We sold our second family car last month. But what we learned was how to save money on future cars. It was a hard lesson to learn because it cost us a lot more money than we initially thought it would. We looked primarily at the cost of the actual car, and didn’t pay attention to the other details. In the end, it was the details that we just couldn’t take. Hence, we sold the car.
This article is focused on how to really save money on a car by buying a car that has a low or at least reasonable cost of ownership. Here are four things you must look at before you purchase a car. You must take these into account and compare them to other cars you might purchase to see which car you should really buy.
Look to Save on These Four Car Costs
The following four costs make up what is commonly referred to as the total cost of ownership. In some cases, you may be able to lookup the total cost of ownership on one of the popular car sites like Kelley Blue Book or Edmunds. However, these estimates are often based on old data and do not reflect recent gas prices. Also, the depreciation figures are based on older cars, but often, because of more electronics in cars, newer cars seem to be depreciating quicker than expected, even with the high demand for used cars caused by the recession.
Resale Value / Depreciation
The biggest factor to determine the cost of you car is not just the actual sticker price, but rather how much of the sticker price the car will lose in depreciation over your period of ownership. To find out what the cars you’re looking at may lose in value, you can look up the expected resale value. These figures are typically published for 3 and 5 year periods. However, you should assume that the car you have will depreciate further than you expect. For example, the car that we just sold was four and a half years old. The 5 year resale value was reported as 50% on the car, however, we were only able to sell it for 42% of the MSRP, and it wasn’t even five years old yet. A big factor in finding high resale cars is to buy cars that are more popular, or that will be in higher demand in the future. For example, hybrids may have a higher resale value if oil prices and the green movement continue. Also, the more expensive the car, the more it typically loses in percent. For example, if you buy a sports car with all the options, but get it in a four door model, you could have a hard time selling it because most people looking for that car will want the two door version. Therefore, buying the most common options and styles helps keep resale higher. While you are deciding which car to buy, make sure that you calculate the total cost of depreciation over the time you expect to own the car. You’ll need to add this to the next three costs.
Gas prices have been rising dramatically over the past few years. Heck, you could say that about gas prices over the last few decades. Because of limited supply and continuous increases in demand, I’m guessing this trend will likely keep going. That’s why I believe fuel costs are the second biggest expense that you should consider. To figure out the difference in fuel costs over the lifetime of your car purchase, all you have to do is run a couple of quick calculations. First of all, calculate the total number of miles that you’ll likely drive over the time period that you plan to own the car. Then estimate how much gas will cost on average. I recommend using a rate 25 to 75 cents higher than current prices. You can run different scenarios based on big or small increases to get a feel of the difference fuel economy can make. Make sure that if the car you are considering requires premium fuel that you take that into account. Now, you need to take the fuel economy figures for the cars you are looking at run the calculations.
For example, let’s assume you are looking at two cars. One gets 25 mpg and the other 35. Let’s say you expect to drive the car 75,000 miles over the time you own it. First, calculate the total gallons of gas needed for each vehicle by dividing the 75,000 miles by the mpg. For the 25 mpg car, you would need 3,750 gallons and for the 35 mpg car you would need only 2,143 gallons. Now, multiply the gallons needed by the price of gas. If we assume $4.25 for gas, the low mpg car would need $15,937 in gas and the high mpg car would only need $9,107. The savings for the low mpg car is $6,830. Take the total gas cost estimate for the cars you are looking at and add them to your total cost estimate. There are still two more expenses to add.
Maintenance and Repairs
The next cost you have to consider is car maintenance and repairs. Different car manufacturers have markedly different costs to repair and maintain them. For example, an oil change on our Nissan costs about $25, while on the BMW we sold it was $200 per change. The same goes for tires. Four tires for our Nissan were $600. For the BMW they were $2,000. In general, the cost of maintenance and repairs is more expensive for higher end and European cars. Buying a domestic car will typically save you money in maintenance. For an estimate of the average maintenance and repairs, you can look around on the major car websites, but these numbers also vary by region, so if you live in a high cost area, make sure you increase the cost estimates. Add this cost into your total cost estimation. There is one more cost to consider.
The final aspect of the long term cost of a car is car insurance. We already discussed how to save money on car insurance in another post that addresses how to save money on insurance. For our purposes today, we simply need to calculate the total cost of insurance for the cars you are looking at. What I’ve found is that insurance prices can vary quite a bit for very similar cars. For example, two $25,000 cars can have insurance rates that are 100% different. Typically, sportier and bigger cars will cost more to insure. Also, newer cars will cost more to insure because the replacement value is higher. The more dangerous a car is deemed, the higher the insurance costs. Also, many other factors such as the theft rate of similar cars can make a difference. Before you buy a car, make sure you check out the insurance rates for that vehicle and add that to your total cost of ownership. Expect insurance rates to rise about 4-6% a year during your ownership.
Once you’ve totaled these costs for each vehicle you are looking at, be sure to compare them to each other so that you can decide which car is a better financial choice. If you do it right, it should be able to save you thousands of dollars on your car over the period of ownership. Also, we didn’t really discuss hybrids yet, so here is a quick opinion on that topic.
Consider a Hybrid
You may think that buying a hybrid could be the answer, but before you make that decision, make sure you read our article about whether or not a hybrid saves you money. The truth is that higher hybrid prices, unless driven a lot of miles each year, will probably mean that a hybrid will not pay off for you. At least it didn’t pay off for me when I ran the calculations.
Have you had an experience with a car that cost you a lot more than you expected? Please leave us a comment with your ideas on how you saved money on the car that you bought.