How to Calculate the True Cost of Owning a Car Comments48 Comments

The following is a guest post about the cost of owning a car. If interested in submitting a guest post, please read my guest posting policy and then contact me.

Purchasing a car can be a major expense, second only to buying a home for most consumers. And like owning a home, owning a car also comes with the cost of maintenance and upkeep. What initially seems like a low starting price can skyrocket over time when you factor in the added costs of insurance, maintenance, and fuel. For example, although a Dodge Journey SUV may cost $1,600 less than the comparable Toyota Highlander, according to Consumer Reports the Dodge will actually cost you $5,000 more in running costs over a 5-year period. It’s helpful to take a closer look at all of these associated expenses to calculate the true cost of owning a car. This will help you better compare your options, for a realistic picture of what to budget.

Cost of Fuel

One of the most obvious costs you can expect to pay is fuel. This can really add up over time, particularly for larger cars and SUVs. Cars that require premium or diesel fuel will take a bite out of your budget, while hybrid vehicles will help offset their higher sticker price by lowering your fees. Fuel accounts for nearly 25% of the full cost of car ownership over a period of five years, so it’s worth comparing mileage carefully to choose a lighter, more efficient car if possible.

Depreciation of Value

Although fuel may come to mind first, depreciation is actually the largest expense when you look at car ownership as a full package. It accounts for almost half of ownership costs over the first five years of owning a car, because the car’s value can fall so steeply. It’s estimated that the average model depreciates in value a whopping 65% in the first five years alone. To offset depreciation, you’ll want to compare models carefully and look at their resale values. Perennial bestsellers like the practical Toyota Prius tend to fare better over time when compared to sportier hatchbacks like a Suzuki SX4 or Mazda 3.

Insurance

Your insurance rates can vary widely, depending not only on the car you drive but also on your driving record, credit history, and location. However, some cars are easier to insure than others. A practical Skoda will always incur lower rates than a flashy BMW. If you have narrowed down your list of potential cars to a few top candidates, you’ll want to run these through insurance comparison tools to see how they measure up. It’s also worth shopping around to find the lowest insurance rates, because each provider has their own unique formula.

Cost of Maintenance

If you’re purchasing a brand-new car, in most cases you won’t have to worry too much about costly repairs. However, to extend the lifespan of your car and fight depreciation it’s still important to take it in for regular maintenance. According to data from Consumer Reports, maintenance and repair costs make up 4% of the total ownership costs of a car. Most costs are covered by a factory warranty during this time, but some vehicles still can incur higher costs than others. The Porsche Cayenne SUV can cost $4,000 in maintenance costs during five years of ownership, which is far higher than most others in its class.

No matter what type of car you are driving, you can minimise your costs by keeping an eye on your budget, including how much you’re spending on maintenance, insurance, and fuel. This will help you keep car ownership costs under control over the long run.

If you enjoyed this post, please consider subscribing to the RSS feed or you are welcome to leave a comment below.
This entry was posted in Financial Advice, and tagged , , Comments48 Comments
By : Adam | 8 Aug 2013
Tweet this article :
Div line

48 thoughts on “How to Calculate the True Cost of Owning a Car

  1. Novabild

    Depreciation is a bigger factor in new cars than used cars. As soon as you drive your new car off the dealer lot, it loses some of its value. This is one cost you won’t notice right away, but when you’re ready to sell your car, it means you won’t be able to get as much money for it as you could if it was brand new.

    Reply
    1. Free Money Minute

      I agree. This is the single biggest reason why people who buy cars generally have a harder time building wealth. If you are buying a $30,000 brand new car and losing $8,000 in value the minute you ride it off the car, you need to be making much more that $40-50k to continue to maintain momentum towards building wealth.

      Reply
      1. Jeremy

        I know all about that mistake. I don’t see myself buying a brand new car again after seeing how much I lost from depreciation. Some new vehicles are especially bad for losing value to depreciation.

        Reply
  2. Anthony @ Thrifty Dad

    Good post. Insurance was a pretty big factor when I bought my first car (still running). I made a list of all the car models and years I wanted. Narrowed them down to about 5 and called the insurance company. It was surprising to see how when we factored in some of the insurance costs, some of the cheaper cars were actually more expensive.

    Reply
    1. Jeremy

      I wish I had been so thorough when buying my current car. The insurance was incredibly high. Luckily it’s decreased a lot over the years due to a clean driving record.

      Reply
  3. Rita P @ Digital Spikes

    Fuel prices are going up, not sure how much more… These days electric cars are becoming popular and save lot of money. My next new car would be electric car and there are lot of benefits including federal tax credit rebate on the car as well as home charging stations (50% off). Also I heard some states provide free parking for electric cars

    Reply
    1. Jeremy

      While electric cars may be the future of driving, I wouldn’t be so quick to buy one. The expensive batteries balance out a lot of the fuel savings. Where I live there simply aren’t enough places to charge them yet.

      Reply
  4. snarkfinance

    I did the same analysis before purchasing my latest car, but I set a threshold of how much I would care. If two cars, for example, where without $2,000 of each other over a five year period I decided I would choose whichever I liked best overall. I mean, I have to drive the freakin’ thing, right?

    Reply
    1. Jeremy

      Yes you do still have to ultimately consider what you want to drive. If you focus it completely on price, there’s a good chance you won’t be happy with what you drive.

      Reply
  5. Adam @ Money Bulldog

    Glad I read this today, it’s reminded me that my car is due for a service. I agree with Sean and Mr.CBB also brought it up in a comment the other day, regular maintenance is one of the simplest things you can do to bring down the long term costs of running a vehicle, yet so many people still ignore it.

    Reply
    1. Jeremy

      I’d have to say it’s also a reminder for me. I’m due for an oil change that I’ve been putting it off. As much as I’d rather not do it, I don’t want to pay more in the long run.

      Reply
  6. Todd @ AllThingsFinance

    Fuel is really 25% of the cost of ownership?? Damn!! I bought a 2003 Mustang when I was 20. I’ve driven it 140,000. Maintenance, other than routine, has been almost zero. I average 19 miles to the gallon, which isn’t bad for the car. I am paying $85 a month for insurance, which I bet is higher than what I could have.

    Time for me to buy a TESLA…

    Reply
    1. Jeremy

      I’m not too surprised about that, but I’m sure many people would overlook it. I should have considered it more with my current car. I knew the financing and insurance would be pricey, but I didn’t consider how I’d be paying a lot for gas in the long term.

      Reply
  7. Tara @ Streets Ahead Living

    Great post. I remember when I was in college and in need of a new car and was dumb enough at first to think I could afford a car payment! My brother was like, no you can’t… have you factored in insurance and maintenance? and then I realized I could not afford to buy a car.

    Reply
    1. Jeremy

      Young people especially might forget about the extra costs of vehicle ownership. It’s one thing to be able to afford the car payments, but affording to actually own a car is another story.

      Reply
  8. Mark Ross

    Great post, this really helped me know the different costs a car owner needs to pay. I’m glad I haven’t paid for a car yet. I will certainly take note of those. With the amount of depreciation involved, I think I’ll just buy a secondhand car, instead of the brand new ones.

    Reply
    1. Jeremy

      Yep, definitely buy secondhand to save on depreciation and insurance. Just make sure it is in good condition otherwise the maintenance costs will balance it all out and cause big headaches.

      Reply
  9. jacob | iHeartBudgets

    Driving the car off the lot is bad enough, but hanging on to that car will cause your wallet to leak without you knowing it until you try to sell. Depreciation is the single biggest waste of money in America, and it’s all spent on shiny cars. UGH!

    Reply
    1. Jeremy

      For sure…it is a huge waste that far too many people put up with. The allure of a brand new vehicle is often too much. I think there does come a time with a car that was bought new that it is best to hold onto it to get more years of it rather than trying to sell it. You might as well get some years where it’s not costing as much rather than putting down the cash on another car.

      Reply
  10. Pauline

    There are a ton of additional fees, in Europe you often pay a tax disc every year as well, and then there is the cost of small things your insurance won’t cover, like a stone breaking your windshield, or someone stealing your tire caps. It can get expensive.

    Reply
    1. Jeremy

      Sounds like the insurance is a lot different over there. Our insurance here has special rules for glass damage where it doesn’t affect your monthly premiums. I think stolen hubcaps or any other part attached to the car is covered too.

      Reply
  11. MonicaOnMoney

    Great points! I considered buying a used Mercedes Benz convertible but then starting talking to others about how expensive it is for maintenance and decided my next car will be a Honda instead!

    Reply
    1. Jeremy

      Personally I don’t like dealing with heavy traffic. So I’d gladly take transit to work provided that the route isn’t too long. I had to drive this morning and I had forgotten how much I dislike driving downtown.

      Reply
  12. Ankit

    Insightful post! I am yet to buy a car but I have heard that Insurance is the elephant in the room when it comes to assessing the true cost of a car. The fact that insurance cost depends on so many variables makes it tricky

    Reply
    1. Jeremy

      That is especially true for first time car owners. Without any driving history insurance companies will charge a lot more to ensure you. Plus they tend to charge more for riskier drivers such as young people. So your first car insurance can be quite pricey.

      Reply
  13. Christine @ ThePursuitofGreen

    Good points to bring up! Wish you had written this a few months ago when I bought a new car! Yes I did…brand spanking new. Though…it ended up being the best option for us.

    -First we looked at different hybrids. We even considered Ford but eventually went with Toyota because their cars last forever! Ford…still not tested yet.
    -Second we went for a regular Prius. My husband is really tall and it was a bit small for him. So then we had to go for the larger size version Prius V.
    -After that we looked for used models. None to be found as the model is fairly new. Looked at 2012’s…not worth it.
    -In the end, got a Prius V with 0% APR.

    Getting 50 mpg now:P

    Reply
    1. Jeremy

      The new vehicles these days do tend to get great gas mileage which could make it a lot more worthwhile. It sounds like a case where you were so set on a particular vehicle that you didn’t have much choice about going used. That is where things get more expensive. The people who are open to several options can often get a much better deals.

      Reply
  14. Yonelyn

    Everyone knows that cars are expensive. In addition to the cost of acquisition, there’s maintenance, insurance and the ever-increasing cost of gasoline. We all know that those costs add up, but few of us know exactly how much it really costs to own a car.

    Reply
    1. Jeremy

      It is a big tricky to really calculate beforehand as those costs aren’t established until you actually get the car and start driving it. All we can really do is some research beforehand and don’t commit to anything that may be cutting it close to fitting in your budget.

      Reply
  15. Thomas | Your Daily Finance

    I say buy used and even then get something a lot cheaper then you can actually afford. Maintenance for me is by far the biggest cost. Insurance is fairly cheap when you are driving a 96. Costs add up and like a home things can and will go wrong so plan for them.

    Reply
    1. Jeremy

      Going used is the smart move, but I’d be hesitant about a car that old. It’s likely at the age that a lot of maintenance is required. By just getting a used car that is 2-3 years old you get the savings without major work being due soon.

      Reply
    1. Jeremy

      Yeah I don’t know why more people don’t realize that a car’s value drastically diminishes over time. It’s definitely not the best investment that they might assume.

      Reply
    1. Jeremy

      10 years sounds like a good idea, but there is probably a magic number depending on the car where you want to sell it off. You don’t want to get hit with any major scheduled maintenance down the road.

      Reply
  16. Derek Chamberlain

    This is why I’m hunting for a used Toyota Corolla.

    I’ll get the most savings on gas, depreciation (used), and repairs (really reliable).

    I’d recommend to anyone to go for a used Toyota or Honda and spend your hard earned money on something else vs. getting from point A to point B.

    Reply
    1. Jeremy

      I agree that a used Toyota or Honda is the way to go. I plan on going that route with my next car. There is definitely better things to spend money on than transportation.

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>