Edit: It has been brought to my attention that it’s not right to include both the cost of the vehicle and the depreciation on it. If you would assume you’ll sell the car after 5 years, you would include the depreciation (the difference between the price you bought and the price you sold). For now I’m going to assume you’ll keep car a while longer, and re work the numbers that way. (Thanks to jrc1122 in the Total Money Makeover forums).
I am also adjusting the maintenance costs on the alternative scenario. The cost to maintain (oil changes, tire rotations, etc) should be about the same whether it’s a new or used car. The only real break you get on maintenance on a new car might be in the first year, where maybe you only need oil changes.
On to the article …
Often times when we buy something we only consider the cost to purchase the item and don’t consider other associated costs. In this blog we will outline the real cost of owning a car.
With a car people typically will get into a car payment and they will think of the cost of the car as the monthly car payment. Many people will realize there is the cost of gas. Many people will forget that there is the cost of maintaining the car. Most people don’t think about the depreciation (the decreasing value) of their vehicle.
Here is a breakdown of all the costs of owning a car:
- The price of the car
- Interest on the payments (If financed)
- Smog check (if your state requires it)
Let’s use a Toyota Camry for our example. The Toyota Camry is one of the best selling cars in America today (http://autos.aol.com/gallery/best-selling-cars/). A no frills Toyota Camry will cost around $20,000.
Depending on where you live, the registration costs will vary. In California in the county where we live, this Camry would cost $317 to register and there will be $1650 in taxes.
Bankrate.com currently shows the interest rate on a new car to be around 5.5%. If you finance the car, that will come to about $3,000 in interest. It looks like the average annual auto insurance rate for 2009 is $1,736 (http://www.carinsurance.com/kb/content17532.aspx).
The Camry gets 22 (city) to 33 (hwy) miles/gallon. If we average those and assume driving 50% highway and 50% in town, that’s about 27-28 mpg. At 15,000 miles per year and $3.10/gallon for gas (the current national average for gas), that is about $1,700/yr for gas.
Maintenance should be fairly low at the beginning but will increase as time goes on. According to Edumunds.com, The Camry will cost about $3,500 in maintenance in 5 yrs. That is an average of about $700/yr.
Smog checks are required in California every 2 years. A smog check will run about $40. that’s $80 in a 5 year period.
After 5 years it’s likely that the tires will need to be replaced. According to tirerack.com, to replace the tires with the same type as the originals, the price will be about $125-$172 per tire depending on the car model. I know you can get cheaper replacement tires, so let’s assume they are $100/tire. That’s $400 to replace the tires once.
Repairs are estimated at Edmunds.com to be about $800 in the 5 years which averages to about $160/yr.
Depreciation is estimated, again at Edmunds.com, to be about $10,000. This seems low to me. I’ve heard that the typical car looses about 70% of its value in the first 4 years. But let’s go with the Edmunds,com estimate anyway.
If we total everything up we get the following chart.
|Cost of buying and owning a car for 5 years|
|The price of the car||$20,000.00|
Wow! That’s almost
$60,000$50,000. If you knew it would cost you $60k$50k to buy and own that new car, would you still buy it?
An Alternative Approach
What if instead of buying a new car, you decided to pay cash for a used car. Let’s say, for example, you really liked the Toyota Camry, but you instead paid cash for a 1995 used Toyota Camry for $2,000. While you are driving this car around, you save the car payment you would have had – about $400/mo.
Then let’s say, after 10 months you decide to trade up for a better Camry. You can sell your current Camry for probably about $1,700, losing only about $300 to depreciation. Now you have $5,700 to upgrade to a 2002 model, which will cost about $5,000.
Let’s say that you do this again. In 10 months, you can sell your 2001 Camry for about $4,700, again losing only about $300 to depreciation. With the additional $4000 you can upgrade to a 2007 Camry. And let’s say you do this one more time. Now in 30 months, you own a 2011 paid for $12,500 Camry. (Note that a 2011 Camry today cost $20,000, but in 3 years, you should be able to get one for about $12,500).
If you compare this to the first scenario of buying a brand new 2011 Camry, you’ll see that after about 3 years, in both cases you own a 2011 Camry, but in this alternative scenario, you have a paid for 2011 Camry while with the new car scenario you still have two more years of car payments to go.
Let’s see what the cost of ownership would be for this alternative scenario.
|Used Car/Trade Up scenario|
|Year 1||Year 2||Year 3||Year 4||Year 5||Total Paid|
|The price of the car||$2,000.00||$5,000.00||$9,000.00||$12,500.00||$12,500.00|
|Depreciation (add: on vehicles sold)||$300.00||$300.00||$600.00||
|Note: The total subtracts the sold price of the previous car|
The total cost of 5 year ownership using this alternative is about
$12,000$9,000 cheaper. Of course, if you decided to stick with the 2007 Camry instead of upgrading to the 2011 model, you’d probably be even better off financially.
So what can you do with that extra
$12,000$9,000? If you invested it in good mutual funds for 30 years, that $12,000$9,000 would become about $238,000$178,000.
The new car is the “drug of choice” for the middle class. It is probably one of the biggest reasons the middle class stay middle class. When you factor in the cost of the lost opportunity to invest, that new car costs you about
$296,000$227,000 (the $238,000$178,000 + the cost of ownership). Would you still buy that new car if you knew it would cost you $296k$227k?
When you pay cash for a car, you keep that monthly payment amount free to do other things. The average car payment is $470/mo. If you started investing $470/month now, how much will you have at retirement age? Right now, go to an on-line retirement calculator to find out. The S&P 500 averages 11.8%. In the calculator, assume you can average a return of 10-12% on your investments.
Does this make you mad at yourself or your spouse for buying that new car? Tell us about it.