Owning a car can be expensive but you shouldn’t be surprised by the costs. As Eric Outlined in his first post within the Car Buying University being educated is the most important part of buying car. We hope you use this post as a guide so you aren’t caught by any unseen costs after you sign on the dotted line.
Many car buyers see the price on the sticker and assume that is what they will have to pay for a car. While this figure is near what you will have to “pay” for the car its is definitely not the total cost of owning the car. To keep yourself in the clear we suggest you take a look at all the costs.
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Fixed Costs
To own a car you have to buy it, this part is obvious but what about other fixed expenses that you may not know about such as Car Insurance, Taxes and Registration fees, and depreciation. You need to know about them so they don’t come back to bite you so we have broken it down for you.
Car Insurance
Nearly all of the States in the USA require car insurance, only New Hampshire and Wisconsin don’t. Each state has different limits as to what type of coverage you will be required to carry but in most cases you will have to carry atleast Bodily Injury Liability. Many states also require that you show financial responsibility in the form of insurance or a bond to ensure that you will be able to repay any damage you may cause in an accident.
We recommend that before jumping in over your head you check out one of the major insurance providers and check out quotes on the car you are looking at. Typically they will require you to have a VIN number on hand so don’t forget to write that down before requesting a quote.
Depreciation
You have probably heard that the moment you drive your new car of the lot it will have lost value, but that can be a hard idea to wrap your head around so here is how it works. Essentially depreciation is an accounting term, which is more than you need to know, but what it tries to do is put a value on the usage, passage of time, and wear and tear on a vehicle. That said each day when you wake up and start your car to drive to work you are indirectly paying for this “usage, passage of time, and wear and tear on the vehicle.”
This may leave you asking but why? I own the car.
It really comes down to that there is more value in owning a car today, than there is tomorrow. Depreciation is a way of quantifying that value. The idea may be pretty abstract but I assure you it is very real. Federal Tax Guidelines assume within the first two years of ownership the value of a car will depreciate over 50%. This calculation is used for tax purposes only and is based on a 5 year lifespan, but it gives you a good idea of how much this unseen expense is really costing you.
So what can you do about it?
You have a few options. The first is to reduce the wear and tear on your vehicle by taking good care of it. Which you should anyways! The next is to buy a used car. Savvy and educated car buyers know about depreciation and realize that used cars often offer more value with less depreciation. Though this is merely a rule of thumb there is a lot of truth to it. Lets take a 2 year lease for example.
Leases have different limitations than owning a car, one of which is a mileage cap. Now we aren’t going to get into the technical details of leases in this post but if you understand that mileage is the easiest way to understand how much a car has been used. It is easy to see that a car that is coming off a lease probably has lower miles and may have been better taken care of than a car coming from a trade-in. Many leases also require that scheduled maintenance be completed on time, which is also another plus. All in all cars that have come off a lease are typically a great choice for someone trying to minimize lost due to depreciation.
Finally depreciation isn’t felt until you sell your call. Often times, buyers find themselves “upside down” which means they owe more on their car than it is worth. For a full run down on what to do when this happens. The Simple Dollar has a great article on what to do if you find yourself in this situation.
Variable Costs
First lets define Variable Costs. These are costs that don’t have a specific price tag associated with them. They could range from Gas, to Oil Changes, to an unexpected repair. All of these need to be planned for, without examining these carefully you may find yourself in a pinch.
Gas
Lets start with the essential one, Gas. Most cars run on fossil fuels, few run on other sources of energy but either way the car won’t run without an energy source. So when you are reviewing your car options be sure to check out what type of gas mileage your prospective gets along with what grade fuel it uses. Moving from a car that uses regular to premium, be ready for the extra expense. Don’t let it creep up on you.
To check the gas mileage of just about any car visit FuelEconomy.gov. This is an authoritative source with tons of tips and statistics on fuel economy.
Oil Changes
Most people get these done by a “quick lube” company or by the dealership. This is something many people recommend you get done every 3,000 miles or more depending on the type of oil you use. The oils which last longer also have a higher price tag associated with them. Keep on top of this so you don’t run into an expected problems.
Maintenance &Unexpected Maintenance
By driving a car you run the risk of it breaking down. For many this is the last thing that they want to think about, but I suggest you be prepared for when/if it does happen. To friends and family I suggest that you save 15% of your car payment to go towards unexpected maintenance. This means for every $100 you pay monthly, you should set aside $15. This may seem like a lot, but would you rather be in a pinch or have some extra money saved up?
Parking & Tolls
Depending on where you live you may find yourself having to pay for parking or toll roads. These expenses can add up especially in a big city!
In the end education is key to being a good car owner! Knowing all of the expenses associated with owning will help you better understand how much you can really afford to spend on a car.
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