Opportunity cost of newer cars

Legacy_user

There are budget new cars that on paper look cheaper to run than continuously replacing bangers (which includes higher rate of road tax and cost of transferring insurance)

However, the reason I put this in savings& investments -
- the opportunity cost of the cash tied up in the car is significant

Suppose someone was investing and averaging 9% a year - that's a yearly cost of £90 per £1000

If the value difference between a new car and a banger was say £7000 (£7500 new £500 old) - that's £630 a year!!!

It gets bigger with more expensive cars - say it was a 20k car Vs a £500 banger - 19.5*£90= £1755 per year!

So even if bangers didn't last the whole mot, they're worth it
And not taking finance too should mean you can stoozie more to free up your emergency pot to invest

jamei305

I tend to buy newish cars with cash and keep them for 3 to 4 years. I use the eventual sale price and various other costs to calculate a figure for ownership cost per month. This helps me to figure out when to sell. Usually it comes down to new tyres being needed soon. However I hadn't considered the opportunity cost, which is another thing to throw in there so thanks for that.

missile

Banger economics has been well publicised and discussed. For those on a tight budget, it is one way to own a vehicle. Another option is car sharing. Another is public transport, supplemented with a hire car for those (rare?)occasions when one really must have a car. There are some very attractive PCP deals with manufacturer incentives.

Good luck on achieving a reliable £500 car and a risk free 9% return. :rotfl:

System

Nobody said risk free, just average return
I'm hoping £500 just for a car with most of 1 years mot, then scrap if fails. Sone cars won't last that long of course, but still with such a high opportunity cost you can afford a few bangers

I think investing brings something new to bangernomics, suddenly the opportunity cost is much more severe

bowlhead99

MatthewAinsworth wrote: »

If the value difference between a new car and a banger was say £7000 (£7500 new £500 old) - that's £630 a year!!!

So even if bangers didn't last the whole mot, they're worth it

If the banger doesn't even 'last the whole MOT' as you suggest, that's £500 replacement cost to get another one plus whatever maintenance you did before it became beyond economic repair. And you have spent the year driving around in a crappy car. And you need to take time out of your life to replace the car, perhaps on an urgent basis, as well as sort the insurance, which to many people will be worth £100++ if they value their leisure time.

The last car I bought for £7500 lasted me 14 years and got me £2000 back at the end; having been about five years old when I bought it. Whereas the last car I bought for £1200something in my student days was sold for £800something after a year or so as it had more problems than I wanted to deal with. The depreciation per year was about the same at £350-400 ish. You are right, one of them had me more money 'tied up' in the asset (whether funded by cash or debt) but that extra money tied up was the difference between driving an old banger and driving a prettier and more reliable and more comfortable and higher performance enjoyable car.
Some people do not value nice cars at all, it is a tool to get from A to B and it can be replaced by the bus to work or the shops and if they want to go to the other end of the country they can take the train, not go at all, or rent something. And they are only working 9-5 weekdays so they have evenings and weekends to sort out repairs or buying a new one or whatever. For those people, the opportunity cost of having £7,500 or £20,000 tied up in a more reliable car is madness, when the £20k might be a year's household income or even the £7500 might be several years' discretionary spending.

So, for those people it can make sense to save or invest the money instead and live hand-to-mouth or just-in-time replacement of an old banger.

And even for others who don't have money worries, they can then look at the world of investment and see that x% potential stock market return (or y% saved finance cost) to grow their wealth instead.

But 9% is a relatively ambitious long term rate for stockmarket investing (say 20 years plus). Not something you would set as a benchmark expectation over a 'few years' of car ownership. The car ownership period might be, say, 1 year on the banger or 5 years on the non-banger that you want to replace with one of similar cost once 50,000 miles has made it tattier and more out of date. Over that relatively short period as part of a bigger economic cycle, the market that produces 9% long term might have lost 50%.

So, you'd have to have the 'invest rather than have a nice car' as a long term project with a twenty year planning horizon to get the 9%. And for a lot of people, twenty years ahead is a long way to commit, because your life and preferences change. In my university days, I bought the aforementioned £1200 car as a nice little runabout and it served its purpose. Couple of decades later, bangernomics isn't something for which I have the time nor the inclination.

My last car cost £30k+ not £500 as I wanted a high performance luxury executive saloon and not something old, noisy, tatty and unsafe. As a MSE, I did of course get a three year old one which was half the price of buying new, as I don't have money to burn on that first 50% depreciation on a high list price, and didn't want to have to finance it to get something marginally better. But you'll find most people have different personal circumstances and preferences and therefore will make whatever argument they like about the opportunity cost of one thing vs another, and we're all different.

System

I suppose if you judge the opportunity cost to be worth it - if that value is a high proportion or not, and how urgently people want to save - things like having a dB pension or enjoyable job do somewhat quash the desire for early retirement - I'll do up the house and take a couple of holidays before I consider retiring. It is hard to ever spend though when you're so used to saving and getting by - I have no appreciation for posh food for example

colesy

I do 30,000 miles per annum and generally run my cars for 4 years. I appreciate that the loss in value given that sort of mileage will be very high, but it's essential for my business. For the last 30 years I've usually bought low mileage ex-demonstrators. The dealership takes the immediate new car depreciation hit and, as an ex-demonstrator, it's usually got a high end spec. The one exception was a pre-registered vehicle with delivery mileage that I got for £10,000 below list price - a one off excellent deal, but they're out there if you look for them.

username12345678

I've got a salary sacrifice lease deal that is going back when the contract is up due to the changes in tax liabilities.

My wife has tested the 'bangernomic' theory to destruction and over 6 cars and 13 years with an average price of around £750-£1000.

Very little hassle and saved a fortune!

parking_question_chap

bowlhead99 wrote: »

My last car cost £30k+ not £500 as I wanted a high performance luxury executive saloon and not something old, noisy, tatty and unsafe.

My car is well over ten year old, quiet, tidy and safe.

Though I guess some people like to pay over the odds for image.

Glen_Clark

parking_question_chap wrote: »

My car is well over ten year old, quiet, tidy and safe.

My Rover Maestro was 18 years old, quiet tidy and safe when I sold it 8 years ago for £400 (bought a motorhome as I retired. I can look online and see the old Maestro still taxed and MOTd today https://www.gov.uk/check-vehicle-tax ) But that was because I had it from new and looked after it. Which is the exception rather than the rule. If you wanted to buy one in that price range now you would probably find them all 'noisy, tatty and unsafe'.as bowlhead says

username12345678

It's a relative thing much like any other discretionary purchase.

'Every Pound a Hostage' would be on my family crest but I get why others would value more than just utility in a car if they can afford it.