Car costs are a large part of my budget, but I don’t know how to reduce them.
Transportation is usually the second largest expense in your budget – behind housing. So, how much do you think your car costs you every year? Is it a big part of your annual spending? Think about it while I keep talking.
Let me know if this was you. Your thought process started out like this. “Well, gas is $2.50 per gallon, and I get around 20 miles per gallon around town. I usually drive, oh, . . . I don’t know, 100 miles per week . . .” Let me stop you right there.
It’s pretty obvious that you have no clue how much your car is costing you just to own, let alone transport you somewhere. This is a huge problem.
I wrote in a previous article about the biggest things that people waste money on, and one of them was buying a new car. On this point I think most people understand, the biggest drop in depreciation comes in the first year. Every subsequent year the depreciation is slightly less. Check out the curve below, and answer this question. Where on that curve would you want to spend your hard-earned money on a car? 100% equals brand new, and 50% would be half the original price. The bottom of the graph is the life of the car in years. We’ll get back to this towards the end of the article.
As an aside, just think about all the parts that go into your car, and the engineering that it took to figure all those things out. From the internal combustion to the air-conditioning to the radio to the automatic windows, the modern car is incredible. It truly is amazing that our cars don’t break more often than they do, considering the abuse that some drivers put them through.
The Cost of Driving According to Really Smart People (the IRS)
Anyway, let’s continue. The IRS thinks it costs you 53.5 cents per mile driven to operate your vehicle. Granted, this is an average based on lots of assumptions. But let’s just go with it for second.
The average American drives 12,000 to 15,000 miles per year. Let’s split the difference and assume 13,500 miles per year. So . . . simple math . . . your car costs $7,222 per year to operate. And if you have a car loan, you spend even more! The average car payment is $479/month or $5,748! So, just to recap. If you’re average (and most are by definition) you spend $12,970 per year to own and operate your motorized plush wheelchair! Let’s break this down.
Gas is currently $2.50 per gallon. (It fluctuates so often, I used $2.50 as a rough average.) If your car gets 20 mpg, that equates to 12.5 cents per mile. Or $1,687 per year. Then include incidentals like insurance ($1000), oil changes (3-4 per year – $150), registration (varies – $100), inspections ($25), and taxes (also varies). The remainder is widely varying depending on your particular vehicle, which includes costs like depreciation and repairs. Again, the IRS has averaged all these costs to come up with their 53 cent number.
By comparison, last year my wife and I spent just $2,786 for TWO vehicles! Add in depreciation of $142 and $713 for our two late-model transports and we have a grand total of $3641. Or just $1,820 per vehicle in one year!
Three Steps to Spend Less on Your Cars
So how did we do it?
Step one: NO CAR PAYMENTS. I can’t stress this enough. Never use future money to buy something that will continually go down in value. You might as well throw ten or twenty-dollar bills out the window while you’re driving your future away.
Step two: Drive LESS. Have to go to the store? Wait until you have to do several more errands, and plan a nice circular route through town to complete them all in one efficient trip. Does it take a little effort and planning? Yes, but the alternative is driving all the way across town every. single. day. Even though you were just there yesterday and the day before. Also if possible, choose a house/apartment closer to work.
Step three: Choose a reliable, older car. Our vehicles are currently ten and fifteen years old respectively. Remember that depreciation curve. Check it out with my added notations. This shows when you should buy your cars.
Notice the slope of the curves. There are two distinct regions. Initially the slope is steep, which makes sense as you lose most of your cars value in the early years. Eventually the slope starts to flatten out as the value doesn’t change much from year to year. If you said “HERE” initially when I asked the question at the beginning of this article, you would be most certainly correct.
The majority of the high depreciation years are gone, and there is still plenty of life left in that amazing machine that is a car. You want to find cars that are 6 – 9 years old with 60,000 – 90,000 miles. At this point in their life, they are worth roughly 30% of their original
stupid sucker purchase price.
In full disclosure, we bought our ten-year old car brand new, before we became the wily money veterans that we are today. Our other vehicle was nine years old when we bought it. And we just bought another car that is 8 years old.
The IRS number (53 cents), from my perspective seems outrageous. As our cost per mile is only 36 cents. And I’m sure there are many out there that are much more efficient than we are.
It all comes down to how much you drive, and the car you choose. For most of you, your car is killing you. Your ability to increase your wealth and net worth is being whittled away dollar by dollar by your ridiculous car loans and depreciation.
By limiting the amount you drive, you save on gas, depreciation, some incidentals, and repairs (people who drive more are harder on their cars).
Are your car costs dragging you down, or are you one of the weird ones with much lower car costs?