Buying New vs Used Car: The Hidden Costs That Keep People from Retiring Early
The Hidden Cost of a New Car
A brand-new car might smell amazing, but that scent comes at a steep price. As soon as you drive it off the lot, your car loses about 10% of its value instantly.
Within the first year, depreciation hits 20%, and after five years, the car is worth only about 40% of its original price. If you buy a $40,000 car today, it will be worth just $16,000 in five years.
BUT this rapid loss in value creates a golden opportunity for those willing to buy secondhand cars.
A 3 to 7-year-old car can still be in excellent condition while costing significantly less. I’ll talk some of the details behind that.
Millionaire‘s Mindset About Buying Cars
In The Millionaire Mind by Thomas Stanley, research shows that wealthy individuals prioritise value and long-term cost-effectiveness over flashy status symbols. Rich people tend to keep their cars longer because they view them as investments, focusing on maximizing their lifespan and getting the most out of them. They also consider how the money saved can be better invested elsewhere. Many millionaires choose to buy cars with cash rather than financing an expensive new vehicle.
I will never forget the time I lived in Sydney, right on the harbour, in a beautiful apartment. My neighbour was a gynaecologist who owned a home likely worth $30–40 million today, as it was already worth several million 20 years ago. Yet, every day, he drove to work in a beat-up old Toyota. I remember thinking, Wow, there’s something to this. Why isn’t he driving a Porsche?
It made me realize there’s truth to what The Millionaire Mind discusses about wealthy individuals—they don’t always flaunt their wealth.
The Financial Breakdown: New vs. Used Cars
Let’s compare three different car buyers:
- Mike: Buys a new $50,000 car with a loan interest rate of 7%.
- Steve: Buys a $20,000 used car with a loan interest rate of 7%.
- James: Buys a $20,000 used car with cash.
Over the life of their loans which 5 and half years on average, here’s what they end up paying:
- Mike: $59,800 approximately
- Steve: $35,000 approximately
- James: $20,000 (paid upfront)
Assuming James invested the money saved from buying a new car, James could turn his savings into $1.8 million by retirement 40 years after with a 10% return interest.
The True Cost Over a Lifetime
This concept is pretty mind-blowing, but it gets even crazier when you consider how often people replace their cars. Many buy their first car in their 20s and then replace it every 10 years. Let’s break down what happens in that scenario.
To be realistic, I’ve based my calculations on a 7% return rather than the S&P 500’s historical average of 10%. The reason? I wanted to account for inflation, which I’ve estimated at 3%, so we’re looking at savings in today’s dollars.
Now, let’s say someone buys their first car at age 20. By making a smarter financial choice, they could save $596,000 over time. Then, as life progresses and they meet a significant other, they start buying two cars instead of one. At age 30, they purchase two cars and invest their savings. By age 40, they do the same—replacing their cars every decade while investing the money saved.
The reason I factor in a 10-year investment period is that the savings accumulate over that time. Even with this conservative 7% return and a 10-year buffer, the final number is still impressive. If you were to invest the savings immediately at 10%, the results would be even more staggering – easily reaching several million dollars.
Honestly, when you run the numbers at 10% with immediate reinvestment, the figures start looking almost unreal. But even with a conservative estimate, the amount saved and invested over a lifetime far exceeds what most people have for retirement.
How a Used Car Can Make You Feel Richer
Many people crave the prestige of a new car, but there’s a hidden joy in owning a used car:
- You can perform basic maintenance yourself, like oil changes and wiper replacements, saving money and increasing your connection with the car.
- You can customize it—upgrade the stereo, add accessories, and truly make it your own.
- Less financial stress—without a hefty car loan, you can allocate money to investments or experiences that improve your quality of life.
I want to share something with you called the IKEA Effect. It’s the idea that when you build or work on something yourself, it holds more meaning and value to you. This applies to cars as well—even if you have no technical skills or interest in car maintenance.
I’d encourage you to start small. Try simple tasks like checking the oil or changing the wiper blades. These little efforts create a sense of investment in your car, making you appreciate it more. I guarantee you’ll feel a greater sense of joy when you drive it.
And it doesn’t stop there – you can also personalize your car with accessories, making it feel even more like your own.
How Much Should You Spend on a Car?
Follow these financial guidelines:
- The 25% Rule: The total cost of owning a car (purchase, insurance, maintenance) should not exceed 25% of your annual income.
- The 15% Rule: If financing is unavoidable, your monthly car payment should not exceed 15% of your monthly income.
Ideally, you should buy a car with cash, even if that means choosing an older model.
Finding the Best Used Car
When shopping for a used car:
- Check the vehicle history report (CARFAX, MOT, etc.) to ensure it hasn’t been in major accidents.
- Research common issues for the model you’re considering.
- Perform a thorough inspection or get a pre-purchase inspection from a mechanic.
- Buy a model known for longevity—millionaires prefer cars that last a long time.
Final Thoughts
Buying a new car is a financial trap that keeps people from building real wealth. Instead, choosing a high-quality used car, paying in cash, and investing the savings can lead to financial security—and you’ll still enjoy a reliable, stylish ride. By shifting your mindset, you’ll not only drive a great car but also feel richer every time you get behind the wheel.
