by Transport (along with housing and food) is one of the big 3 when it comes to expenses that dominate the average person’s budget. For the majority of people their transport costs will fall into one of the following categories – personal transport (cars, motorbikes etc.) or public transport (buses, trains etc.). In this blog article we will be focusing on personal transport (in this case cars) and how an individual’s approach to buying cars can affect their progression to FI (Financial Independence) over the course of their adult life.
In this post we will follow the development of 5 different individuals who each have a different approach regarding car ownership. For the sake of this post these 5 people will each have identical incomes and budgets except for their car costs. These people will be:
- Person A – Leases a new car every 3 years
- Person B – Buys a new car every 3 years
- Person C – Buys a new car every 10 years
- Person D – Buys a 3 year old car every 3 years
- Person E – Buys a 10 year old used car every 10 years
To make it even for all parties we will use the same car which in this case will be a 2L diesel Volkswagen Golf. Persons B, C D & E will all pay road tax (included with lease) at £150 a year. The purchase price of each car will remain the same throughout the 40 years as inflation for all is being ignored (lease price also will not increase). Average maintenance costs is roughly £29 a month in the UK including servicing, MOT and repairs. As new cars do not need an MOT & are in warranty (3 years) I will only include 50% of these costs for new cars (£14.50). Person C will only have these savings in the first 3 years of car ownership. It will not be £0 because:
- Older cars are more likely to have serious problems but parts are cheaper, you do not need to use a manufacturer approved garage.
- Leased and new cars will be in warranty but have to be serviced in accordance with lease agreement which will be more expensive
- Insurance – New cars are slightly more expensive to insure (≈£20 a year).
Finally the difference in money between the 4 persons will be invested in an S&P 500 index fund. We will assume that this will give an inflation adjusted return of 7% a year (historical performance of the S&P 500). This means that whichever option is the most expensive will invest £0 into the fund. By ignoring inflation in both the price of the car and the S&P 500 return all of our final figures will be relative to today’s purchasing power.
*To simplify the calculations I will subtract the cost of road tax from Person A instead of adding it to all the others
Person A – Leases a brand new car every 3 years
To find a realistic price for leasing a brand new VW Golf over 3 years I used a comparison site (www.autoleasecompare.com) to ensure the price being paid was reasonable. From this search I found that the expected price person A would pay is £10,585 over the 3 years. This would be split up into the following:
- £2641.63 as an initial upfront payment
- £220.14 per month for the remaining 35 months.
These 3 years were then repeated for 40 years (with the last lone year being an average cost of the 3 year plan).
Person B – Buys a brand new car every 3 years
To calculate the costs to purchase a brand new VW Gold 2L Diesel I used www.Autotrader.com which is the largest online car dealer in the UK. From here i searched for a brand new Golf with the same specs as the one leased and took an average price of:
£25,29. To accurately calculate the costs for person B they will spend £25,291 every three years but after the initial purchase I will subtract the costs of a 3 year old Golf (£14,856) to account for the money person B would recoup when selling their old car.
- £25,291 – £14,856 = £10,435 every 3 years (after initial purchase)
Person C – Buys a brand new car every 10 years
I have used the exact same principles as person B to calculate costs for this person however instead of subtracting the costs of a 3 year old Golf I have subtracted the costs of a 10 year old Golf (£4,547). Autotrader has been used for all car prices to keep consistency throughout while giving me access to the biggest range of data (it has the most cars listed).
- £25,291 – £4,547 = £20,744 every 10 years (after initial purchase)
Person D – Buys a 3 year old car every 3 years
To determine a fair price for a 3 year old Golf I took the average price of 4 Golfs which were of a similar spec (and had reasonable mileage) which worked out to be £14,856. In keeping I will subtract the price of a 6 year old Golf (average of 4 similar cars for sale) to give our real price.
- £14,856 – £9,176 = £5680 every 3 years (after initial purchase)
Person E – Buys a 10 year old car every 10 years
Finally our last case study and almost certainly the saver of the most money. This person will buy a 10 year old Golf (average of 4 prices) for £4,547 and sell his 20 year old golf for £1500.
- £4,547 – £1500 = £3,047
My Prediction
I think it’s pretty obvious which option will run out as being the cheapest over 40 years and anyone who isn’t expecting Person E to take up this mantle may want to read a few more posts in this blog. However I was torn between whether Person A or B will be the most expensive in the long run.
My guess is that Person A who is leasing the car over 3 years will end up paying the most. My thought process is that by not having the hassle of selling the car afterwards and having less responsibilities as you are not the owner you will therefore be paying a premium for these benefits. My expectation from most expensive to cheapest; A, B, C, D, E.
Take a minute to make your guess in the comment section and read on to see if you were correct.
The Results
| Lease | Buy New (3 Year) | Buy New (10 Year) | Buy 3 Year Old (3 Years) | Buy 10 Year (10 Years) | |
| Person A | Person B | Person C | Person D | Person E | |
| Year 1 | £5,152 | £28,202 | £25,291 | £15,036 | £4,727 |
| Year 2 | £7,644 | £15,216 | £4,907 | ||
| Year 3 | £10,135 | £15,396 | £5,087 | ||
| Year 4 | £15,287 | £38,637 | £25,471 | £21,257 | £5,267 |
| Year 5 | £17,779 | £25,651 | £21,437 | £5,447 | |
| Year 6 | £20,271 | £25,831 | £21,617 | £5,627 | |
| Year 7 | £25,423 | £49,072 | £26,011 | £27,477 | £5,807 |
| Year 8 | £27,914 | £26,191 | £27,657 | £5,987 | |
| Year 9 | £30,406 | £26,371 | £27,837 | £6,167 | |
| Year 10 | £35,558 | £59,506 | £26,551 | £33,698 | £6,347 |
| Year 11 | £38,050 | £47,295 | £33,878 | £9,574 | |
| Year 12 | £40,541 | £34,058 | £9,754 | ||
| Year 13 | £45,693 | £69,941 | £39,918 | £9,934 | |
| Year 14 | £48,185 | £47,475 | £40,098 | £10,114 | |
| Year 15 | £50,677 | £47,655 | £40,278 | £10,294 | |
| Year 16 | £55,829 | £80,376 | £47,835 | £46,139 | £10,474 |
| Year 17 | £58,320 | £48,015 | £46,319 | £10,654 | |
| Year 18 | £60,812 | £48,195 | £46,499 | £10,834 | |
| Year 19 | £65,964 | £90,811 | £48,375 | £52,359 | £11,014 |
| Year 20 | £68,456 | £48,375 | £52,539 | £14,240 | |
| Year 21 | £70,947 | £69,120 | £52,719 | £14,420 | |
| Year 22 | £76,099 | £101,245 | £58,580 | £14,600 | |
| Year 23 | £78,591 | £58,760 | £14,780 | ||
| Year 24 | £81,083 | £69,300 | £58,940 | £14,960 | |
| Year 25 | £86,235 | £111,680 | £69,480 | £64,800 | £15,140 |
| Year 26 | £88,726 | £69,660 | £64,980 | £15,320 | |
| Year 27 | £91,218 | £69,840 | £65,160 | £15,500 | |
| Year 28 | £96,370 | £122,115 | £70,020 | £71,021 | £15,680 |
| Year 29 | £98,862 | £70,200 | £71,201 | £15,860 | |
| Year 30 | £101,353 | £70,380 | £71,381 | £16,040 | |
| Year 31 | £106,505 | £132,550 | £91,124 | £77,241 | £19,267 |
| Year 32 | £108,997 | £77,421 | £19,447 | ||
| Year 33 | £111,489 | £77,601 | £19,627 | ||
| Year 34 | £116,641 | £142,984 | £91,304 | £83,462 | £19,807 |
| Year 35 | £119,132 | £91,484 | £83,642 | £19,987 | |
| Year 36 | £121,624 | £91,664 | £83,822 | £20,167 | |
| Year 37 | £126,776 | £153,419 | £91,844 | £89,682 | £20,347 |
| Year 38 | £129,268 | £92,024 | £89,862 | £20,527 | |
| Year 39 | £131,759 | £92,204 | £90,042 | £20,707 | |
| Year 40 | £135,287 | £138,563 | £87,657 | £81,047 | £19,387 |
So here are our results over the 40 year time period and a little surprise for myself. Although the costs between leasing and buying new over the same time frame (every 3 years) are similar it turns out that according to the data I used, leasing a brand new Golf is cheaper than buying new. It is possible that I was either getting an above average deal on either the lease or a bad deal on the new car and with this in mind I think you can safely assume that if you plan to lease or buy for only 3 years the price is very similar. As expected and obvious the older the car the cheaper the costs become for the owner. Some key points to note are:
- It is cheaper to buy a 3 year old car every every 3 years than it is to buy brand new and use it for 10 years
- A large amount of the costs of buying a brand new car is the tax associated with it (20%)
- If you are a business it make make more sense to buy brand new if you are a VAT registered business (and avoid the 20% tax)
- Buying a 3 year old car and using it for 3 years is almost half the price of buying a new car and using it for 3 years
- Buying a 10 year old car and using it for as long as possible really saves a huge amount of money if you are willing to live without the luxury of a newer model.
The above table gives us a great insight into the costs behind car purchases over a long period of time but of course it is not as simple as saying everyone should buy an old car and use it forever. This may be an attractive option for someone who rarely drives, only makes short trips and has no real interest in cars. However for someone who regularly spends hours in their vehicle for work or commuting this is certainly going to be less desirable. Alongside this although they may be cheaper to fix, older cars may break down more often and this table does not take into account the annoyance and frustrations of those situations.
Overall this table has reinforced my opinion that buying new is a fool’s game and the real savings are found in the secondhand market. Whether you choose to buy a newer or older model you can be comfortable knowing you’ve saved a decent chunk of money. For me…. I’ll be sticking with my 12 year old, reliable Fiesta and investing the difference saved.
Investing the Difference
This for me is the real kicker of this post. As someone who is invested in the stock market I see any money saved as another opportunity to fund my stock accounts whilst the pandemic is preventing me from following my passion of travelling. So by using the figures in the table lets find out what Persons A, C, D & E could really have saved by investing the difference that they saved from their more financially responsible decision… Sorry Person B but you’re our benchmark at 0. The below table shows us what they each saved:
Now what we will do is plug the monthly investment into a compound interest calculator and let it work its magic over 40 years. The calculator that I use (free for everyone) is https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php
Once knowing the yearly figures of each person’s investment I could record these into a table before creating a graph to represent this. Both the graph and table are shown below:
| Year | Person ALease | Person BBuy New(3 Year) | Person CBuy New(10 Year) | Person DBuy 3 Year(3 Year) | Person EBuy 10 Year(10 Year) |
| 1 | £87 | £0 | £1,314 | £1,487 | £3,073 |
| 2 | £180 | £0 | £2,722 | £3,082 | £6,369 |
| 3 | £280 | £0 | £4,233 | £4,792 | £9,903 |
| 4 | £386 | £0 | £5,852 | £6,625 | £13,692 |
| 5 | £501 | £0 | £7,589 | £8,591 | £17,755 |
| 6 | £624 | £0 | £9,451 | £10,699 | £22,112 |
| 7 | £756 | £0 | £11,448 | £12,960 | £26,784 |
| 8 | £897 | £0 | £13,589 | £15,384 | £31,793 |
| 9 | £1,049 | £0 | £15,885 | £17,983 | £37,165 |
| 10 | £1,212 | £0 | £18,347 | £20,770 | £42,925 |
| 11 | £1,386 | £0 | £20,987 | £23,759 | £49,101 |
| 12 | £1,573 | £0 | £23,818 | £26,963 | £55,724 |
| 13 | £1,773 | £0 | £26,853 | £30,400 | £62,826 |
| 14 | £1,988 | £0 | £30,108 | £34,084 | £70,441 |
| 15 | £2,219 | £0 | £33,598 | £38,035 | £78,607 |
| 16 | £2,466 | £0 | £37,340 | £42,272 | £87,362 |
| 17 | £2,731 | £0 | £41,353 | £46,815 | £96,751 |
| 18 | £3,015 | £0 | £45,656 | £51,687 | £106,819 |
| 19 | £3,320 | £0 | £50,271 | £56,910 | £117,614 |
| 20 | £3,646 | £0 | £55,218 | £62,511 | £129,190 |
| 21 | £3,997 | £0 | £60,524 | £68,517 | £141,602 |
| 22 | £4,373 | £0 | £66,212 | £74,957 | £154,912 |
| 23 | £4,775 | £0 | £72,313 | £81,863 | £169,184 |
| 24 | £5,207 | £0 | £78,854 | £89,268 | £184,488 |
| 25 | £5,671 | £0 | £85,868 | £97,209 | £200,898 |
| 26 | £6,167 | £0 | £93,389 | £105,723 | £218,494 |
| 27 | £6,700 | £0 | £101,453 | £114,853 | £237,362 |
| 28 | £7,271 | £0 | £110,101 | £124,643 | £257,595 |
| 29 | £7,883 | £0 | £119,374 | £135,140 | £279,290 |
| 30 | £8,540 | £0 | £129,317 | £146,397 | £302,553 |
| 31 | £9,244 | £0 | £139,979 | £158,467 | £327,498 |
| 32 | £9,999 | £0 | £151,412 | £171,409 | £354,246 |
| 33 | £10,808 | £0 | £163,671 | £185,288 | £382,928 |
| 34 | £11,677 | £0 | £176,816 | £200,169 | £413,683 |
| 35 | £12,607 | £0 | £190,912 | £216,127 | £446,662 |
| 36 | £13,606 | £0 | £206,026 | £233,237 | £482,024 |
| 37 | £14,676 | £0 | £222,234 | £251,585 | £519,943 |
| 38 | £15,823 | £0 | £239,613 | £271,260 | £560,603 |
| 39 | £17,054 | £0 | £258,248 | £292,356 | £604,203 |
| 40 | £18,374 | £0 | £278,230 | £314,978 | £650,954 |
So this is where this blog post begins to get fascinating as we look at the true savings that were made by each member of our case study if they had chosen to invest the difference in an index fund:
- Person A has an account balance of £18,374
- Person B has an account balance of 0… sorry.
- Person C has an account balance of £278,230
- Person D has an account balance of £314,978
- Person E has an account balance of £650,954
Take some time to look at the real value that can be generated by simply choosing to drive an older car. It’s a life changing amount of money for most people. After 40 years of making a small sacrifice you now have hundreds of thousands of pounds you can choose to spend however you wish. Maybe a couple of exotic holidays every year, possibly your dream house, possibly you leave your job a few years earlier or perhaps you just want to leave something behind for your beloved children. The true freedom comes from having these choices available. For reference the average pension pot in the UK is just over £60,000, less than 10% of Person E.
Would you really rather drive a new car and rely on the state pension?
Finally out of interest I was wondering what you would need to spend on a car each month that you could have invested over 40 years to become 1 million pounds. It’s £385. Anyone paying that or more just for a car a month… is it worth it?
bookmarked!!, I like your blog!
Thank you, it’s appreciated 🙂