Calculating Car Ownership Costs For The Rest Of Us

It's time for your brain to come off that long extended holiday vacation and start thinking about what your car is really costing you.

Here's one to think about - the actual cost or "sticker price" of a car has very little to do with how much that car will cost you.

Americans are challenged by finance (I'm not excluded). Houses, and cars are all big investments, but do you sit down and calculate the real cost of ownership (COO) based on the purchase price, interest costs, insurance, maintenance, taxes, and whatever else adds to these ballooning expenses? Based on the number of foreclosed houses and repossessed cars, I'm guessing a lot of people don't do this.



Depreciation:

This accounts for approximately 50% of the COO. To calculate depreciation, check out the residual value tool from Cars.com. You might be shocked when you see that most of the depreciation happens in the first two years. Remember that you can decide to save some money if you buy a car that is two years old rather than new off a car lot.

Fuel:

This cost is highly dependent on what car you buy and how much you drive, but in general this is about 25% of the COO. Use this calculation to determine your fuel costs: (mile driven per year) ÷ (car miles per gallon) × (gas cost per gallon). Check out my Gas Savings Calculator if you want to do a smash-up job of figuring out your true gas costs.

Interest:

Your interest costs on a car loan are usually about 10% or your total COO, but vary depending on your credit score, existing loans, and other seemingly esoteric criteria. Don't get caught up in interest compounding questions or the difference between and APR or APY. Just multiply your loan interest rate times the loan amount to estimate your cost. Interest rates on new cars are about 7%.

Insurance:

Just like your credit score and loan costs, insurance costs are idiosyncratic. Insurance costs are another 10% of your total COO. Don't, don't, don't forget to call you insurance company to find out your insurance costs before buying a car. NOT doing this could cost you over a thousand dollars per year because your insurance cost is partly based on how other people drive the same car - not you.

Maintenance & Repair:

You're probably going to be surprised to find out that this cost is only about 5% of the COO. Modern cars don't break down that much and they are usually under warranty if they do break down. The catch here is that maintenance and repair require your time, and that's not in this calculation. If you're like me and hate spending money to repair cars and go to dealers, you may consider a Certified Pre-owned car like me.

Other Stuff:

There's other stuff I'm not including because it's relatively minor, but you may want to consider if you really want to do a great COO calculation. Taxes and registration costs can add up over time. Probably the most overlooked cost is the opportunity "cost" of an expensive car. If you buy a $30, 000 car instead of a $40, 000 car, then you have $10, 000 left over to invest and actually make money. However, if you're going to spend all your money no matter what your car costs, it's probably best to leave this out.

Happy calculating!

Check out the original post at: http://blog.carsala.com/2009/01/26/calculating-car-ownership-costs-for-the-rest-of-us/