How to Make $1M Dollars With Critical Thinking.
The start of many subtle ways your life is affected by compounding returns and opportunity cost.
The world is a funny place.
Everyone runs into an early grave chasing money that just seems to vanish without you even having the joy of spending.
One place it vanishes often is our cars.
We say we can’t live without them, but for many of us we know that isn’t true. What we are covering today is the total cost of purchase and operations of the average car for the average Canadian over their working life and its associated opportunity cost.
Before that we need two concepts we’ve referred to several times on YDFM - compounding returns and opportunity cost.
Compounding Returns?
Some assets (stocks etc.) return you money every year when you buy them (dividends) and these can be reinvested to have a larger return the following year. In YDFM we refer to this in a financial context but it applies the same to exercise, education, or even productivity - all of which get easier and faster over time.
Opportunity Cost?
Those value of what you could have done with spent time or money (but didn’t because you spent it one something else). For example, the opportunity cost of taking summer classes would be less time and money to spend outside.
What is the True Cost of Car Ownership?
Cost of depreciation over 6 year term
Cost of interest over a 6 year term (assumed)
Cost of gas (assumed)
Cost of insurance (averaged over the Toronto population)
Cost of maintenance (averaged, including new tires)
Since the Ford 150 has been the best selling car overall in Canada for 15 years we will take that as a baseline. How some of these costs are calculated is out of scope but for the totals please see the following spreadsheet. You will notice the cost of purchase is not included because the Cost of Depreciation assumes that the vehicle will be resold after the financing term.
Total Cost of Operation for the Most Popular Ford F150 ($68,400 MSRP)
These are relatively conservative estimates of the yearly operating costs. These are averages of averages (not completely accurate in other words). How much it costs to run a vehicle is entirely dependent on who is driving the vehicle, where, and for what purpose. It is however close enough for demonstration purposes.
And What Exactly Does this Have to Do With Me Making $1M?
I’ll show you! Remember compounding returns from earlier? Please see the following graph below.
If our average Canadian lived in Toronto and were persuaded to take public transit everywhere they would have a maximum total monthly expense of $156 (the cost of a TTC monthly pass, the most expensive in North America). They would have $533.61 CAD left over that could go elsewhere.
There are now two options. First, our average Canadian could make the average choice to use the savings to finance consumable goods (clothing, fancy restaurants, things called “Pro Max”), or buy a bigger house. Second, they could choose to invest it in one of the passive income vehicles we talk about at this link; preferably with a yearly return of 6-7%.
If our median estimate holds true the average Canadian car buyer (that chooses not to buy) ends with more than $1M just by thinking about it.
That doesn’t even factor in these other less tangible benefits:
The zero chance of dying in a highway accident.
Never running over a pedestrian, cyclist, animal on city streets.
The spiritual boost you get from being secure in the knowledge you aren’t needlessly destroying the environment.
The 1.36 years you don’t sit in traffic and the 5+ years of life you EARN by having to walk.
Now I know what you’re thinking:
“But I need a car for XYZ thing!!”… probably involving children, grocery stores, or the winter. Lies.
While it is true that serious inequities in public transit persist across North America cities, this is a political problem caused by slack demand for new public transit investment.
From the 1940s onward Toronto lost scores of transit routes including this one on Mount Pleasant Ave.
I’ll save the Neo-urbanist dialogue about the socio-economic tragedy of car dependent cities for another post.
Let me know in the comments below if $700,000-$1.5M tax free and 6.5 years of healthy living would convince you never to drive again.
That’s it for this week!
Sincerely,
James Davies.