Opportunity Costs and Cars

opportunity cost

A recent news article suggests that more Canadian’s are buying luxury cars these days than ever before and that many of them may find themselves in “over their heads.”   The article suggests that part of the reason for this is what they call the Wealth Effect, people thinking they are wealthier than they really are.  No argument there but I also think that sometimes people lose sight of all the opportunity costs that come with an expensive car. In other words, what could you do with the money that could be saved by buying a more modest car rather than a luxury one?

According to investopedia opportunity cost is defined as the benefit that a person could have received, but gave up, to take another course of action.

For example, let’s say Buddy is in the market for a new car and he is having trouble deciding between a shiny new BMW sedan and a used Hyundai Elantra. (Yes, I know that’s a big leap but I’m trying to make a point here.) The luxury sedan will cost $75,000 and the Hyundai can be had for $15,000.  If Buddy chooses the BMW, the opportunity cost of that decision appears to be $60,000.

What do you think Buddy could do with $60,000 instead of spending it on a cool car?

Ah, if only it were that simple. Remember: those prices do not include taxes. Assuming Buddy lives in Ontario, he will need to add the 13% Harmonized Sales Tax (HST) to both prices before he can determine how much each car will end up costing. Taxes in, the Bimmer will cost $84,750 and the Elantra will now be $16,950. That’s right, the BMW will cost $7,800 more just for the taxes alone. (Want to pay less taxes? Spend less money!) The opportunity cost of buying the BMW will now be $67,800.

What do you think Buddy could do with $67,800 instead of blowing it on a cool car?

Ah, if only it were that simple. Chances are that Buddy doesn’t have the money needed to pay for either car just sitting around in his bank account. It’s more likely that he will need to borrow the money and borrowing means paying some interest. The dumb purchase (I’m through being subtle) could now cost $93,683 while the smart decision would cost $18,734.  Revised opportunity cost? $74,949.

What do you think Buddy could do with $74,949 instead of completely wasting it on a “cool” car?

I could go on. You know I could. Buddy could decide to spread the BMW’s loan out longer, which would just end up costing him more. We should add freight, levies, and PDI (pre-delivery inspection) to the price of the Bavarian Money Waste. Which car do you think would cost more to insure? Which car do you think would cost more to repair? But I think the point is made.

The cost of a car is more than just the price. Taxes, fees, insurance, maintenance, repair, borrowing costs, and more—all of these things play a part in the total cost of a car and they always cost more on an expensive “prestige” ride than they do on a humbler model.

Remember, a car’s purpose should be to get you and your stuff from point a to point b safely and reliably.  And you don’t need a prestige model to do that.

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