and I a weekly allowance of $5.  ($5 roughly equates to $10 today.)  I think this was for covering the cost of school lunch "extras" and going places with friends.  From my parents' perspectives, this ballpark estimate seemed reasonable.  From my perspective, $5 was a lot of money and I wasn't going to let my parents know that I didn't need extra snacks at lunch... or that my friends parents were super nice and wouldn't let me pay at outings.  

All of that money went into secret, diversified hiding spots where it was left untouched.  Years later, when I finally solidly wanted something, my parents were astonished.  Cash started appearing left and right out of nooks in my room.  All told, my eight year old self squirreled away half a thousand dollars, equating to a Super Nintendo and SEGA Gensis in one shopping trip.  Throw in a few games for each system and I was happy, but broke.  I played each of those games thoroughly.  I still remember sitting there, flipping between channels and consoles for, literally, years.  

One game in particular, Uncharted Waters, had me sailing the world, building a fleet of ships, and investing in ports.  This game taught incentive in discovery and compound interest.  I'd switch to this game and check with the central bank.  "Not enough today", I'd say, waiting for enough compounding interest to buy the best fleet.  The game stayed on, in the background, night after night.  Finally, when the maximum amount of money accrued in the central bank, I spent it as feverishly as I had the real money.

The foundations of my young personality included some of the best financial tenets: Delayed Gratification, Investment, and Compound Interest.  If I had the capability to invest that money, I may have shaved years off of my future retirement.  My current, older self is, well, selfish.  Everyone looks at the best stocks of the past decade like AOL, Intel, or NVidia and wishes that they had the foresight to pick that stock.  In this instance, I'd rather have my youthful enjoyment and those pieces of my personality.  I was, and still am, happy.

As Simple as a Cup of Coffee

Reducing expenses in everyday life

There are an infinite ways to retire early.  The mathematical approach simply states that your sustained withdrawal income must be more than your expenses.  Since high dollar salaries may be difficult for some to attain, I'm going to focus on expenses, specifically, everyday expenses.  There are habitual elements to spending money that are discounted, not accounted for, when reviewing yearly expenses.  I often hear coworkers slurp up an aromatic, steaming coffee and echo the sentiment, "Gotta have my morning cup."  Something as simple as Starbucks coffee every work day can translate to a significant amount of money.

Let's say a coffee costs $5.  During the workweek, that coffee costs $25 and, throughout the year, the cost equates to about $1,250.  Investing that amount of money into the stock market would garner some impressive returns.  Compounding that sweet, sweet interest over 10 years at the average stock market yearly gain of 7% (historical average, inflation adjusted), results in an account balance of about $16,000.  That's a new economy car or, to use relative terms, ten and a half year's supply of coffee.  The extra ~125 cups of coffee after saving for 10 years may not be that convincing, but drinking a couple thousand cups of coffee in a day would be superhuman.  See, the numerical value obtained at the end of the investing period should be spread out over several years to reflect an accurate rate of consumption.

Withdrawing that coffee nest egg at a rate of one coffee per work day would yield far more cups of delicious coffee.  You could drink coffee for the next 25 years without spending any additional money.  After 25 years, your savings would be exhausted and you'd have to start saving again or increase your minimum expenses.  Now that 35 years has passed since the start of the experiment, you're probably retired, living on a fixed income, and deciding if the coffee is worth your long term financial security.  Maybe there's a different way to look at the situation.

What if you decided to do something a little differently at the ten year mark?  You're sitting on ~$16,000 with a potential lifetime of compounding interest.  If you were to skim 3% off of your thick wad of stock certificates, you'd be able to maintain the same balance of money indefinitely.  In this case, the 3% equates to ~$640 or half a year's supply of coffee.  If you're able to moderate your coffee consumption by half and drink a cup every other day, you could have coffee indefinitely.  That sounds like a nice, carefree approach.  There's no sharp readjustment period and you can leisurely drink coffee without worry .  I think I'll start saving right after I finish this cup.

[Compulsion to spend money]

[The 4% rule and FIRECalc]

[Is there a perfect ratio of saving and spending that relates to any purchase?]

401(k) Comparison

In the United States government, there's talk of reducing tax-deferred 401(k) contributions from $18,000 a year down to $2,400.  Let's take a look at the different outcomes when contributing the maximum in both cases.  I'll assume that a person's career is 40 or fewer years, the historical stock market return of 7% (including inflation) continues, and that a 4% withdrawal rate is acceptable for indefinite retirement income. [The 4% Rule and FIRE Calc]

Figure 1 - Comparing the Growth of Different 401(k) Contributions

After 30 years in the $18,000 a year case, one would be able to save approximately $1,700,000 and withdrawal $68,000 in retirement.  Considering that the median household income in the United States sits between $50,000 and $60,000, this saver's household would be able to live comfortably without question.

After 30 years in the $2,400 a year case, one would be able to save approximately $226,000 and withdrawal $9,000 in retirement.  This amount would cover almost 20% of the median household income.  While any amount in retirement would be a boon, an 8 times multiple in retirement is a huge disparity.  In terms of time, the higher limit contributor would generate $9,000 income in retirement after contributing for ten years, whereas the lower limit contributor would generate that amount in thirty years.

By changing the limit, the US government is attempting to reap taxes now instead of later.  This short term way of thinking damages younger Americans and does not provide a long term fix for the US budget.  As a 30-something, upper middle class worker, instituting the $2,400 limit at this time would be especially damaging.   I'd lose out on contributing the maximum in the prime of my career.  In the next few years, my 401(k) balance will reach the ten year amount of $250,000.  For others my age, many millennials haven't even started saving due to massive college debt.  [College Debt Story]

The disparity in 401(k) balances will become shockingly apparent over time.  To show the difference in account balances depending on age, here's a graph of the consequences of implementing this limit at the different times in one's career.

Figure 2 - The Effects of Reducing Contributions at Different Times

The disparity is massive early on in one's career and compounding interest plays a huge role here.  After 40 years, those who contributed the maximum $18,000 for only 5 years were able to accrue $1,500,000.  Compared to those who were capped at $2,400, $500,000 is meager.  The disparity starts to fade as the onset of the limit shifts further into one's career.  Those who are just starting to invest in a 401k should be outraged.

The effect on the stock market will probably be detrimental as well.  If 401(k) contributions are taxed at a 25% rate, one would expect that the capitalization of the 401(k) market would decline in a similar manner.  [Estimate of the amount of money 401(k) plans contribute to the markets.]


The older generations who came before me would have already socked away their retirement nest egg.  401k plans have been around since the late 1970s, so it is conceivable that someone has been able to invest for 40 years and has reached a comparable amount.




[Tax Deferred vs Non Taxable vs Wholly Taxable Accounts] [Breakdown of of classes in the united states]  [Distribution of Wealth] [Sources of retirement income]  [Chart of retirement contributions and outcomes - flat, front loaded, back loaded] [Minimum Required Distributions]

  [The Rich Get Richer]  [The 1%]

The 4% Rule and FIRECalc

The 4% rule is an overly simplistic rule of thumb for determining income in retirement.  If a soon to be retired person has $1,000,000 in the stock market, they should be able to withdrawal 4% or $40,000 almost indefinitely.  The rule stems from taking the historical yearly gains of the market from the 1920s to the 1970s and determining the maximum safe withdrawal that will never exhaust the base portfolio amount ($1,000,000 in this example). 

 Consider a person on the edge of retirement, they're plotting out the 4% rule based on the current value of their nest egg.  Assuming continued growth, they should be safe using the 4%.  However, due to people living longer and the volatility of the markets, the 4% rule starts to breakdown over multiple decades in retirement.  Any downturn in the early retirement years can make a large impact on future returns.  [Story about 401k Comparison]  In order to mitigate losing years, the early retirement crowd (Those choosing to retire in their 30s and 40s.)  adopt the 3% rule, using the extra 1% as a buffer for the unexpected downturn.

You may not trust either percentage.  This is where FIRECalc (Financially Independent, Retire Early Calculator) helps a ton.  Here's the link:  https://www.firecalc.com/.  FIRE Calc takes every previous historical stock market possibility and extrapolates it for the duration of retirement and your anticipated withdrawal rate.  This gives concrete odds of success.  If you're averse to risk, you'll want every scenario covered and FIRECalc covers every scenario.

Thanks You for Reading!
-Dan of MoneyGlider