How Much Does it Really Cost to Own a Car?
July 29, 2013
Do you ever find yourself wondering at the end of each month, where does all the money go? One place you might want to take a very close look at is your car expense. Most people look at their car expense as a list of separate expenses â€“ car payments, gasoline, repairs, auto insurance, etc. Of course, some of these expenses are larger than others. But when you add them all together, your car expense easily becomes one of the largest expenses in your budget.
According to the Automobile Association of America (AAA), the average car is costing the average American $9,122 to keep in 2013. You can be paying more or less, depending upon the type of car that you own, itâ€™s age, mileage per gallon, the number of miles that you drive each year, and a host of other variables. The AAA number is the average, and a good starting point to look at this near universal and often underestimated expense.
Where Does the $9,122 Go?
AAA uses two very broad cost categories to determine the annual expense of owning a car. The first category is operating costs. These represent the actual out-of-pocket costs to keep your car running. It includes gas, maintenance and tires, and the cost for each based on the number of miles driven.
The second category is ownership costs. These are what it would cost you to own a car, even if you never drove it out of your garage. The one exception here is depreciation, which is partially determined by the number of miles driven, but also by the age of the car. It’s a bit of a hybrid.
According to AAA, the cost breakdown is as follows (with 15,000 miles driven per year) – I hope you like numbers:
- Gas, 14.45 cents per mile, or $2,168 per year
- Maintenance, 4.97 cents per mile, or $745 per year
- Tires, 1 cent per mile, or $150 per year
Total operating costs, $3,063 per year.
- Full-coverage insurance, $1,029
- License, registration and taxes, $611
- Depreciation (based on 15,000 miles driven), $3,571 – more on this one in a bit
- Finance charge, $848
Total ownership costs, $6,059.
Total operating costs and ownership costs, $9,122.
Take a Closer Look at Depreciation as an Expense
It accounting terms, depreciation is used to allocate the expense of a major purchase over its expected useful life. In a household budget, that can be a confusing concept. After all, how does that represent an actual expense?
When it comes to cars, depreciation is a real expense on at least two fronts:
- It approximates the principal portion of your car loan payments. If you have a $20,000 car loan, with a 6% interest rate and payable over five years, the principal portion of the loan that will be repaid within the first year will be approximately $3,536. That almost exactly matches the AAA depreciation estimate of $3,571.
- It represents the eventual replacement cost of the car. Every year that you own a car, it drops in value. As it does, your cost of replacing the vehicle rises. This is a cost that you will bear whether you recognize it or not, in that you will pay it eventually.
When you are paying your car loan, the amount of principal repayment is fairly close to the level of depreciation on the car. And typically by the time the loan is paid, depreciation on the car begins to slow substantially. Either way, depreciation, whether represented by loan principal repayment or by the declining value of the vehicle, is a very real expense in the ownership of a car.
Your Actual Costs Can be Much Higher or Much Lower
Itâ€™s important to remember that the AAA numbers are based on a compilation of all drivers in all types of vehicles. If you own a higher priced car, or drive substantially more than 15,000 miles per year, then your cost on your vehicle will be higher than $9,122. If your car is lower priced, and/or you drive less than 15,000 miles per year, your car expense will be lower.
Which brings up a relevant topic . . . .
Reducing Your Car Expense
If the AAA average is anything close to what youâ€™re paying, itâ€™s likely that the annual cost of a single car is one of the largest expenses in your budget. And if you have more than one car, that expense is still higher. If youâ€™re looking to cut your living expenses, youâ€™ll have to take a close look at your car expense, since it is such a large outlay.
To lower your car expense, consider making the following changes:
- Buy a lower-priced car â€“ the less expensive the car, the lower nearly all of your expenses will be.
- Buy a used car â€“ the depreciation bite is much lower on a five-year-old car than it will be on a brand-new one.
- Buy a car without taking a loan, and both a lower priced car or used car will help you accomplish this.
- Mileage affects car costs, keep them to a minimum.
- Regular maintenance can prevent costly major repairs.
If you have two cars, and your expense level is average at $9,000-plus per year per car, your annual combined car expense is over $18,000 per year (let that sink in for a moment). Now let’s say that you cut your cost per car to $6,500 per car per year â€“ or $13,000 for both. That will save you $5,000 per year.
That will be enough to fully fund either a traditional IRA or a Roth IRA â€“ do you think thatâ€™ll have an impact on the future of your finances?
(Source: Your Driving Costs – How much are you really paying to drive? from AAA)How re you really paying to drive?
All posts by Kevin Mercadante