The True Cost of an Automobile.
Man do I love my trucks. I have owned a Toyota Tacoma and a Ram 1500. I loved both of them, but then I did the stupid math on the cost of ownership and it was not a pretty realization for me. After I learned more about the FIRE movement, I knew I was going to have to make a change. I now drive a 2011 Ford Escape and I have no payments. I started with realizing the true cost of cars and researching. Lets go through an example.
Just to make it simple let’s say I bought a new Ram 1500. If we reference Edmunds true cost to own chart we will see how expensive it becomes in 5 years. Rams have a ton of different trims and can range from 30k to 60K. We will say we spent around 45k on a new Ram 1500. Now things to consider are; financing, insurance, maintenance, fuel, depreciation, and as always taxes. As you can see there are many different areas that make new cars expensive. In total, Edmunds says the true cost to own will be about $42,600 for a five year period. Let’s look at some of the different categories with numbers I have calculated.
Before you even get the keys you will have to add taxes and fees. Taxes around here will drive the price up to $48,375 (7.5% tax). There are always fees attached and can be around 700-1000. The price has now gone up to $49,375 and we have not even left the damn lot.
If you are like me, paying 49,375 in cash is not a viable option. Which means you are probably going to take out a loan. Some new cars you can get 0% on for 60 months. That is great, but you still have a payment. According to Value Penguin the national average is 4.21%. We decide to put some money down and get it back to a 45k loan. The true cost of a 60 month loan at 4.21% will be about 50k. The payments will be $833.00 dollars a month. For an automobile $833, that would stress most people out like me. Some people figure out a way to make it okay in their head though. It is not a good thing. At one point in my life, I made it out to be okay to have more debt. I even had one of my coworkers tell me the other day that their car payment for their new Ford Expedition is $1250. He finished it off with a shrug and said it is just money… Not a good way to live your life. Especially when his car payment is close to my mortgage for my house. Some people will have mortgages for less then that car payment, just let that sink in. Don’t go down that road. It is not just money, it is your way to freedom.
When I bought my ram 2013 1500 it was at least a few years old. I turned in my Tacoma and ended up with a loan for 20k around 3.5%. This was before I really started tracking everything. My payment was around 363 a month. Now, for some people that doesn’t sound bad, but I also had student loans to pay. At this point in time I thought accruing this debt was normal. I was going down the path most Americans take.
The law requires you to have insurance and plus you are going to want to protect your expensive purchase. We will say that it will cost you about a $100 a month to insure your new truck. This will add up to about 1200 a year. Typically the pricier the auto, the more expensive the insurance.
Fuel expenses can also add up. Fuel cost have been pretty cheap this year, which has been nice. I highly doubt they will stay this low forever though. Looking at some examples; My Ram 1500 was averaging 14.9 miles a gallon. Lets say I drive around 10,000 miles a year. Right now the average is $2.78 according to AAA. The math says my fuel expense will be $1,865 dollars a year. Now instead, let’s say we drive a Honda Civic and get 33 miles per gallon. The math says we will spend 843. The new ram average is about 20 MPG, which could equal $1,390 in fuel costs. You can save a $1,000 a year just by driving a fuel-efficient car. Obviously if you need a truck and you are driving a lot, you should pay attention to miles per gallon.
Edmunds estimates maintenance for a new Ram 1500 are $3,843 for five years. This averages out to $768.60 a year. Edmunds estimates for a Civic is $3,219 for five years. Not that far off from a truck. No matter what you drive you will experience maintenance costs. Used vehicles can potentially have higher cost though. Make sure you buy a reliable vehicle.
Unfortunately, most new vehicles suffer on depreciation. According to Edmunds, the depreciation over five years for a Ram 1500 look like this; Year 1 $7,469, Year 2 $1,732, Year 3, $1,638, Year 4, $1,923, and finally Year 5, $1,819. This totals up to $14,581. Note the dramatic drop in value during the first year. Maybe a new car is not the best way to go after all. Automobiles are always a depreciating asset. You are not going to make money off them. Always remember that!
I used a mixture of my calculations with Edmunds. Using these numbers, I came up with a true cost own total of $43,124 (14581+(1865*5)+(1200*5)+4375+3843+5000). My total was close to their total. Of course there is more that Edmunds does not go into. Now lets talk about the opportunity cost. We calculated a payment of $833 a month for 5 years (60 month) loan. Let’s say you put $833 a month into a total market index fund. We won’t even use a crazy rate of return either, let’s say 6%. Doing the math tells use our investment account would have increased by $58,114. That is a lot money to miss out on. The number can make one want to puke all over. Car salesman are trying to make money, they do not care about how much you are going to spend. They just want you to buy the car. Make sure you do the math before hand and understand the financial consequences of your actions.
As you can see, a new auto can be extremely costly. Always remember it is a depreciating asset and will never earn you money. Buying an automobile is a big deal and lots of research needs to be done ahead of time. A used car can help offset some of the depreciation loss. The sweet spot seems to be around 5 years. Maintenance costs can also add up quickly and even faster on imports and luxury autos. According to Edmunds by year 4 one can spend $4,000 on maintenance alone. Make sure you have a reliable auto when you buy one. The goal will be to drive it into the ground. If you can avoid a loan too that is great. You should be able to get at least 10-15 years without a car payment and that is a lot of money that can be invested. CNBC had the average new car loan in 2018 at $530 and for a used is auto $381. That’s a lot of money to be saved when you have a paid off car.
When choosing an automobile, choose wisely. Make sure it is a reputable brand that is going to last. Make sure it is efficient. Make sure it does not cost to much. Make sure to buy something that you will want to drive for a long time.