Caution ahead: This article includes a lot of math
So you’ve decided you want to purchase a car. We can easily shop around by looking at the advertised sale price of the vehicle. That is fraught with danger though, as there are many other costs of owning a car that should be considered.
For example, one car may cost $1,000 more than another car to purchase, but it may be $1,000 per year cheaper to run. This would make the more expensive vehicle to buy much cheaper in the long run. Let’s take a look at some of the costs.
Purchase cost of a car
This is the first, and easiest cost to calculate. It is the sale price that is being advertised. This is not always a fixed price though. Car prices are usually always negotiable. We will discuss some tips on how to negotiate a lower purchase price in our next article.
To get the annual cost, first decide on how many years you anticipate to own the vehicle (2). Then estimate the expected sale price (3) of the vehicle as best you can. Subtract the expected sale price from the purchase price (1) and divide that total by how many years you expect to own the vehicle (2). You now have the annual cost of just the car purchase (4), not including ALL after purchase costs. Another word for the difference between sale and purchase cost is depreciation or loss of value.
After purchase costs of a car
1/. car loan cost
Ideally, you will be able to purchase your vehicle without getting out a loan. If you are not in a position to buy the car outright, then at least calculate the cost of your loan and add just the interest portion of the loan to the cost of the car. The Sorted loan calculator is a good resource for this.
I will enter $15,000 loan amount at 12% interest rate, with $200 fortnightly payments into the sorted loan calculator and I am told that my interest payment on this vehicle will be $3,454. I must now divide this amount by the length of time I plan to own the car (9 years). $3,454/9 = $384 per year (5). I will add this to our calculation.
Tip: To keep your loan costs down, shop around. Don’t feel compelled to go with the car dealers finance company. That is often the most expensive. Ask around BEFORE you make the vehicle purchase, then you will have the power to decide who has the best loan terms.
2/. Petrol costs
This is probably the hardest to calculate, but if we take it step by step then definitely achievable. There are four variables that we must know to make this calculation.
How much fuel is consumed for our chosen vehicle. Most often expressed as a litre amount per 100km. This information can easily be found on the car manufacturers website. You may see a range such as 5-7. There is a range because fuel consumption can vary depending on the terrain (hills use more fuel), driving behaviour (sudden braking and acceleration uses more fuel), worn out tyres, delayed servicing, air conditioning, overloading, poor quality fuels and oils to name a few, all affect how much fuel we consume.
The tank capacity. How big is the fuel tank? Expressed in litres, and can also be found on the car manufacturers website.
The current fuel price at the petrol station.
Our driving distance per week. An average of how many km’s we drive in any given week.
From this information, we can then calculate how much we will pay in petrol per year.
We can now add $4,061 in annual petrol costs to our annual cost of car ownership calculation.
3/. Vehicle registration costs
Here is a full list of vehicles and what band they fall under. Band 4 vehicles are considered safer than band 1 vehicles, and as such have lower licensing and registration fees. Vehicles are put into bands depending on how safe they are considered to be. Newer model and smaller vehicles tend to be considered safer as a general guide. The cost for each band can be seen on the attached link.
Added to calculation
4/. Warrant of fitness cost
A warrant of fitness (WoF) is a regular check to ensure that your vehicle meets required safety standards. Vehicles registered before the year 2000, will need a WOF check every 6 months. After 1 January 2000 and a WOF is needed just once per year. Less than two years old, then a WOF is only required on the cars third birthday, and then every year thereafter.
5/. Car maintenance costs
Newer vehicles will generally need less ongoing maintenance than older vehicles. This cost will need a bit of educated guesswork, because we can’t always predict what will go wrong and when. This could cover anything from wheel alignment to cambelt replacement to broken windscreens. Anything that is preventing your vehicle from being safe on the road and performing at its peak.
6/. Car insurance costs
It is a very personal choice whether you get no insurance, third party insurance, comprehensive insurance, or any other type of car insurance. I would recommend at the very least, third party. You never know how expensive a car may be if you are involved in a fender bender. Some high-end vehicles are very expensive to repair and if you are at fault, this will come out of your pocket if you aren’t insured. Your choice of insurance and excess levels will depend on your own emergency savings, and your personal tolerance for risk. How much can you afford to lose without worry?
7/. Parking and any other vehicle related costs
Cleaning, parking, roof racks, tolls, car supplies, tickets, sound system, and so on.
Total annual cost of car ownership
Now we have all car ownership costs totalled, we can calculate the annual cost of owning a particular car. We simply get the sum total of (4) to (11).
Total annual cost of car ownership
In this example, the car is costing us $9,506 per year for 9 years, for a total 9-year cost of $85,555
8/. Opportunity cost of car ownership savings
What if we could make the following savings?
Holding onto the car for 14 years, instead of 9 (new sale price ($8,000)
Buying the car with cash (no finance)
Saving $1,000 per year in petrol with safe driving and a bit more walking
Saving $200 per year in insurance by combining our insurance with the same company as our house and contents insurance
Negotiating on the purchase price and getting a deal for $19,000.
Let’s input these changes:
Just by making some sensible changes, we have saved ourselves almost $2,000 per year. If we take it a step further and invest the $2,000 difference into the sharemarket and earn 5% returns, then we are actually $3,000 a year better off by making these changes.
If we extrapolate this type of car buying behaviour out to 42 years, then we would be $6,500 per year better off just from saving $2,000 per year, thanks to investing and compound interest.
If we can go any length of time without having any car, or maybe 1 car instead of 2, then our savings can be even greater. Just make sure to include the cost of public or alternative transport if you go down this route, to make it an accurate calculation.
If you would like to compare the cost of one car versus another car just perform the same calculation but with different figures for each car you are looking at. It is important to go through this process, because although one car may look more expensive to purchase, the annual costs may not actually be that dissimilar thanks to lower annual costs. An electric vehicle is a perfect example of this.
Final Thoughts
Most of these vehicle costs can be lessened by the type of car you purchase, paying with cash, shopping around for vehicles, shopping for insurance, shopping for best loan rates, driving less, less aggressive driving behaviours, maintaining your vehicle, and owning your vehicle for longer.
It may appear cumbersome to go through this process, but if you are serious about making your money go further, then the right decisions on vehicles can potentially save you hundreds of thousands of dollars over your lifetime. Plus I have made it a bit easier for you with a pre populated spreadsheet you can use.
Small price to pay for a few hours of shopping and calculations, right?
Join me for the next article, where we will discuss some tips on how to reduce the purchase price of a car.
If you need help analysing any financial decisions, then get in touch and we may be able to help.
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
Are there any other costs I have missed out? What strategies do you use when calculating the cost of a vehicle? Are there some costs here that you hadn’t considered before? Comment below.