How much does it really cost to own a car? More than we think!
Most people don't like to think about the cost of their cars. Or if they do, they think of it in simplified terms. "This new KIA costs me $149 a month in lease payments!" they crow, neglecting to think about the $3000 they put down on the deal. But moreover, they fail to take into account insurance, fuel, repairs, and other "hidden" costs that add up to more than the purchase price of the car, over time.
Simply stated, we spend thousands and thousands of dollars a year on cars, and many folks simply can't afford this, which is what drives them into the poorhouse. Or, they buy a brand-new car, cannot afford to properly care for it, and as a result, it barely outlasts the payments.
How much does it cost to own a car? A lot more than you think. A lot more than I thought! There are a number of expenses - both fixed and variable. Some expenses occur regardless of how much you drive, such as depreciation, insurance, and taxes. Others are directly related to how much you drive, such as gas and oil and tires.
And yet, with regard to the latter, we are just as blind in determining actual costs. Just as the fellow crows that his KIA costs only $149 a month (which is not nearly the actual cost) he thinks, that since it gets 30 miles per gallon and gas is "about three bucks" that he is spending only about 10 cents a mile to drive it. However, oil changes, tires, brakes, and repairs can inflate this number to double that, in a hurry. And likely, he isn't getting 30 miles per gallon and is paying more than $3 a gallon for gas - at least today.
Let's example these costs in a hypothetical example and see what we come up with.
First, let's examine Variable Costs: These are costs that vary with usage. The more miles you drive, the higher these costs run.
1. Gasoline. Say you get an average of 20 mpg with your mini-SUV. At $4 a gallon (coming soon to a gas station near you) this works out to 20 cents a mile. You can play with this number, based on gas prices and gas mileage. For example, 30 mpg brings this down substantially to 13 cents a mile. $3 a gallon gas brings it to 15 cents a mile. Interesting how gas mileage and the price of gas trade-off in savings - and why so many people would rather just see lower gas costs than get an efficient car. But efficiency pays.
2. Oil: Even "free oil changes for life" have a real cost, as There is No Such Thing as a Free Lunch (or oil change). The dealer who offers "free oil changes for life" just pads this into the price of the car, or uses the free oil change as a come-on to get you to pay for car service that you may or may not need. Some car dealers and chains offer oil changes "as low as" $15.99, which is suspect, as the cost of oil and filters easily exceeds this. But of course, that price is for a stripped economy car, and you don't qualify for that price.
If we assume a typical car, having 5 quarts of oil and a filter, at about $3 a quart and $3 a filter, you are looking at $18 just in costs. A more realistic price would be $30 or so, with many cars running $50 to $100, particularly for synthetic oils and esoteric filters (BMW, Mercedes).
And of course, there is change interval, which is like a religion to some folks. Jiffy lube will say to use regular oil - but change every 3,000 miles. BMW says to use $12-a-quart Castrol Syntec, (and all 8 quarts of it) but to change only every 12,000 miles or so.
Let's assume a $50 oil change every 5,000 miles. That works out to a penny a mile.
3. Tires: Most people don't think of tires as a wear item. But like a roll of Scotch Tape, you "unwind" your tires as you drive, leaving a thin layer of rubber on the road behind you. A good set of tires today can last 30,000 to 50,000 miles and cost $600 to $1000 a set, mounted and balanced. This works out to about 2 cents a mile - twice what you pay for oil changes. Probably didn't see that coming.
4. Brakes: Brakes are a wear item, and how long they last depends on your driving skill and style. The X5, for example, had pads replaced at 25,000 miles with the original owner. The second owner had the pads and rotors replaced at 50,000 miles. That is pretty typical wear. The car now has 130,000 miles on it, and I have yet to replaced pads or rotors. My driving style has gotten more than three times the use out of the pads and nearly double the wear out of the rotors.
But let's assume pads at 25K and rotors every 50K. Again, come-on prices abound (like with oil changes) but I think we can quote, realistically, $200 for a pad change, and $500 for pads and rotors. This works out to about 1.5 cents per mile.
5. Repairs: This is hard to quantify, as how much repair a car needs depends on the age, model, make, and your driving skills, as well as how you take care of a car. Some items, like batteries, will need to be replaced on a regular schedule. Others, like oxygen sensors, are replaced at 100,000 mile intervals. And of course, you can buy a car, never service it, and end up with a clunker that you unload later on.
New car fans will argue that having everything covered "under warranty" is great, as it eliminates repair costs. However, the huge depreciation (see below) far outweighs these sort of repair savings.
And often, repairs costs are independent of mileage. A car battery goes bad over time, not based on mileage.
All that being said, let's assume $1000 a year in repairs, on average (some years, nothing, other years $3000) and that works out to about 5 cents a mile at 15,000 miles a year.
TOTAL VARIABLE COSTS: About 30 cents a mile.
Now Let's look at Fixed Costs: These are costs that you incur regardless if you drive 5 miles or 50,000 miles. They are the fixed overhead of owning a car. We can figure these out on a per-mile basis, as we did with repair costs, by assuming the 15,000 mile-per-year average that most Americans drive.
1. Depreciation: This is the biggie and it varies from new car costs (the highest) to clapped-out junkers (the lowest, but highest in terms of repairs). In general, a car depreciates 50% in value every 5 years, until it reaches scrap value. This cost will depend on how expensive a car you buy and how new it is.
Let's assume you buy a secondhand car for $20,000 and keep it five years. That would be a pretty typical average used loaded Camry. After five years, it will be worth $10,000 at that point, if you are lucky, and at 15,000 miles a year (75,000 miles) that works out to 13 cents a mile. As you can see, this is right behind fuel cost in terms of cost-per-mile.
And as you can see, the more you drive, the lower this cost-per-mile is. Yes, a lower mileage used car is worth more - but not that much more to offset the difference. There is little or no savings in keeping a car in your garage, in terms of depreciation.
You buy a brand-new car, and pay $40,000 for it, you can easily double this figure. Yes, you save that 5 cents a mile in repair costs, but you add in 13 cents more per mile in depreciation.
2. Insurance: This also is based on mileage, as the more miles you drive, the higher your costs are. I pay $15 a month for basic liability. You likely don't. And if you have a loan, you have to have collision and comp. How you drive, how old you are, and how many accidents and tickets you have all vary this all over the map. Let's assume $1500 a year for collision and comp and liability, with $500 deductible for that $20,000 Camry that you have a loan through the credit union on. This is not atypical. That works out to a ten cents a mile, which is pretty staggering, when compared to other costs.
3. Registration, Inspection, Taxes: Again, these are all over the map. Here in Georgia, I might spend $50 to $100 a year on registration and taxes, with no inspection. In Alexandria, Virginia, I might spend $75 a year on registration, another $1500 a year on property taxes (back in the day) and another $75 a year on safety and emissions inspection. Let's assume an average of $150, which works out to a penny a mile.
TOTAL FIXED COSTS: About 25 cents a mile, at 15,000 miles a year.
Total Cost Per Mile (fixed and variable costs): About 55 cents a mile.
Total Cost Per Year (at 15,000 miles/Year): $8250 a year (ouch!)
The last number may come as a surprise to many. In my hypothetical example, the consumer is driving a lightly used Camry that he bought for $20,000. The idea that a $20,000 car could cost over $8000 a year to run, would seem preposterous to most. But it easily could, when you add up all the costs involved.
And you can play with these numbers if you want - the point is, play with them, include them all, tweak them, but be sure to add them up and don't neglect anything.
For example, if you say you want to lease a car, well, your depreciation will be a lot higher (take the total cost of the lease, including the down payment and and back-end charges) even if your repair costs are less. But bear in mind that things like tires and brakes are often not covered by warranty, but are considered wear items by many manufacturers (a friend of mine turned in a leased car recently, and was told they had to pay for four new tires!). Other manufacturers cover some of these things - BMW covers "maintenance" for four years, 50,000 miles, including brakes.
A brand-new car will require more insurance, too. A used car, less, but may have higher repair costs. These factors balance out, in many cases. It is like pulling on a wad of salt-water taffy. You can pull one way or push back another.
If you are a careful driver and are handy with tools, you can control many of these costs to your advantage. As I illustrated in the brake example above, by driving carefully and coasting to a stop (as opposed to using the service brakes at the last minute) I can decrease the wear on this item considerably. And at 1.5 cents per mile, this is a considerable savings - hundreds of dollars a year.
Similarly, driving more slowly and driving for mileage can decrease your fuel costs - which can be as high as, or higher than, your depreciation costs.
Owning an older car that does not require collision insurance, for example, can also decrease your insurance costs considerably - from $1500 a year to $250 a year. And again, driving more carefully and slowly will decrease these costs dramatically as well. Driving fast and getting into accidents drives these costs through the roof.
When I started this blog, I had six cars - three BMW convertibles, including the one shown above, plus our pickup truck, the X5, and a 1948 Willys Jeep. Since they were all "paid for" and I did not drive any of them very far, I thought that they didn't cost me much to own. After all, what is the real overhead on a car you drive maybe 5,000 miles a year - if that?
Well, the largest cost was in depreciation, of course. The 1997 Cabriolet above cost me $22,500 used (far down from its brand-new price of $40,000!) and I sold it later for $6800, a loss of $15,700 in depreciation, over a period of eight years, or about $2000 a year. Throw in another $500 a year for insurance, and you are looking at $2500 a year, plus registration and inspection, $2600, and then gas, oil, tires, repairs, well, $3500 or more. Multiply that times six cars, and you are looking at a staggering $21,000 a year. Or look at it another way, that $22,500 car cost me $28,000 over eight years.
Don't get me started on the boats....
A lot of these costs are "hidden" to the consumer, as they are spread out in tiny incremental transactions - a tank of gas here, an oil change there, a set of tires somewhere else. And the depreciation costs - usually the largest single expense - is never really "realized" until you sell the car, and even then, most people never do the mental calculation and do the math on the overall costs.
Why did I have that many cars? Well, we had two homes, and having two cars each, at each home, didn't seem too extravagant. And then you have to have a hobby car, right? Or a Jeep? Or an old truck to drive to the dump, right?
Well, that is the thinking - and it is the thinking of a lot of people in the USA, where cars outnumber people by about 1.1 to 1.
It pained me to sell the car shown above. Yes, it was as nice as it looked, and it was fun to have. But the cost per year was killing me. And I started to realize that having a fun toy was costing me an extra year of work until I could retire.
Obviously, in the USA, many of us need cars to get to work. But realize how much a car is costing you and costing your estate, in terms of overall wealth and damage to your net worth. If you are paying thousands of dollars a year to own a car - and have several in your driveway - it could represent a substantial portion of your disposable income.
If you are complaining about living "Paycheck to Paycheck" then take a look in your driveway. Chances are, the problem may be sitting right out there.
12 comments:
Hi Robert,
At what point would you drop the collison on a vehicle. Our Volvo wagon has 167000 miles on it and is 10 years old. Would this qualify?
As well, if I buy a used vehicle, I think I remember you saying not to buy at a dealership. I was talking to someone the other day and they said to me that they leased a truck for 3 years. When they were about to return it the mileage was quite a bit over the allowable amount to instead of paying thousands of dollars in penalties they paid someone $300 dollars and they rolled back the mileage. I didn't know that this is still possible. I'm actually shocked and dismayed.
See this posting:
http://livingstingy.blogspot.com/2009/08/when-do-you-drop-collision-and-comp.html
When to drop collision and comp is a personal decision based on several factors. See the link.
Rolling back odometers is very hard to do these days, depending on the car. For a BMW, you have to reset the mileage on the instrument cluster AND on the engine computer. This cannot be done without a lot of specialized electronic tools.
The best used car deals are from individuals who are car enthusiasts, have all service records, garaged their cars, etc. They are out there. They are not too hard to find. They are worth looking for.
A "mystery car" from the used car lot might be a good deal, or perhaps not. But on average, you are going to pay more, too.
Considering a car can be a 10-year commitment, is always amazes me how many people walk into a dealership and make a snap decision within a few minutes.
"Yea, that one looks good. Got it in beige?"
Manhattan: Parking $500 per month
Brooklyn $250 per month
Or if you have a house with a garage and a driveway you can easily rent it out and COLLECT hundreds of dollars and NOT SPEND it.
Parking is free in Manhatten, if you work the system.
My Brother kept his VW there. On even days, you had to move it to one side of the street to let the street sweepers through. So everyone double-parked between 10 and 2 on one side.
Then the next day, they moved the cars to the other side. It was weird - they would ticket and tow you for parking on the side being swept, but not ticket or tow you for double-parking.
Needless to say, if you had to go anywhere between 10 and 2, you had to make sure you were parked on the "outside".
They did an episode of Seinfeld about this - with the fellow with the keys, who moved people's cars.
Frankly, I am not sure I would have a car in Manhatten - the bumpers get all scratched up by people parallel parking. They actually put bibs on the bumpers, but it doesn't seem to do much.
I first tracked all of my auto expenses in 2011 after reading an auto TCO article in 2010.
I don't have the data to back it up, but the car I was driving (2001 4cyl base model Camry) was probably the best car I've owned from a TCO perspective - $.22/mi in 2010!
It's ALL ABOUT DEPRECIATION. I bought it for $3600 and in a year it dropped about $200 (<$.02/mi). There are a few things you can do to bring the other $.20/mi down, but they take a lot of work.
The way I looked at it, anything above $.02/mi is a premium - how nice does the car have to be to justify it?
I gave/sold it to my mom after she hit a deer and totalled her Accord. Wish I still had it, but the exact same Camry at a dealership was $1500 more than the Blue Book mine valued at, and I didn't have the heart to let her end up with an unknown car for that much money.
I ended up with a private sale Sonata a couple of weeks later - guess we'll see how that does. It's a V6, and newer, so it won't come close to that Camry, but my target was <$.35/mi, and it should be in that ballpark. Guess I'll have to see if the $.13/mi premium over the Camry is worth it...
As far as insurance, one word of caution... I dropped comp/collision on my Accord when its value dropped to $5k. Then someone without insurance or any money hit it (which is why I bought the Camry). Your article about the futility of lawsuits applies here.
Moral of the story: The odds of your car requiring out of pocket repair are greater than your odds of being at fault for an accident.
I had a 1988 Camry 4-cylinder and it was a very good car, quick and comfortable, and I wish I never sold it and bought that damn Taurus!
A v-6 is nice, but gets worse mileage, costs more to repair, and is a lot harder to work on, if you do your own repairs. In the future, I am going "base engine" on any car I get.
Collision insurance on a $5000 car is sort of a waste of time. Yes, it might have paid out in your case - but only $4500.
And how much would have paid in premiums over 4-5 years? Probably $4500, I'd bet - depending on your age, driving record, etc.
It is a choice. You can be a risk-taker or a risk-avoider. And it depends, as I noted in the article, how much and where you drive.
To me, $4500 isn't going to break the bank. And I drive 3,00 miles a year and live on an island.
And you can bet, I drive more carefully. Driving defensively is the name of the game.
I hope they threw the uninsured motorist in jail. They rarely do, of course, except in Texas.
Great post. You missed one (arguably the most important) cost: what economists call "opportunity cost." All the money that is going into the car purchase (and maintenance) could instead be invested profitably.
In the year 2000 I bought a new Porsche (at age 30). Someone asked me how much it cost. I ran the numbers based upon the total out of pocket at the time (not even including the ongoing maintenance) - then compounded that amount based upon a 7% annual return and a reasonable life expectancy of 78 years (of which I had 48 years remaining). The resulting sum was astronomical; from this perspective, the car cost well north of $500,000.
I am still guilty of owning too many cars and other depreciating physical assets. But I have no illusions about the financial ramifications.
Cheers!
Thanks for your comment, which raises a very good point!
When we buy an expensive car or a hobby car or a boat, not only do we lose money on the car, we do lose that opportunity cost.
And this is probably the ONLY instance in your personal life where opportunity cost arguments make sense. Salesmen try to use them for leasing or loans - spending. The real place where the argument makes sense is NOT SPENDING.
Of course, life would be pretty dull if everything was traded-off for opportunity cost.
In the case of Porches, and other sports cars that are not used as daily drivers, but rather hobby cars, I would suggest buying one USED from an ENTHUSIAST for half the purchase price.
While this does not eliminate the costs or the opportunity costs, it easily halves them.
And let's face it, a 5-10 year old Porsche is still one heck of a car.
This is perhaps one reason I keep the M Roadster. At 13 years old and 35,000 miles, it is worth maybe 12 grand, but provides good basic transportation, costs little to own at this point, and is fun.
Like Cristalino Cava sparkling wine, it is possible to have fun - on a budget!
I'm glad to hear you have an M Roadster – that makes me feel a little better about my own automotive guilty pleasures.
I still have the 2000 Porsche. After 12 years, it's now worth about 25% what I paid for it. The math is painful, but the ownership experience has been rewarding.
Yes, if you're going to get one, buying a used vehicle is absolutely the way to go. Quite often these sports cars are garaged and pampered – best to let someone else take the major depreciation hit.
Owning this sort of car is kind of like having dessert. Life would be pretty dull without the occasional slice of chocolate cake. Just don't convince yourself that you're eating it for the antioxidants...
A friend of mine who is really rich (as opposed to most Americans, who live off salaries, and thus are only pretend-rich) bought the car, new, off the showroom floor in December of 1998 for $44,000.
I paid $29,000 for it (it remains the most expensive car I have ever bought) four years later, two days after the warranty expired. It had 7,000 miles on it.
Today, it allegedly books for $12,000 or more (some claim $16,000, I am skeptical) and has 35,000 miles. We drive it regularly - at least three times a week.
In terms of depreciation, yes, it was a nightmare. But the original owner took a $13,000 hit to drive 7000 miles, or about $2 a mile. Ouch.
We at least have this down to 50 cents a mile.
And at this point, its depreciation curve is flattening out.
The book value actually went UP $500 last year, because of the so-called "used car shortage".
Go Figure.
One phenomenon I notice is that people LIE about their gas mileage - a lot.
Few people keep track of it (measuring how many miles between fill-ups and dividing by the number of gallons) but rather estimate it in their head.
Indeed, few it seems "fill up" their car anymore, but instead continually throw a few bucks into it at a time.
So they basically lie about their gas mileage, their 401(k) savings, their penis size, etc.
I've had people with monster SUVs tell me they are getting 30 mpg on the highway, when even a typical Camry struggles to get that much.
One aspect I failed to mention is INTEREST PAYMENTS if you finance a car with a car loan.
Assuming, again, our $20,000 used Camry, financed through the credit union over five years at 4.5%, you would pay $2,134.46 in interest.
This would add about 3 cents a mile.
Interest rates for car loans were as high as 11% not too long ago - figure on seven cents a mile, if they ever go up that high again (or if you are foolish enough to use a "Buy Here, Pay Here" car dealer for financing).
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