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Cost of Owning Vehicles

12.23.2011 by Matt Jabs //

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:

  1. $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.
  2. 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?

Categories // Money Management, Transportation Tags // automobile, cash flow, financing, Money Management

How To Spend My Tax Refund? C.L. Haddon Answered

02.18.2010 by Matt Jabs //

Need help with your situation? I offer free personal finance advice.

Visit the Ask Matt Jabs page and fill in the form to ask your question for free.

How should I spend my tax refund?

DFA reader C.L. Haddon asked:

Hi, Matt – I am receiving approximately $1,000 back from taxes this year and want to make the best decision as to how to use it. Should I pay down credit card debt, payoff a small installment loan or put it in savings for an emergency fund? I have a personal loan of $1075 at 18%, a credit card with a balance of $3,500 at 14.99%, a credit card with a $1,000 balance at 0% (until June, 2010), another credit card with $4,500 at 9.99%, and lastly a Sears card with a balance of $650 at 22%. I live on SS and income from a part-time job.  I commonly have some difficulty making ends each month, primarily due to one-time events like medical co-pays, prescription co-pays, auto repairs, etc. I am 65, female, and the sole wage earner. What is the best use of the $1,000 refund?

Always pay yourself first

Hi CL, thank you for your question.

If I were in your situation there would be no question as to what I would do with the $1,000 tax refund – I would start an emergency fund and save the entire amount as a buffer against the “one-time events” you mention.

Here are some other ways you can a turn your financial situation around:

Increase your cash flow

The reason you have credit card debt is because it sounds as if you are living pay-check-to-paycheck.  You need to increase your cash flow.  This does not mean that you have to increase your income (although that is a solid idea if it is possible) instead you may want to focus on decreasing your expenses so you have more money available for savings at the end of each month.

Other ways to increase your cash flow:

  1. Create and live by a written monthly budget
  2. Implement the cash envelope system.

Doing these two things help make my wife and I much more efficient in our spending.  Now we tell our money where to go instead of wondering where it went.

Decrease expenses

After seeing your income sources and your debt amounts I am assuming that a good portion of your cash flow goes toward debt repayment; but are their any expenses you could cut, at least for awhile?

Some possible expenses to cut:

  1. Cable TV – we just plain do not need television, if cutting this helps you get on your feet financially, then cut it.
  2. Cell phone – cut back your plan or consider getting a land line with limited or no long-distance service.
  3. Eating out – we were spending $6,000/year on dining out and have since all but eliminated this expense.
  4. Unnecessary groceries – pop, snacks, etc.  Instead focus on beans and buying in bulk, here are a few ways to save money on groceries.

Pay down debt

Another reason you have no cash flow is because so much of your monthly income is going toward the interest on your debt.  I am willing to bet that your debt stacked up slowly over time as one emergency after another hit your pocketbook when you were without savings.  If you have that $1,000 emergency fund then you have some solid ground to stand on next time something comes up.

Build your savings

Beyond creating your emergency fund you should also continue to fund it each month, even if you can only do so a little at a time.  I have debt too, so I cannot save everything I make.  What I have decided to do is attribute 75% of my available cash flow to debt repayment and 25% toward savings.  This allows me to pay down my debt and save at the same time – I call it the 75/25 method.

What do you think?

Do you think that C.L. should use her $1,000 to start an emergency fund, pay down some of her debt, or toward something else entirely?

If you need personal finance advice… ask Matt Jabs.

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We accept no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this material. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Any advice taken from this site does not in any way establish a client/adviser relationship.  We always recommend that you consult with a licensed, qualified professional before making any financial or investment decisions.

Categories // Debt, Spending, Taxes Tags // cash flow, Reduce Expenses, Savings, Spending, Taxes

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