Last week I had to have my winter tires changed back to summer tires, and an oil change. At the same time, since I know it’s cheaper to maintain an automobile than to replace it, I asked to have the car inspected to uncover any pressing issues.
Of course, at the end of the day I forked over my credit card to pay a $1,200 bill.
To me, that’s an entire investment in a stock. With a 5% dividend, you’d earn $60 a year with that money, or $5 a month.
I’m sure there’s something you spend $5 a month on; well, that cost could have disappeared from your life.
This obviously got me thinking, “Can I really retire earlier by getting rid of my car? How much earlier can I retire?”
Obvious Monthly Car Costs
When glancing at or looking through your monthly statements, you’re aware of how much you pay for
- auto insurance
- car payment (if you have one; I don’t)
That’s three bills you have to account for to cover with your dividend income. Those are recurring monthly costs. Let’s just look at how much I pay in these categories for my car; this will exclude a car payment so it’s most likely far worse for the majority of people.
So… that’s all you need to cover with your dividend income before your financially independent of your car, right? Obviously… if you read the header to this article you’re already aware that’s incorrect.
Ambiguous Yearly Car Costs
Let’s look at some other costs that don’t recur every month which we need to remember to add to our monthly budgets to be covered through passive income.
- Required maintenance (tires, oil)
- Potential repairs / wear-and-tear
These are all charges that come yearly, but I’m certain many budgeters and investors forget about them when constructing their monthly budget. I don’t know the prices of these items all throughout the country or the U.S.A, so I’ll use my hometown prices.
In Quebec, renewing your license costs 157.33$ on a yearly basis, so this accounts for 13.11$ per month.
In Quebec, renewing your registration costs 262.82$ on a yearly basis, so this accounts for 21.90$ per month.
This is the price we’re forced to pay if we want to continue using our cars to get us around. I also know these costs will most likely never go down, and only up.
Put All Your Car Costs Together in One Place
Now, to compile all of my automobile costs over a year and averaged per month, it costs 2,857$ a year, or 238$ a month, to be driving.
Please understand that below are my personal costs, but this can vary pretty widely depending on the person. Many people have car payments to make, and many people may have less or more maintenance and repair costs depending on what they’re driving.
How Much do we Need to Invest to Cover our Total Car Costs?
Let’s look at what kind of investment we require to cover these costs.
With a yield of 3%, we’d require a portfolio value of $95,233.
With a yield of 3.5%, we’d require a portfolio value of $81,628.
With a yield of 4%, we’d require a portfolio value of $71,425.
So there you have it. Obviously the higher the yield the easier it is to be paying bills through dividends, but it also has the potential to reduce the dividend safety – depending on a number of factors, like the payout ratio.
Those numbers are pretty big – and imagine you didn’t have to save up that much more to passively cover your auto costs? I understand for some it may not be possible now or in the future, but it is important to at least take a look at what it’s costing you.
How Much More Quickly Can I Retire?
At an investment plan including $18,000 a year – it would take over 5 years to save up that money plainly to cover these costs at a safe 3% yield. This does not take into account any car payments. It would most likely be harder, and as a result shave off far more than 5 years of saving up to be considered financially independent in your auto budget. I think, in earnest, it could shave off a healthy 5 to 10+ years, overall, depending on your situation. Hence, I’m being conservative in saying you can retire 5 years earlier by getting rid of your car.
Imagine you have 5 more years of your life to spend exactly as you see fit? Sounds pretty good to me. Of course, and as I said, it can be difficult or near impossible for many – but a lot of people are able to pull it off!
Is There an Alternative to Driving?
I’ve recently been very interested in getting around by bike, and hopefully I can make progress with that in the summer. However, in Canada, half the year is immersed in snow – so I would only be able to bike around for the other half. Still, public transport would be great – if it were possible to get anywhere close to my job in less than an hour. We’ll look more into biking later on in our lessons.
For the time being, I plan to make trips to friends’ houses and the gym by bike since they are all within 20 to 30 minutes biking distance. It would be great for my wallet (less gas costs), good for the condition of my car (less wear & tear), good for my health (increased heart condition). Sounds pretty good to me. Of course, I need to do some work on the bike I use as it’s been a few years since it’s been put to work.
Another option is to take public transit if possible. Of course, this cost has to be analyzed since if you already have a car and are paying gas, sometimes taking public transit might actually not make sense.
This has been interesting me lately as I attempt to become more frugal and live a more natural life. I find that I’ve gotten to a place where investing has become a nice habit that I have less trouble keeping up with and have more time now to branch out into other things in addition to my interest in stocks.
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Thank you for reading.
What’s your experience with your car and it’s associated costs? Have you made any attempts at reducing costs or have anything in mind?