We Americans love our cars. Especially shiny, brand new ones. And when it comes to calculating the cost to own, operate, and maintain our cars, there are several cost components to consider: fuel, insurance, maintenance/repairs, taxes, car loan interest – surely one of these items is the largest cost component of car ownership, right? Nope!

Would you believe the single largest cost component of car ownership is actually depreciation? That’s right, it’s the invisible cost that is difficult to recognize because unlike every other cost, you don’t write a check or swipe a card to pay for it. But depreciation is real and is something all car buyers should pay attention to.

Source: ScienceDirect

Source: ScienceDirect

In their first year alone, new cars lose around 20% to 30% of their value (according to Black Book). That means if you spend $50,000 on a new car, you will lose $10,000-$15,000 in depreciation in the first year! Over the first 5 years of a new car’s life, the typical car loses 60% of its value (according to Carfax). Using that same example, a $50,000 new car today is likely to be worth $20,000 in 5 years. That is $30,000 lost to depreciation in over just 5 years. Ouch!

Not to worry, this cost can be avoided. All you need to do is consider a gently used car. Let someone else take the initial depreciation hit over the first several years of the car’s life and consider owning a car when the depreciation rate isn’t as steep.

For most of us, cars are a necessary part of our daily lives and we will likely be driving (and buying!) cars for many decades over the course of our lives. So we should understand the total cost of car ownership before we buy. Believe it or not, the way we approach car buying throughout our lives can have a significant impact on our ability to achieve our financial goals like saving for retirement, owning a home, paying for kids’ college, etc. Need help planning for your financial goas? We can help! Contact us (512-649-2383 team@truefg.com) or book an initial consult with us here.