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Cost of Owning Vehicles

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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?

How to STOP Financing Your Vehicles

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How to stop financing cars

Many people pay more than sticker price for their automobiles because they finance the vehicle and pay interest on the debt every month.  I used to be one of those people… never again.

What follows is a quick summary of how you can STOP financing your vehicles and start paying cash.  Doing so will help you save money, lower your debt burden, and give you true ownership and control over your purchases.

  1. Stop thinking you have to borrow money to buy a car. Most finance problems are thinking problems.  If you think buying a car with cash is not doable, then you will probably never do it.  Believe me, it is doable… starting thinking it is.
  2. Aggressively pay down existing auto loans. If you can afford extra debt payments, make them.  If you have a lump sum amount saved that you can put toward your existing auto loan, do it.  If you have to sacrifice to start making extra payments, then consider lowering your cell phone plan, cutting cable, or making any other sacrifice you can think of to help repay your loan faster.
  3. Continue saving after loan is paid off. After you pay off your existing loan, continue putting that amount away every month.  The difference is… rather than paying the financing company, you’re paying yourself.  Create a separate savings account called “Next Auto Fund” and begin funding it every month.  You can also use an envelope and stash the money there.
  4. Buy used. Many new cars are simply not worth the extra cost.  Next time you purchase a vehicle consider something that is at least a year or two old.  Betsy and I usually settle on cars that are no more than $6,000 and are working to fund our “Next Auto Fund” with $12,000 to cover both our vehicles.
  5. Don’t forget to save for repairs and maintenance too. Alongside our “Next Auto Fund” we also have a “Auto Repair & Maintenance Fund”.  After speaking with my auto mechanic, we decided that $100/vehicle/month is a good basic number to use for funding this account.  Betsy and I have been saving $200/month for over a year now and it has worked phenomenally.

Using these tips and some good old fashioned discipline you can stop financing vehicles and start paying cash.  Don’t forget point number 5 – it is key to your success!  If you don’t create a maintenance savings then you’ll undoubtedly end up tapping into your “Next Auto Fund” to pay for repairs… which defeats the whole purpose.

My history with financing cars

My first automobile was a 1987 Pontiac Sunbird.  I loved it.  For me it was the best car in the world… and to get it, I was willing to go into debt for the first time.

I was 17 years old and had $700 cash savings to use toward the car – but it cost $1,700.  I couldn’t get a loan without a cosigner and my dad wouldn’t do it so I hit up my grandpa… he obliged and we signed on the dotted line for a $1,000 loan.  I paid $100/month for 10 months (along with an extra interest payment the 11th month) until it was paid off.

That is how I started financing vehicles.

After the Sunbird I financed two other vehicles – both used.  I’m 35 and have owned these 5 vehciles:

  1. 1987 Pontaic Sunbird – Paid $700 cash and financed $1,000.
  2. 1991 Chevy S-10 Pickup – Gift from my amazing mother Kathy.
  3. 1988 Chevy Sprint – Paid $1,300 cash.
  4. 1996 Ford Mustang – Financed $6,000.
  5. 1999 Jeep Cherokee – Financed $7,200.

Paid off and saving

Now-a-days we have both our vehicles paid off and have around $4,000 saved for our next vehicles.  As mentioned above, we also fund our repair and maintenance account with $200 each month to cover expected care costs of the vehicles.

Next time we go to purchase a vehicle, rather than paying $7,000 for a $6,000 car… we plan to pay closer to $5,000.  Because like Dave Ramsey always says… 90 days is NOT the same as cash!

Auto Financing After Bankruptcy – Marlon Answered

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In case you haven’t heard, I am offering free debt help.

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

How much should Marlon spend for a vehicle?

DFA reader Marlon asked:

“On super bowl Sunday of last year my sister in law totaled my car. 15 days later we bought a 99 Mercury Cougar.  We went to a buy here pay here car lot.  As of March 1st we will have made one year of payments. Just this past December I got my bankruptcy discharged. I would like to get out of the 99 Cougar and into something safer.

How long and how much should I come up with for a used vehicle?”

The 1/10th Rule for purchasing a vehicle

I first saw this concept used by the Financial Samurai, and I like it.  The 1/10th Rule states that the car you buy should cost no more than 1/10th your gross annual salary.  Example:  If you earn a $50,000 yearly salary [50,000/10 = 5,000] you should spend no more than $5,000 toward your next vehicle.

Marlon, divide your annual salary by 10.  That is the limit on how much you should spend toward a vehicle.

Financing after bankruptcy

You also mention the fact that you just had your bankruptcy discharged in December, 2009 and are wondering how long you should wait.  I am assuming you mean how long you have to wait before you can be considered for additional financing for yet another vehicle.  I have a couple of things to say about that.

  1. Can you finance? Financing purchases may be what caused your bankruptcy in the first place.  You said you were making payments on the 99 Cougar and that March 1st will mark 1 year worth of payments, but you also stated your debts were discharged in December.  Did that discharge not include the auto loan for Cougar?  Do you still owe on the Cougar?  If so then the last thing you should be thinking about is financing another vehicle.  If the Cougar is unsafe AND unpaid then you need to focus on getting that debt settled ASAP… THEN you can begin saving money toward another used vehicle.
  2. How long until you can finance? Although a bankruptcy can remain on your record for up to 10 years, its effect on your credit can begin to lessen the day after the case closes.  As long as you handle your finances responsibly from here forward, your credit will improve sooner than you might expect.  How soon you will be available for financing depends on how responsibly you handle your credit from here on out.
  3. Rebuild your credit. Your credit has taken a hit and needs to be nursed back to life.  If your debt to income ratio (the measure of your monthly debt payments to your monthly gross income) is raised too high too fast your credit will never improve and you’ll find yourself back in financial trouble but without another bankruptcy net to fall into.  If you must borrow, do so a little at a time.

Here’s what I would do Marlon:

I would not finance another vehicle.  You mention the Cougar is not safe.  If the Cougar is not beyond repair then do whatever necessary to get it operating safely.  Will new brakes make it safe?  Then get new brakes.

If it is beyond repair then do the following:

  1. Find alternate transportation (friends, bicycle, bus, etc.)
  2. Cut out all unnecessary spending.
  3. Save extra money toward your next used vehicle.

Do this as long as your situation will allow, or until you have enough money saved to buy a vehicle in sound operating condition.  You can find such vehicles for as little as $1,000 if you know how to look.  Also, remember not to spend any more than 1/10th your yearly salary on the vehicle.  So if 1/10th your salary is $5,000 – then shoot for somewhere between $1,000 and $5,000 for the vehicle.

What do you think?

What would you do if you were in Marlon’s shoes?

If you need debt help or personal finance advice – Ask Matt Jabs.

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