As we continue to discuss cash flow topics in our Ballast Atheneum, we considered it relevant to discuss car payments. Among the more common things we find that tends to break a budget are the often-forgotten costs of car ownership. It’s easy to remember the monthly payments, insurance premiums, filling up the gas tank, and oil changes. However, we find that many of our clients (and ourselves as well) tend to forget about a multitude of other costs associated with owning a car.
It’s generally “smaller” things like changing air and oil filters, rotating the tires, new wiper blades, refilling fluids, and replacing light bulbs. Not gigantic expenditures by any means, but they can add up quickly. Let’s also not forget about taxes and registration in your birth month (Happy Birthday!), and replacing the tires, brake pads, and battery every couple years. Hopefully you don’t run into transmission, power steering, or suspension problems, but if you own a car long enough, eventually these kinds of issues will come up.
AAA estimates that the average cost of owning a new vehicle in 2017 is $8,469 ($705.75 each month). Pickup trucks top the estimates with an annual cost of $10,054 while small sedans are the most affordable at $6,354. Small SUVs and hybrids cost around $7,600 per year while medium SUVs and large sedans cost around $9,400. Another thing to keep in mind is that while your car may be covered by a warranty for the first few years, thereby reducing these costs, you may be in for some bigger expenses when the warranty expires.
You might keep your car forever, but chances are pretty good that one day you’ll sell it or trade it in. This brings up perhaps the most overlooked cost of car ownership: depreciation. We all know that our cars started to lose their value as soon as we drove them off the lot. While some cars keep their value better than others, cars tend to lose around 15–25% of their value each year for the first five years, meaning that your car is worth about one-third of its sticker price at the end of five years. Small sedans and small SUVs tend to have the lowest annual depreciation costs while minivans and electric vehicles are at the higher end of the spectrum.
Since we’re on the general topic, we may as well touch on the Buy v. Lease debate. Among the pros of leasing are that you would generally have a lower monthly payment than an auto loan, you would eliminate most of the depreciation cost since you don’t have to worry about trading or selling the car, the car is typically always covered by a warranty, and you get to switch out for a new car every couple years. Some of the cons of leasing include you can only drive a set number of miles, you must perform consistent and proper maintenance, you may be required to purchase gap insurance, if you fail to meet the terms of the lease you can expect to pay extra fees, and it is typically more difficult to get out of a lease than it is to sell a used car.
Among the pros of buying a car is that you own the car, you can put as many miles on it as you want, you can customize your car as much as you want, you can keep it for as long as you want, and you don’t have the risk of lease-end charges or other fees for breaking the terms of the lease. The cons of buying include higher monthly payments, maintenance and repair costs when the warranty expires, and you’re responsible for selling or trading it in if you want a new car (assuming you don’t keep the old one). In general, it’s cheaper to lease in the short term but cheaper to buy in the long term.
The point of all of this is not to endorse one make or model over another, to make an argument for buying or leasing, or to convince you to sell your car and start riding the bus. Rather, the point is to help keep these kinds of things in mind when creating and monitoring a budget and your cash flow. Often, we’ll see clients allocating $X amount per month on paper for car expenses, but when it comes time to pay the piper, the money isn’t there – it’s easy to do since you aren’t buying new tires every month. A good way to solve this problem would be to set up a direct deposit into a separate car expense account. When the issues arise, you’ve got the earmarked funds ready and waiting. If you’re unsure how much you should be putting aside for car expenses each month, a good starting point would be to take a look back at all of your car-related expenditures from the past year, add them up and divide by twelve.