Know What Your Car Is Costing You
by Joel Fink
Do you know what your car is costing you? Or the most expensive thing about owning a car? If not, you should. Here’s what you should know.
Let’s talk cars.
What is the most expensive thing about owning a car?
Is it the insurance? How about gasoline or interest on your loan? What about those expensive repairs and maintenance?
The high cost of depreciation
Turns out that the most expensive thing about owning a car is depreciation. Depreciation is a fancy word for how much the car declines in value over time. Unfortunately, a car starts declining in value immediately after you buy it.
According to Edmunds.com, a new car will lose 9% of its value one minute after you buy it and will decrease by about 19% in its first year (see “How Fast Does My New Car Lose Value”). After two years, it will have decreased by about 31%, by 42% after three years, by 51% after four years, and by 60% after five years.
To put that into dollars, let’s say you pay $15,000 for a new, moderately priced four-door sedan. The car will be worth about $13,650 when you drive it off the lot and about $12,150 at the end of the first year. The cost just to own the car (i.e., the depreciation) for the first year is $2,850 (19% x 15,000).
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The depreciation for the second year will be $1,800 (31% x $15,000 minus the first year’s depreciation). Depreciation for year three will be $1,650 (42% x $15,000 minus year one and two’s depreciation). Depreciation for year four will be $1,350 (51% x $15,000 minus year one, two, and three’s depreciation). Depreciation for year five will be $1,350 (60% x $15,000 minus year one, two, three, and four’s depreciation).
Remember that the depreciation cost is in addition to all the other costs of owning a car like gasoline, auto insurance, parking fees, interest on the car loan, and repairs and maintenance.
1. Do your research before you buy a car.
Look for reasonably priced cars that fit your needs with good “total cost of ownership ratings,” including things like gas mileage, dependability, and maintenance.
2. Talk to your auto insurance company before you buy.
Ask them what the insurance rates will be on the model and year of the cars that you are considering. If you feel like your insurance rates are high, don’t be afraid to shop around with other insurance companies or talk to an independent insurance agent.
3. Consider buying a gently-used car.
Since the depreciation is highest in the first couple of years, you can save on the purchase price of a car that is one or two years old.
You need to weigh buying a used car versus a new one since the potential for higher repair and maintenance costs increase as the car gets older.
Also, new cars often come with warranties, although you can sometimes get warranties on used cars as well, at least up to the level that was offered on the car when it was new.
Related: Buying a Cheap, Reliable Used Car
4. Keep the car as long as you can.
Although the repairs and maintenance can be more expensive on older cars, the depreciation cost will be very low in those years. Also, you may have (hopefully) paid off that car loan by then, so you can enjoy at least of few years with no car payments.
Cars are an expensive necessity for many of us. Taking the time to make a good purchase, driving the car as long as possible, and doing all you can to keep your insurance rates low will help keep those car expenses in line.
Reviewed June 2021
About the Author
Joel Fink is a retired CPA and financial services executive living in Dallas, Texas. He enjoys writing articles that help real people with simple ideas to manage their money and improve their lives.
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