Blog #20- How Much Does My Car Actually Cost Me?

Blog #20- How Much Does My Car Actually Cost Me?

Hi, and thanks for popping in to read this weeks' Blog, which promises to be an interesting one for anyone who owns a car (so that represents the vast majority of us!). If you are new here please do check out this page, which will tell you a little about why this project exists and what it's aiming to do for you. If you prefer to listen to this episode on our podcast you can check it out here:

While some would argue that the cost of running a car hardly qualifies as a Financial Planning topic, I would beg to differ. Seeing as many of us possess one for the duration of our adult lives our choice of car represents a significant life long investment. What I am hoping to uncover is exactly how much they cost and what if any differences there are in buying a 'newish' car versus an older car!

Some of you at this point will hit the red 'x' in the top right hand corner, you like your cars, you don't care what they cost you, provided you can afford to have a 'nice' car you will continue to do so irrespective of the financial costs. I respect that, hit the red 'x', but might do you no harm to see what it is actually costing!

In the interest of being up front I will state that even before we look at the figures I have always had a strong bias towards owning older cars (6-10 years old) where the largest depreciation costs have been absorbed by a previous owner, however I am always open to correction, so lets see which option is the more informed from a  financial perspective!

Assumptions:

For the purpose of this exercise I based my findings on 2 family sized cars. The 'newish' car is a 2013 Volkswagen Passat 1.6 Diesel from a dealer, with 62k miles on the clock costing €20,450- listed on Carzone.ie at time of the research.

The 'old' car for the purposes of this exercise is a 2007 Ford Mondeo, 1.8 Diesel, 90k miles on the clock costing €4,700 from a dealer, again it's listed on Carzone.ie at time of research.

Our exercise will assume we hold the car for 3 years, before changing it again for another car. Mileage assumed at 13,000 miles per annum.

The Cost of Owning a 'Newish' Car for 3 years:

  1. Depreciation: €12,450 - Buy it for €20,450. Based on the research when you go to sell a car of this type in 3 years, assuming average mileage and it being well maintained, you will get approximately €8,000. Irrespective of selling it privately or trading it in this is the approximate value achieved (even VW which historically hold value reasonably well).
  2. Fuel Cost: €4,029 - This modern car will give approximately 55 miles per gallon on average. www.honestjohn.co.uk is a great website for honest mileage numbers. Using a diesel price of €1.25 per litre, and travelling 13,000 miles per annum, thats the cost over the 3 years!
  3. Motor Tax: €570 - As a post-2008 car, with relatively low emissions of 109g/km motor tax will set ou back €190 per annum
  4. Maintenance: €1,200 - This assumes carrying out 1 annual service and changing 2 tyres per annum, with no other major outlay on this relatively young car
  5. Insurance: €1,800 - This one is a big variable dependent on the driver and his/her status and years of no claims bonus etc, however the same figure will be used on both examples
  6. Total Cost = €20,049

The cost of having this car for the 3 years is over €20,000. With good fuel economy and low tax it still amounts to a fairly sizeable amount of cash! If we break that down annually it is €6,683. Per month that is €557. If you are on the higher tax bracket you need to earn €1,100 Gross Salary in order to pay for your car..........................If you are on €50,000 per annum that is a weeks wages every month!! Seems hefty, but lets now compare it to the alternative, a cheaper, less flashy, less efficient and perhaps less reliable motor!

Cost of owning an 'old' car:

  • Depreciation: €2,220 - Buy it for €4,700. Based on the research when you go to sell a car of this type in 3 years, assuming average mileage and it being well maintained, you will get approximately €2,500. Irrespective of selling it privately or trading it in this is the approximate value achieved.
  • Fuel Cost: €5,039 - This less modern car will give approximately 44 miles per gallon on average. Using the same diesel price of €1.25 per litre, and traveling 13,000 miles per annum, that's the cost over the 3 years for this car.
  • Motor Tax: €2019 - As a pre-2008 car, with a 1.8 litre engine you are in for a juicy €673 per year road tax, no avoiding it!
  • Maintenance: €2,400 - This assumes carrying out 1 annual service and changing 2 tyres per annum. In this instance we have included €300 per annum for ad-hoc repairs. While this could be quick a lot more or less on a car of this age and mileage this average is an industry accepted figure.
  • Insurance: €1,800 - This one is a big variable dependent on the driver and his/her status and years of no claims bonus etc, however the same figure will be used on both examples
  • Total Cost = €13,478

So there you go, the estimated cost of 3 years of motoring in such a car will cost you just south of €13,500, which works out at €4,492 per year and therefore €375 per month. Before tax you are looking at earning €750 Gross Salary to put this car under your back-side.

The single biggest cost differentiation between the two options is depreciation, yet this is the one factor which many many of us do not give due consideration to. We fail to include that in the cost of ownership, however it is a very real part of the cost, and in some circumstances is the single biggest aspect to the overall cost. Fact. PCP Finance which is all the rage these days on newer cars is essentially a finance agreement in which you agree to pay an amount each month which covers the cost of the depreciation, until such time as you get to the end of the PCP Finance Term, where you then trade-in, for example. You are repaying the depreciation essentially, not the 'loan'.

I have nothing against PCP Finance, or indeed against shiny and aesthetically pleasing cars at all. However what does cause me unease is that many of us millennials see the shiny new shapes, we see what our peers are driving, we see the latest adverts, we see the 171's on the road and we start to feel that our 'old' car is giving a poor representation of ourselves to the world and portrays a lack of success. I'm being somewhat melodramatic here obviously but there are elements of these emotions behind our decisions in buying 'newish' cars.

I often look to the example set by Mr. Warren Buffet (3rd wealthiest man on the planet). He drives a regular joe-soap car, and seems pretty happy with it!!

car-cost-warren

Conclusion:

As always I believe you are more than capable of drawing your own conclusions from the above. As with many of our financial decisions there is more often than not an emotive drive determining the outcome. One could choose to drive an older car, and to use the 'savings' to save for the future, enjoy an extra holiday or some other experience. In the examples above there is a monthly difference of €180 per month, saved over 10 years with a half-decent return and that's €25k, a college fund for one of your kids!

Likewise one may prefer to be seen driving a 'newish' car, they may like the reliability and feeling they get from a more modern car, and are happy to sacrifice the 'savings' in favour of these aspects. Or indeed they may not realise the costs of owning a car, until now!

Ultimately the choice is yours of course, but at least now you have a greater sense as to what your car is costing you, and indeed if you have 2 cars in your household what they are costing you.

If you are trying to budget and manage or indeed reduce your cash outflows the ownership of cars can be one of the single biggest factors in doing so.

I have included a sample calculator which I created for you to run your own numbers here, have fun!

 

Thanks for reading, sharing and spreading the love!

Paddy Delaney (QFA, RPA, Qualified Coach)

 

 

 

 

 

 

 

 

 

 

 

 

 

Which Cars Depreciate The Most & The Least....?

http://www.whatcar.com/news/the-best-and-worst-depreciating-cars/

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