Look out of your nearest window, and there’s a good chance you’ll see several expensive tonnes of metal, glass, and plastic sitting idle.

In fact, I am doing that right now.

It wasn’t always this way for me. In the early phases of my investing journey, I managed to avoid the expense and responsibility of owning my own car.

But I could only hold out so long. And between work trips and the need to transport kids quickly and safely, the debate now isn’t whether we need a car – it’s whether we need a second.

Unless you live in a big city with a spiderweb of public transport routes, car ownership can feel mandatory.

But I’m employing every strategy I can think of to avoid ponying up for an extra vehicle.

And with all the app-based doorstep deliveries and on-demand transport options around now, that’s much easier than in the days of the Littlewoods catalogue and the milkman.

A car costs more than the metal

Cars are deeply personal. One person will swear by their 17-year-old Nissan, while another will insist it’s irresponsible to drive something without a top Euro NCAP safety rating.

So to figure out the cost of car ownership, I’ll have to make some broad assumptions.

This won’t match every Monevator reader’s particular needs – or their adeptness with an oil can and socket set. 

But we must start somewhere, so let’s start with the key spending categories:

• Depreciation – The stealthiest cost of all. If you buy a car for £40,000 and sell it two years later for £28,000, you’ve spent £500 per month through depreciation. With leases, the depreciation is baked into the monthly fee
• Opportunity / financing cost – If you put £20,000 into a car in preference to filling your S&S ISA, you’re also missing out on investment growth. Borrow £20,000 to pay for it and you’ll be paying interest on the finance deal
• Running costs – MOTs, servicing, and fresh tyres. (Here’s your reminder to check your tread depth if you haven’t recently!)
• Tax – Vehicle excise duty depends hugely on the age and type of car. Pay-per-mile charges are on the way, too.
• Insurance – Particularly costly if you’re young.
• Fuel – Whether you pump it or plug it, the price of powering your motor adds up.

What’s the price of a Polo, anyway?

Let’s introduce two hypothetical investors. Both want to own a Volkswagen Polo. But they have very different driving habits and financial tolerances.

So how much financial damage can a modest German hatchback actually inflict?

Alice and the new car premium 

Alice has a long commute – 10,000 miles a year – and she can’t afford to be late for work, so she values the reliability of a new car and a warranty.

She decides to buy a brand-new Polo for £20,000 outright.

• Depreciation: £3,000 (new cars shed value like a wet dog sheds water)
• Opportunity / financing cost: £20,000 at 5% is £1,000 per year
• Fuel: £1,500
• Running costs (including tax and insurance): £800
• Alice’s total annual cost: £6,300

Alice’s total commitment to her car is £121 a week. Every week. All for the privilege of driving 10,000 miles a year.

Note that opportunity cost reflects the investment returns you forgo on the money tied up in the car while you own it. Some of that capital can be recovered when you sell.

Gary and his sensible secondhander 

Gary can get the bus to work if necessary, so he’s less worried about a new car warranty. Hence he buys a three-year-old Polo for £10,000.

Gary mostly uses it for errands and weekend trips, and clocks just 7,000 miles a year.

• Depreciation: £1,200
• Opportunity / financing cost: £10,000 at 5% is £500 per year
• Fuel: £1,050
• Running costs (with tax and insurance): £1,000 (older cars need a bit more TLC)
• Gary’s total annual cost: £3,750

Gary is paying £72 a week. Vastly cheaper than Alice’s shiny new motor.

How about skipping the car altogether?

We can do better!

Jess the car avoider

Jess took a close look at the purchases made by her friends Alice and Gary, and she decided she wants to forgo owning a car entirely.

She also realised she doesn’t want to spend a chunky chunk of her day chugging through traffic jams. Getting a job within walking distance of where she lives solved that problem.

Jess earns £25,000 per year. That gives her £21,521 after tax.

And when Alice points out there’s a vacancy paying a much higher £35,000 at her own workplace, Jess runs through the numbers:

	Walk to lower-paid job	Drive to higher-paid job
Gross income	£25,000	£35,000
Net income	£21,521	£28,721
Car costs (based on Alice’s cost)	£0	-£6,300
Total income	£21,521	£22,421

Jess would effectively only earn £900 per year more with the new job – albeit she’d also be treated to the joys of being stuck in traffic twice a day, thanks to its commute.

Now let’s acknowledge that Jess could find a cheaper car, just as Gary did. 

But equally, many of the best-selling cars in the UK are more expensive than a Polo!

So clearly there’s a lot of people out there who either don’t do these sums, or who think it’s worth paying a premium for that new car depreciation smell.

Car ownership costs compound

Inspired by Jess and her savvy ways, Alice decides to do better.

Somehow Alice is able to ditch the car without losing her income. (Perhaps she found a different job, or moved to another city. Or she convinced her employer that working from home is trendy again…)

Alice is now spending £6,300 less per year (£525 per month) without a car. The money that previously went on motoring she can now plough into an investment ISA. Over a period of 20 years with a 5% return, she’d end up with £213,915.

Nearly a quarter-of-a-million quid, which could easily be the difference between retiring early or having to continue to slog away at the 9-to-5 for a few more years.

There are downsides

Not everyone can do without a car. You might have medical reasons for needing one, or children that have to get to a distant school. There are myriad other scenarios.

But often car ownership is more of a choice. 

Our family already has one car. Our debate is whether we can manage without a second.

And I’ve found there are lots of options these days that lessen the need to have two Frugalist household vehicles doing the rounds.

Instead of driving to the supermarket, I can get an annual subscription for free grocery deliveries. Most supermarkets offer passes for around £40 per year. Adding on Amazon Prime (including Deliveroo) for £95 per year gives access to still more delivery options.

I could budget for an emergency £20 taxi ride every month. Between the local cab firms and Uber, I’ve found it’s pretty easy to find a ride.

A taxi won’t work for a week-long jaunt to the countryside though. So I could also budget to hire a car for one week a year at £200. There are a couple of traditional car hire places where I live. Turo and Enterprise Car Club are other options, depending on your needs and location.

Added up, these alternatives still only cost £570.

The point isn’t that all of the above are essential if you don’t have a car.

It’s that you can afford to splash out on some apparently extravagant services, because compared to spending several thousand pounds per year on a car, they no longer look so extravagant.

Your mileage may vary

For some people driving is a hobby first, and a mode of transport second. If driving and maintaining your car is something you love, then clearly money won’t come into it.

Or perhaps you have access to an excellent company car scheme. With due consideration of the Benefit In Kind brackets, you can enjoy some very cheap motoring.

But most of us are definitely forking out a pretty penny for every mile travelled and every month of ownership, even if we don’t have to feed coins into a dashboard to stay on the road. So it’s worth working out how much we’re spending and why.

How much would your life change if you didn’t have a car? Would your job become impossible? Could you find another employer closer to home?

Which parts of your life rely on having a vehicle, versus where it’s just nice to have? Could some of the challenges be offset with a bit of targeted spending elsewhere?

If you must own a car (or two)

Obviously staying away from the new car dealerships is the best way to reduce the hit to your future net worth.

Modern cars are so well made that many buyers can realistically keep even a used one on the road for a decade.

Pay cash if you can to avoid financing charges.

Finally, buy the smallest car that’s practical for your situation. It’ll usually be cheaper and it will reduce all the ongoing costs, too.

Buy a fancy pair of shoes if you want to show off. They’ll cost you £20,000 less in the long run.

Every little helps

I was talking to a neighbour recently who bemoaned their frustration at having to drive to the big retail park every time they run out of milk.

Somehow they were completely unaware of a small supermarket that’s within walking distance.

I suppose if I’d been driving myself – rather than walking back from said supermarket – then we’d never have even stopped to chat.

We’re all different. Personally though, I feel a bit richer by reducing my car use.

Not just financially, but physically and mentally, too.

Car ownership is still treated as almost a rite of passage. But if you can swallow your ego and buy a smaller used car, walk around more, and actively try to design your lifestyle around the newer alternatives such as supermarket deliveries, then you might just hit that more important milestone – early retirement – many years sooner than you expected.

Index trackers – also known as index funds – are the investment vehicle of choice for passive investors.

Why? Because index trackers provide a low-cost way to build a diversified portfolio that will outperform the average active investor.

Index trackers come highly recommended by some of the biggest names in investing.

Yale’s famed endowment fund manager, David Swenson, neatly summed up the advantages of trackers:

“With all assets, I recommend that people invest in index funds because they’re transparent, understandable, and low cost.”

Even Warren ‘Gazillionaire’ Buffett says index funds are the best investment vehicles for most people.

Safety in numbers

Like other funds, tracker funds enable lots of investors to club together to increase their buying power. They collectively buy shares or other assets across many more companies than any individual could.

For example, index trackers make it possible to invest in all the world’s stock markets via just one global tracker fund.

Trackers are therefore a good way for everyday investors to get into the stock market without exposing themselves to the dangers of individual stock-picking.

Risks and costs are reduced thanks to the scale and diversity of the fund.

And while you’ll never beat the market you’re tracking with an index fund, you won’t lag it by much, either.

Indexes in (just a little) detail

Most funds have an aim. The aim of a tracker fund is to reproduce the returns of a specific market index.

An index is a basket of securities (such as shares or bonds) that is used to represent a particular segment of the market.

Famous indices that you’ll have heard of on the news include the:

• FTSE 100
• Dow Jones Industrial Average
• Nikkei 225

An index is rather like a scoreboard or league table. It provides a systematic way of measuring how a particular market is performing.

There are many weird and wonderful indices out there, from the All-Peru index to the Volatility Arbitrage index.

But virtually all of us only need to concern ourselves with the very biggest ones.

You need to decide:

• The market you want to track (for instance UK domestic equity).

• Which indices track that market, and how the indices differ.

You can then make an informed choice about which tracker to go for.

For example, global equities are covered by a number of indices. Some of the most popular are the MSCI World and the FTSE Global All Cap.

UK equity is similarly covered by a number of indices. The two most popular are the FTSE 100 and the FTSE All-Share:

• The FTSE 100 tracks the 100 largest listed UK firms, and covers nearly 90% of the market ¹.

• The FTSE All-Share covers more than 98% of the market, by bundling together the FTSE 100, FTSE 250 and FTSE Small Cap indices.

If you wanted the most diversified UK index, you’d pick the All-Share.

However we believe that a global index fund should be at the heart of most UK investors’ portfolios. That’s because with this single fund your money is diversified into thousands of companies from across the world.

You can find out which index a tracker mimics by reading its fund factsheet or web page.

Whose indices are they, anyway?

Indices are created and managed by private companies such as FTSE Russell and MSCI.

These outfits define markets slightly differently, which is why their respective ‘global trackers’, for example, won’t own exactly the same companies.

You can even invest in funds that track (supposedly) more ethical versions of their indices, tweaked to reduce exposure to, say, oil and gas companies or cigarette makers.

However because these niche indices differ from the broader markets, you can expect to earn a slightly different return when you go down this route – for better or worse.

Some firms are bigger than others

One thing that surprises new passive investors is that an index typically doesn’t give every company an equal weighting.

Instead, most indices are weighted by market capitalisation – or ‘market cap’.

The bigger a company’s market cap, the larger its place in the index.

Let’s say we have an index containing just three firms. If Company A is worth £700 billion, Company B £200 billion, and Company C £100 billion, then:

• 70% of your tracker would be invested in Company A
• 20% in Company B
• 10% in Company C

As share prices rise and fall, those weightings then change automatically. A company whose value doubles becomes a bigger part of the index. One whose fortunes decline occupies less space.

Market-cap weighting reduces trading, which helps keep costs down. It also reflects where investors have collectively put their money – a wisdom of crowds approach that typically does better than striving to outsmart the market.

The downside is that today’s biggest firms dominate even the broadest trackers.

At the time of writing, a global equity index is heavily weighted to US technology giants, simply because they account for such a large share of the world’s listed stock market.

Not everyone is comfortable with this level of concentration, fretting that it leaves them exposed to the fortunes of a handful of super-sized companies.

It’s worth mentioning though that if tomorrow’s winners emerge from elsewhere in the market, then the index will gradually adjust to reflect that, too.

Gain with less pain

A tracker’s job is to deliver the return of its index.

It usually does this by holding stocks (or other assets) in proportion to their presence in the index.

Some trackers will hold the lot, some only a sample, and yet others will replicate index returns using more complicated financial products.

These differences in methodology help explain tracking error – the extent to which a tracker fails to accurately track its index in any particular year.

Other drivers of index fund performance include the fees they charge investors and the fund provider’s costs of running the fund and buying and selling assets.

Tiny differences can see two funds that track the same index delivering slightly different returns over time – although rarely by enough to sweat the difference.

How trackers win by being average

The key point is that trackers don’t try to pick the winners. They don’t market time.

They just plod along tracking the index, handing over the returns due from the performance of its component securities.

By its very nature, a tracker fund will never hit three cherries on the fruit machine. It will never turn in a stellar index-trouncing result.

Its task is just to replicate the index.

In fact, a tracker will usually undershoot its benchmark, due to fund costs.

But a tracker’s limited ambition makes it cheap to run. And it’s because they are cheap that most trackers outperform expensive active funds in the long run.

Types of trackers

There are two main types of tracker funds:

• Index funds – The majority of these are now structured as Open Ended Investment Companies (OEIC), while a few are unit trusts. The US equivalent is called a mutual fund.
• Exchange Traded Funds (ETFs) – These are basically index funds wrapped up in a product quoted on the stock market, which you buy and sell like other shares. Buying ETFs can therefore incur higher trading costs, though that’s less of an issue these days with low-cost platforms. Also there is a far greater choice of ETFs than index funds. An ETF may be the only way to get exposure to some markets.

You can read more about the different types of tracker in our archives.

We also keep a watching eye on the lowest-cost index funds for UK investors.

Take it steady,

The Accumulator

p.s. This article on index trackers has been updated after ten years hard labour. Comments below are preserved for posterity but may be out-of-date. Check the date!

1. In terms of the total market capitalisation[↩]