Don’t Drive Yourself to the Poor House

Transportation costs amount to a significant portion of most American’s budget (10-25%).  Taking the time to fully consider the total cost of car ownership and how you might reduce that cost can have a huge affect on your net worth.

When the total cost of car ownership is calculated (deprecation, taxes, fuel, insurance, maintenance and repairs) even if you pay cash for the relatively inexpensive ($17,970) high mpg (27/33) Honda Fit; it will cost you $29,182 for 5 years. Step up to a stripped down Prius that gets 51 mpg for a purchase price of $24,939 and that 5 year number  jumps to $31,961 again, even when you pay cash. Given these numbers, it is no surprise that the “normal” American cycle of replacing cars every three to four years can sink your dream of being financially secure. (Try out your make and model at Edmunds True Cost to Own)

If cars are your thing AND you are out of debt, AND have a fully funded emergency fund AND are contributing at least 10% to your retirement savings – I’m not talking you. Otherwise, listen up. In our quest for financial freedom, we need to beat down costs in order to have the funds to do what is important to us.

Once we have money we can spend some on cars if that is what we want; but until then it is ridiculous to spend $30,000 over five years to get from here to there. While you may be absolutely in love the new car smell and the feel of the leather seats the first three months, how will you feel about  it $20,000 from now?

The first step in driving down the cost of driving is to determine what you will need. Remember our goal is to fill our transportation needs safely, comfortably and reliably as inexpensively as possible.

How many miles a week do you drive? Is your job on the road? How many people do you transport? What stuff do you need to carry?

If most of your driving is in town, don’t buy a big car for its comfort on the yearly road trip to grandma’s house; you could rent something once a year. Nor would it be financially reasonable for you to purchase an SUV capable of serious off-roading if you don’t need to drive off-road. Choose your vehicle to fulfill its primary intended purpose.

Maybe you could even do without a car or without one of your two cars.  How far you live from your job or school, the hours you work, the weather and available alternate transportation help determine if you must have a car. If your commute is 35 miles in an area with no public transportation and harsh weather, going without a car is going to be tough. However, if your commute is less than 15 miles a bike may be an excellent option. Trains, buses and subways work in many parts of the country.

If your job is on the road or your commute is too long you may need to have a car. In a recent post, Go Little, I asked that you consider what you need before calculating what you can afford when purchasing a home. Use that same thinking when considering a car purchase. Start with what you absolutely have to have and add from there. Just because you have 12K available does not mean you need to spend 12K on a car.

Maximizing your Car Purchase Dollars

Pay Cash. You must pay cash for your car. If you already have a car loan and you can be debt free in less than two years including that loan, you can keep the car, otherwise you should seriously consider downsizing your car.

Buy & Keep Cheap. To get to the lowest overall costs of ownership:

Avoid new car depreciation by buying a 3-5 year old car.

Work to get the best possible purchase price, do your research and have patience.

Check the gas mileage and compute your estimated yearly fuel expense for all models you might be considering. Be very careful not to assume that replacing your guzzler with a sipper will save you money; actually compute the total cost of ownership for each.

Check insurance rates on the models you are considering and factor that cost into you decision.

Control Maintenance & Repairs costs.

1. Buy cars rated highly for reliability. Check Consumer Reports and Edmunds True Cost to Own for predictions as to what the repair costs will be for your make and model
2. Be able to afford the maintenance. Do NOT make the mistake I once did. I owned a BMW 325i many years ago. I stretched my auto budget to the max to afford that car and every single maintenance or repair bill wreaked my budget and made me miserable. Performing the regularly scheduled maintenance is crucial to happily keeping a car long term.
3. Drive less. Tires, oil changes, gas, insurance are all cost per mile expenses.

Keep It Forever. Ok maybe not forever, but drive it into the ground. The longer you can keep a car the lower the overall price of ownership.

Can you do better with your next car purchase?