The following is an excerpt from my book Margin Matters: How to Live on a Simple Budget & Crush Debt Forever.
Have you ever thought about the cost of owning a car? I’m willing to bet you will share in the same sticker shock I experienced upon researching the joys of automobile ownership. The average price of a new car in America now tops $36,000, according to car-buying site Kelley Blue Book. Purchasing a vehicle should not be done on a whim. It’s a major financial move—for many of us, one of the biggest decisions we’ll ever make. While many consumers focus on sticker price or the monthly payment, they often overlook other costs of owning a vehicle.
Many financial experts warn that buying a new car is the single-worst financial decision you’ll ever make. Why? Because the second you drive that spanking new car off the lot the value drops 30%. That’s called depreciation. Even more unsettling, most people borrow money to buy a car. Why would you borrow money to buy an asset that immediately drops in value by 30%? Seems like a double whammy! I can picture Warren Buffet shaking his head in disbelief.
Expenses Aplenty
For an average vehicle that’s driven 15,000 miles a year, all costs of ownership add up to nearly $8,500 a year, according to AAA’s 2017 Your Driving Costs study. That’s more than $700 a month!
The real cost of owning and operating a vehicle includes:
- Fuel
- Tires
- Maintenance and repairs
- Taxes, license, and registration fees
- Insurance premiums
- Depreciation
- Interest/financing
- Parking and toll fees
- Traffic violations
Our Car Stories
Before we met, my wife bought a new 2008 Toyota Corolla for approximately $14,000. She was single and commuting to college at the time, so she needed some dependable wheels. Her vehicle is the definition of a base model. In fact, it doesn’t have power windows or locks. Clark Howard would be proud! I don’t know if they make cars like this anymore. In another effort to save she passed on the cruise control but ended up adding it later. Since I’m a money nerd, I created a spreadsheet to document all the expenses we’ve poured into our cars since we’ve owned them. The only expense not included in the report is insurance costs. Since 2008, we’ve poured a total of $11,267.28 of maintenance and repairs into the Toyota alone. That’s almost equaling the purchase cost. The car is now 12 years old, nearing 200,000 miles, and runs great.
In January 2014, I bought the most expensive car I’ve ever had – a 2010 Honda Element. I paid $15,500 for it from a private seller who posted it on AutoTrader. I had about half the money saved and I took out a loan from my bank for the remaining balance. We worked hard to pay off the loan (approximately $7,500) and were able to erase that debt in less than a year. Since owning the Honda, I’ve paid $9,078.03 in repairs and maintenance costs. The vehicle is now 10 years old and has about 135,000 miles on it.
Since neither of our cars have much value if we tried to sell them (Toyota $4,000 and Honda $5,000 according to kbb.com), our goal is to keep them as long as possible. Additionally, since they are both paid off, we’ve been able to save a significant amount of money on insurance by dropping our coverage to liability only.
3 pieces of advice when buying a car:
- Never buy a new car. If you want a new car, you will save a ton by simply buying a year-old car. Any new car’s value can drop between 20-30% the minute it’s driven off the lot.
- Never buy from a dealership. I did that once. Never again. I was astonished at all the junk fees they add on. Do yourself a favor and buy from a private seller. Autotrader and Craigslist are great sites for this. When you buy from a private seller you avoid paying thousands of dollars in sales tax along with many other added fees.
- Research how costly routine maintenance and repairs will be for a vehicle you are interested in buying. Call a few local mechanics to get their take. You will be surprised to learn the extreme cost variations in maintaining different types of vehicles.
Regarding Car Loans
For most of us, a car is a necessity. While I would always advise paying cash for a car, I realize that is not feasible for many of us. But do try to save up as much as you can to lower any potential loan. Aim to keep total auto costs, including your car loan payment, within 20% of your take-home pay. Shoot for loan terms of four years or fewer, preferably with at least a 20% down payment. If you can’t pay it off in three or four years, you probably can’t afford the car to begin with. Be smart and avoid splurging on a BMW when a nice Honda will get you there just as well.
Final Thoughts
Even though our cars are paid off, we still pay thousands for the privilege of owning them. If you are a three or two car household, could you get by with two or one? If your city is conducive to walking and offers public transportation, I would highly encourage you to take advantage of the opportunity. Also, if you are in or planning on going to college, determine if you can live on or near campus without owning a car. Imagine the cost savings for just those four years. Ride-sharing services like Uber and Lyft are an asset in this effort, too. Before buying any car, do your research in order to properly plan and budget out how much it will really cost to own it.