If you're serious about saving money, look no farther than your driveway. Take a hard look at your car or cars; they are a serious source of expenses for many people, sometimes ranking just behind housing. Like credit cards, they are an essential part of life for most people, and, like credit cards, you must get them under control.
First, consider getting by with just one car. This can be difficult for working couples or for families with several drivers, but the savings are significant. When you sell one of your automobiles, not only do you eliminate a car or lease payment, or free up some money if you paid cash for the vehicle, but you also greatly reduce your auto insurance bills, which in some high-cost cities and states are considerable.When the time comes to replace that car, should you buy a new or used one? In most cases, the most expensive thing you can do is buy or lease a new car every two or three years. The least expensive route is to purchase a used car, especially one that is coming off lease and may still be under warranty. There is also a middle way: buy a new car and run it until it dies.
That first year is expensive
The problem with a new car is that its depreciation, or decline in value, is much higher during the early life of the vehicle -- especially during the first year. Buying a used car, or keeping a new car for a long time, allows you to avoid much of that depreciation or minimize it by spreading it out over many years, perhaps 10 to 12. Of course, if you do get a new car every two or three years, repair costs are reduced because your car is always under warranty. As you will see, however, this is a very minor plus compared with the negative of depreciation.
The rapid depreciation of a new car can be a nasty problem if you financed the vehicle for five years or more, paid little or no money down, and want to sell or trade the car before the loan is paid off-say in two or three years. You will likely discover that you will still owe more on the car than it's worth.Gary Dobbins is an independent automobile broker in Chadds Ford, Penn. He arranges leases and purchases of cars, new and used, for his clients. He argues that the greatest financial advantage can be gained by buying a late-model used car. He cites the case of a 2004 Volvo, with a $34,000 sticker price, that he leased to a couple in late 2003. After eight months, they decided they needed a van. (Luckily, their lease was structured so that they could get out of it easily.) Dobbins, whose company is called Dobbins Autosmarts, then sold the used Volvo, which had only 6,000 miles on it, to another client for $24,000 -- a full $10,000 under the original price. "That car was a great deal," he said. "It still had three and a half years of the manufacturer's warranty left and had already taken the big depreciation hit."If you want further proof of how expensive owning a new car can be, or how much you can save with a used car, visit the www.Edmunds.com Web site. Once there, click on "True Ownership Costs" on the home page, which will take you to the "True Cost to Own," or "TCO," section. You'll be able to select a car model and see the estimated costs of ownership for five years, depending on the state in which you live. You can also, with some minimum calculations, see the advantage of buying a late-model used car.
Take, for instance, a 2004 Chevrolet Malibu LS four-door sedan with a 3.5-liter six-cylinder engine. According to Edmunds, the estimated new-car purchase price in New Jersey would be $22,069, including the state's sales taxes and fees totaling $1,325. (The price of the car without the taxes and fees would be $20,744, a number that will be useful in some later calculations.) The true cost of owning that Malibu for five years -- the TCO -- would be $35,073. That includes depreciation, financing, insurance, taxes and fees, fuel, maintenance and repairs. That works out to an average per-mile cost of 47 cents over the five-year period. (The Internal Revenue Service, however, allows you to deduct only 36 cents a mile when the use of your car is a tax-deductible expense; many companies use the IRS figure to reimburse employees who use their cars for company business.) Let's look more closely at four of the expense elements and the assumptions behind them in the Edmunds calculations: depreciation, financing, maintenance and repairs. Depreciation is the amount by which a car declines in value from its purchase price. As we saw with the Dobbins Volvo, most depreciation takes place early on, during the first year. In calculating depreciation and resale values, Edmunds assumes that you will drive the car 15,000 miles a year, keep it in "clean" condition, and sell it to a private party. If you sell the car to a dealer or use it as a trade-in, its value would almost certainly be lower.
Financing is the interest expense on a car loan. Edmunds assumes a good credit rating, a down payment of 10 percent, and a loan term of 60 months, or five years . Edmunds is able to constantly update its Web site to account for the slightest changes in interest rates for loans -- and fuel prices -- which I obviously can't do here. if you go to the Edmunds Web site, you will get a different number for interest charges, fuel costs, and the True Cost to Own, depending on current rates and prices. Financing charges are typically based on the balance due and will decrease over the five years as that balance declines. Maintenance includes work that needs to be done to your car on a regular basis, like oil changes. It also includes unscheduled items like replacing batteries, brakes, hoses, mufflers, lights and so on. As you might expect, maintenance will increase as your car ages. Repairs refer to work that must be done on your car that is not covered by the manufacturer's warranty. Older cars typically require more repairs. Putting all the cost elements together, Edmunds comes up with the $35,073 that it costs to own a $22,069 car. Depreciation is the killer. While Edmunds rates the operating costs of that specific model as average, its depreciation is above average. In fact, the car's value plummets by $8,461 in the first year alone. By the fifth year, its value will drop by only $1,312. Maintenance and repairs will rise as the car ages and depreciation drops, but it's not an even match -- not even close.
As Gary Dobbins demonstrated with his Volvo, you can save a lot money on a car if you can avoid that first year of depreciation. Let's assume, for instance, that instead of buying the Malibu new, you buy it when it is three years old. Edmunds estimates its resale value at $8,759 (the purchase price of the car, without sales tax or fees, minus three years' depreciation). The car would only have 45,000 miles on it, and the bulk of the expenses of depreciation would have hit the car's previous owner, greatly decreasing the per-mile costs. If the car were five years old, with 75,000 miles on it, you could pick it up for $5,985. By then the depreciation would have tapered way off and the per-mile costs would be even less. Most modern cars can easily go 100,000 miles or more without serious mechanical problems. If you buy the car with 75,000 on it, you can reasonably expect to drive it another 30,000 miles, or two years, without a serious breakdown. The price of that five-year-old car, $5,985, that you are going to drive for two years, or perhaps longer, is $4,350 less than the depreciation alone on a new Malibu for just the first two years! If you drive that five-year-old car longer than two years, the per-mile cost gets less and less the longer you drive it -- but only to a point. That point is when the cost of repairs gets too expensive. The trick is to know when to stop. One rule of thumb is to give up the car when your annual repair costs equal what annual car payments on a comparable new car would be. I think that's even a little high; it ignores the inconvenience of getting a car fixed. I would put the breaking point at slightly more than half of annual car payments. The point is to live well and save money. Spending too much time waiting for my car to get fixed is not my idea of living well.
If you want an even more dramatic example of how your car-buying habits can limit your financial future, consider an expensive -- and expensive to operate -- sport utility vehicle like the Ford Expedition. Let's use the top-of-the-line Eddie Bauer model with four-wheel drive and a 5.4-liter V-8 engine. The total cost of the vehicle purchased in New Jersey is $40,613. The True Cost to Own over five years, however, is $56,972. That works out to 76 cents a mile. This vehicle depreciates by almost $12,000 during just the first year. The fuel costs alone for five years are more than $10,000. The above is an excerpt from the book Live Well on Less Than You Think: The New York Times Guide to Achieving Your Financial Freedom by Fred Brock (Times Books, 2005). For more information, visit www.henryholt.com or www.nytimes.com.
Source: Money & Work