With the high cost of petrol hitting our pockets, you may be looking at you vehicle costs at the moment.
Transportation is most people’s second or third largest expense, behind housing and food. If you are wanting to get in control of your finances and accelerate your savings, saving money from owning a car can be a great place to put your focus, with big impact.
We often purchase our vehicles on finance, without even thinking of the effect this has on our long-term costs. It is almost seen as the ‘normal’ thing to do. By reading this blog, you should know by now that we are far from normal 😊. We are always looking for the extra edge, by doing something different.
We will look at the ‘normal’ scenario first: Let’s take a $20,000 medium sized vehicle that is 5 years old. We need a $15,000 loan to purchase the vehicle at an 8% interest rate over 5 years. We will assume we are driving 450km per week, at a cost of $1.95 per litre. Finally, we will assume we hold onto the car for another 9 years, and sell for $10,000.
Second hand car
Based on these assumptions, the annual cost of car ownership is almost $10,000. Your insurance, fuel and parking amounts may be more or less, but this is a rough average.
What if we buy brand new instead? Petrol and maintenance may be slightly less, but insurance, purchase cost, and loan amounts will be more. Let’s take a look:
About an extra $400 per year by purchasing a new car. $10,250 per year for your car.
$100,000 for 10 years of car ownership sounds a lot. How can we reduce the cost of car ownership?
What if you could save up for the car and not have to buy it on finance? We could save $400 per year (for the first 5 years) in the 9 year second hand car and 14 year new car examples above. Over $3,800 and $6,300 respectively. If you can’t afford a car without getting a loan, it is probably too expensive.
Don’t sell a new car too soon. In our example, we held onto the new car for 14 years which is abnormal. But as we already decided early in the article, we are abnormal by nature. Many of us get attracted to newer, shinier models and upgrade more often than that. If you are buying a new car every 7 years, you are wasting a lot of money on depreciation. A new car’s value can diminish by half in the first 5 years. Why not let someone else pay for this cost, and buy used vehicles at least 3-5 years old? If you are to buy a new car, then make sure to hold on to it for as long as you can, to recover the depreciation cost on this vehicle, as well as preventing yourself from taking on NEW depreciation cost from a new vehicle.
If we sold the new car in 7 years, instead of 14 years, for $14,000, we would have incurred an annual cost of $11,100. Almost $1,000 extra a year, just because of the impact the cost of depreciation has on shorter timeframes. If we sell in fewer than 7 years, then we are exponentially worse off.
Buy a smaller car if you do not have a big family or a requirement for a large car. We have a habit of buying more than we need. More food, more house, and more car. By purchasing a smaller car, you can usually save on purchase costs, petrol, registration and insurance.
Shop around for the best value insurance. I say best value, because cheapest is not always best value. They may not have a good history of paying out on claims. Often you will get the cheapest insurance if you package your vehicle insurance with your other insurances, such as house and contents. This is not always the case though, and I generally shop around 1 month before my annual renewal to see if I can get better deals elsewhere.
Maintain your vehicle. Check fluid levels, tyre pressure, tyre balancing, air filter, oil filter, and so on. It may cost a bit in the short term, but the long-term savings of preventative maintenance will be well worth it, heavily reducing the likelihood of major repairs.
Live in an area close to your work. With much lower car usage, this will save a lot of money on petrol and maintenance. With less KM’s, the resale value may also be higher for longer. You will need to balance this out against any increase in cost of living though.
Die-hard savers may also ask themselves if their household can go from two cars to one. Massive savings can be made here if it can be made to work.
By implementing some, if not all, of these recommendations, we can save at least $1000 - $5,000 per year. But that is not all.
What is the car really costing me?
What if you did apply some of these recommendations and were saving $2,000 per year (just $38 per week) for 14 years? That is $28,000.
If you were really good and invested that $28,000 earning 5% returns, in 14 years you would have $41,000 extra than you would have otherwise.
We just need to ask ourselves if we would rather have a newer car every 5-10 years, or an extra $11,000 - $26,000 compounding every 5-10 years. The amounts vary greatly under different scenarios, how you are willing to invest, and what you are willing to compromise on.
That $28,000 savings over 14 years, can be turned into $41,000 relatively easily. Multiply this over 3 x 14-year car buying cycles (42 years), and we have $123,000 extra in our pockets based on our assumptions. Just from saving $2,000 a year on car costs and investing the savings.
If we don’t have a car at all over 42 years (yes, extreme scenario), then we would have saved $852,000 by investing the $6,000 instead. I have allowed $4,000 per year to spend on public transport in this situation of not owning a vehicle. Your personal situation could be even more. Maybe less. You would need to run your own numbers. These numbers are just one example.
So, even though car ownership may cost us $420,000 based on an annual cost of $10,000 over 42 years, car ownership may REALLY be costing us $540,000 if we buy new on finance, or $850,000 if we don’t buy at all, and we made a decision to invest instead. This is $20,000 a year cost of car ownership, more than double the $10,000 a year we originally thought. This is called the opportunity cost, which is consideration of the choice we DIDN’T make. Often forgotten, but very important to make in our calculations.
If you are already purchasing second hand vehicles that are 4-5 years old, without needing any finance loans, then you are already enjoying the majority of the savings possible. You can make these savings go even further by pretending you did buy new, on finance, and investing the difference.
Personally, I would much rather have the cash and older cars, than just new cars and no cash. Maybe you can achieve both, and that is good for you. But if you are like most on an average income, trying to make the most of your income, then look towards your transportation costs for improvements to your savings rate. Money for the average Joe or average Jane is best spent on appreciating assets, not depreciating.
Now, how badly do you want that car?
The next article will go over how to calculate the cost of car ownership, and then compare the cost of two or more vehicles when car shopping.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here
Do you prefer new or used cars? How often do you upgrade vehicles? Is selling your vehicle an option? Share your thoughts below