Save for future vehicles
As a general rule, wealthy people do not finance cars – or anything for that matter. It’s easy to understand why: saving money for a car (rather than borrowing and paying interest) reduces the overall cost and saves you money in the long run. Let’s stop borrowing money for vehicles and start acting wealthy.
To quickly demonstrate how much vehicles cost (even when paid off), consider the following examples:
- $500 saved over 12 months at 1% bank interest will yield $6,032. Purchasing with cash gives the buyer bargaining power and the ability to purchase, say, a $7,500 vehicle for $6,000.
- The same $7,500 car financed at 10% over 3 years will cost $242/month and will end up costing upwards of $8,700.
In this crude example we see that saving and delaying the purchase for a year could hypothetically save us $2,700 ($1,200 in interest costs and $1,500 in bargaining costs.) It’s also important to note that buying private party, even if you finance, allows you to retain bargaining power by bringing the lump sum to the transaction.
You get the idea, but what about the cost of owning a “paid for” vehicle?
Cars are expensive to own
Setting aside the “paying cash vs. financing” debate, let’s consider how much it costs to own a “paid off” vehicle. Have you ever ran the numbers to see exactly how much it costs to own your car?
Betsy and I own a car, a Jeep, a motorcycle, and a scooter (but plan to sell the scooter soon.)
Focusing solely on the car and/or Jeep, let’s take an elementary look at the numbers:
- $200/month for gasoline (G)
- $100/month for repairs and maintenance (M)
- $60/month for car insurance (I)
- $10/month for plates and registration (R)
G + M + I + R = cost/month for your “paid for” vehicle.
Running the calculation through for our situation reveals that we spend roughly $360/month for each vehicle. Since both the car and Jeep are “paid off” we see that it cost us approximately $720/month to own both – which is roughly $8,650 annually.
If you finance your vehicle you can simply add an [(F) for financing] to the equation: F + G + M + I + R = cost/month for your financed vehicle. I’m sure you won’t be excited about the results of the equation, but it’s very eye opening.
Make the change
We were originally saving for 2 replacement vehicles, not anymore. While we have no immediate plans to sell either vehicle, we are no longer planning to replace both when they give up the ghost. Instead we will only replace one, which means our “Next Auto Fund” goal just went from $12,000 to $6,000 (it is currently funded around $3,100.)
Update: We bought a new vehicle (much better gas mileage) and are selling the other car, and the Jeep.
It could be argued that we need both vehicles, but a better case could be made for only needing one. Especially if we’re able to separate our emotions from the situation (a wise thing to do when contemplating any financial decision.) After talking it over with Betsy, she agrees that while having the 2nd vehicle is nice, it is not a need.
Alternatives to owning a car
Depending on where you live, where you work, the size of your family, and other considerations – with a few sacrifices you may be able to avoid owning any vehicles, or perhaps get by with less. These suggestions obviously won’t work for everyone so apply it to your situation and be creative.
- Invest in a bicycle. People spend so much money on cars but are typically unwilling to invest in a solid bike. If you spend $1,000 you can get a commuter bicycle that, with the proper maintenance, can last years.
- Walk. If you live close to your grocer and employer, consider walking more. Just be sure to invest in a nice pair of shoes first.
- Carpool. Pay your coworker to hitch a ride everyday and leave your sole vehicle home with your spouse.
You don’t have to get rid of all your cars, but I do encourage you to run your own numbers through the calculation above to get a better idea of just how much vehicles cost, and to begin seriously considering alternatives.
What about you?
Do you own or finance your vehicles? Using the above calculation, how much are they costing you? Will this information change your views of current and/or future vehicle ownership?
We own. I think that in the end, it comes out cheaper – unless you end up with a semi-lemon that always requires maintenance.
But I’m with you. Should we have another car go, I want to figure out how to live with just one. Very tricky when you have a 4yo, and you live in a suburb of Dallas. Things are not designed to be within walking distance in these here parts.
Matt Jabs says
No they’re not… I just drove through Dallas a few weeks back. Most US cities are designed around the automobile as a main source of transportation, which makes the reality of non-vehicle ownership tougher to navigate – although still possible of course. Unfortunately, lemons can be had whether financed or paid for with cash.
Jabs – Good read, my only comment is that I can only see a “one” vehicle concept working for those living w/in larger communities w/ excellent commuting systems, or for young couples w/out children. I just don’t see this approach working for the larger audience.
Keep up the good work, I try to read up on your blog when I can.
Matt Jabs says
Hey Shawn, good to have you weighing in buddy. I agree that a conventional perception will limit reducing vehicles, but what about creatively changing the game? What about lowering debt burdens so one spouse can stay home? What about creative employment where you work from home (like me, and soon Betsy too)? There are always obstacles, so it’s up to us to break down barriers, create our own solutions, and to make our own way. Know what I’m sayin? 🙂
Great post. We just paid off our last auto loan in December 2010 and do not plan to finance in the future. Cash all the way.
I ran the numbers on the two cars we have and they are as follows:
Car # 1 (2007 Model; 35/40 MPG)
Total: $190/month or $2,280/year
Car # 2 (1996 Model; 14/20 MPG)
Total: $252/month or $3,024/year
Combined Total: $442/month or $5,304/year!!! WOW!
I’m glad you posted on this topic today because this is an issue my wife and I have been thinking through lately. We love the convenience of having two vehicles, but we’re convinced this is more of a luxury and a want, rather than a necessity for us because my wife is COO of our home and is home 80% of the time, we live less than a mile from my work and I have the option to telecommute as needed.
We’d love to get rid of one of the cars, but it’s a very hard decision for both of us because the newer, smaller car get stellar gas mileage and is 11 years newer than our other car; the older car is a minivan and can haul things around easier (car seats, strollers, etc), but get’s only half the MPG of the newer car and costs us upwards of $1,000 a year in maintenance. Decisions, decisions, decisions…
Matt Jabs says
Isn’t it crazy how much they cost?!?! Yeah, since she stays home and you live so close to work w/the option to telecommute, I would definitely say you could go w/o a 2nd car. Betsy and I are in the same situation w/my Jeep and her car – and will probably solve the problem by finding a vehicle that is a happy medium w/decent hauling and roominess while still getting good mileage. God bless Thomas!
My wife and I discussed this further last night and we’re about 90% sure we’re going to say bye bye to the old minivan. The remaining 10% will depend on whether or not she can get comfortable driving a five-speed (smaller car is a manual). We’re going on a long trip this weekend and she’s going to drive the whole way to try it out. We’re pretty confident that it’ll work out. Just takes practice.
Oh, and I have a couple thing to add to your “alternatives” list:
1. If, after you get rid of your second car, you discover a temporary need for a second vehicle or a larger one (be it for a long trip, a 4×4 for the snow, or a truck to haul something), you can always rent one. It’s far cheaper to pay a few hundred bucks in rental fees than it is to maintain a second vehicle for the year (as you pointed out in your post).
2. If the vehicle you are downsizing to works for every day use but doesn’t have enough room for all your luggage when you go on trips, consider adding storage space by getting one of those roof storage pods. This is actually something my wife and I are looking into as we move down to the smaller car.
Matt Jabs says
Yeah, it’s not that hard to learn to drive a manual… I learned when I was 13. 🙂 She’ll nail it.
We’re a one vehicle family. We pay cash on low mileage used replacements, and drive them until the repairs become unreasonable. We’ve been that way forever. My husband uses the car a lot so we just work around his schedule. You do what you have to do.
We borrowed money once to partially finance. The full replacement car insurance really killed us. It was one of those situations where the car could do short jaunts but we were going half way cross country and we didn’t have enough saved for a replacement. It hit home when we found out our new state’s premiums were tripled. We scraped the final money together somehow and paid it off just before the move.
Matt Jabs says
Solid Olivia, paying cash on used low maintenance vehicles is also the wise choice for us.
I don’t currently own a vehicle. I sold mine in 2009 when I moved back in with the parents. Hopefully in the future, I’ll be able to afford one. Until then, I’m saving up so I can buy a used car in cash when the time comes.
Matt Jabs says
Amen XJ… amen – great decision!
We’ve got two paid for cars at our house, a 2006 Chevy sedan and a 2002 Honda Civic. Both have medium to low miles and next to no maintenance costs for now. We are already saving up for our next vehicle so that we can pay cash for that one as well. While 2 cars might not be a need, it’s definitely much more convenient, especially living in a big suburban area where everything is spread out so far. At least both of our cars get pretty decent mileage – especially the Honda Our costs come out similar to yours i think, although maybe slightly less because the one car doesn’t get driven more than a couple times a week with my wife staying home with the child now.
Matt Jabs says
Yeah, it’s definitely more convenient having a vehicle for each adult – although certainly healthy to run the numbers and contemplate trimming. Congrats on your paid off vehicles and especially on your wife being able to stay home!
Peter Renton says
Great article Matt. Ever since I graduated college I have always paid cash for cars. I never saw the reason to finance a depreciating asset, so I made do with cheap cars until I could afford a decent one.
We have two cars, paid for in cash, but my wife and I were just talking last week that seeing I work from home now, we really don’t need two cars. We have decided to sell one car next month and the times where we really need a second car we will take a taxi or possibly rent a car. If we spend $100 a month on taxis/car rentals we will be well ahead financially of where we are now.
We will also be riding bikes and taking public transport more. We have a bus stop 100 yards away that can take us right downtown which we have used maybe a couple of times a year. We intend to take more advantage of that as well.
Matt Jabs says
That mindset is key… and I believe more and more folks are finally getting on-board w/the idea. Renting a car for the few times you may need it can easily cost less than ownership – good form.
Good post Matt. But I think the convenience of having your own vehicle sometimes outweighs the other options you have mentioned here, especially commuting by public transport or walking. Anyway I like the tone of your post which is that we should be creative and find means reduce the cost of owning vehicles. Keep up the good work.
Really like the sentiment of the article. Of course, I live in Chicago with no car, so it’s easy for me to get on board. 😛
Another option for people with no car, but who might need one periodically (and I realize this isn’t available everywhere) is a car sharing program like Zipcar. They generally have various plans available where you pay more or less depending on your usage. For shorter trips where you still might need a car it’s cheaper than renting. (And generally less hassle.)
Matt Jabs says
Oh yeah, I forgot about these services… thanks for mentioning them Kalinda.
Great post Matt. I would like to drop down to a single car, however with my grad school in the evenings and our 2 dogs we are unable to do so completely. We try and car pool the days I do not have class to cut down on the gas costs. We’d both love to start biking to work and I think we might slowly institute it at 1 day a week and scale up from there. We live 12 miles from our office and biking would take us a little less time to get to work which could save us a bunch of money and help our health! However, Atlanta is not a bike friendly town by any means and many vehicle patrons do not like to share the road and will clip you. For now we are stuck paying G-M-I-R.
Matt Jabs says
Yeah, unfortunately a lot of U.S. cities are less than optimized for bike commuting! I’m sure you can find a way and I encourage you to start biking in 1 day/week to cut costs. God bless David.
My husband and I have owned both of our Saturn SL1s for years now but have just hit a serious financial wall so we are considering about cutting our cost with regards to our travel. My husband works downtown – which is 15 minutes from our home – but he pays $5/day in parking. Since I work out of my home, I’m considering driving him to and from work as my car has very low mileage and the gas mileage is awesome. The thing in this case is will the time I spend driving offset (and the cost of gas) offset the $25/week parking? Unfortunately, there is no option to carpool and taking the bus would cost the same as the parking per day. This is a tough decision but, given our situation, it’s one we need to seriously consider.
Matt Jabs says
Hi Shannon. If I were in your shoes I would strongly consider getting rid of the 2nd vehicle… which will definitely be worth the daily drive you will need to make. Another option – find a coworker of his that lives close and take turns carpooling. Other options – ride a bike whenever possible, take public transportation, ask boss if he can work from home a few days/week, move closer to his job. Godspeed, let us know what you decide!
Yes we’re also aiming to do away with a car once our son graduates high school and leaves for college. In the meanwhile we recently saved some money by putting both cars on the same auto insurance policy. You do what you can, I guess.