Price Only Tip of Total Car Cost Iceberg
When you are looking to buy a car do you only consider the monthly payment when deciding whether or not you can afford to purchase the car? If so, then your "personal finance" luxury liner stands a good chance of meeting the same fate as the Titanic.
The moment you sign on the dotted line of an automobile title, you immediately obligate yourself to a host of costs that come attached to the price tag. Let's briefly discuss each cost before we use the car buying calculator to expose and size up the costs located beneath the surface of an automobile purchase.
Tax, Fees, License, Extended Warranty Costs
In addition to the purchase price of the car, you can also expect to be charged sales tax (if applicable) as well as your initial title transfer and license fees. Sadly, many people add these costs to the financing package, meaning they will be paying interest on these upfront fees for years to come.
The depreciation cost is the most important, yet most overlooked and least understood of all costs associated with buying and owning a vehicle -- or any other depreciable asset for that matter.
In case you don't know what "depreciation" is, depreciation is the amount by which an asset wears out (or progresses toward becoming obsolete) for a given period.
Or to put it another way, depreciation is the drop in resale value (what you can sell the asset for) for a given period. Typically an asset depreciates at a faster pace when it's newer, and at a slower pace as it becomes older.
As it relates to an auto purchase, the value of the monthly depreciation of a vehicle is equal to the amount you should set aside to replace the vehicle once it has reached the end of its useful life.
If you're not setting aside a vehicle's depreciation as it occurs (which is over above any auto loan payment you're already making), guess what you will have to do when it's time to replace the vehicle? Yep, you're going to have to continue to help pay the huge bonus checks paid to the lending institution executives.
But wait! It's not enough to know what depreciation is; you must also understand the difference between two types of depreciation. In addition to normal depreciation that occurs as an asset wears out or becomes obsolete, there is also a type of depreciation I refer to as Warp Speed Depreciation.
Warp speed depreciation is the type of depreciation that occurs the moment something goes from being "new" to being "used." The instant you sign the papers to become the proud owner of a brand new car, the brand new car becomes a "used" car, and the resale value plummets by as much as 20% of the purchase price!
This accelerated decline in value means that the absolute worst thing you can do is to buy a brand new vehicle every 1-2 years. That's because your average annual cost of depreciation will likely run in the 20% range, whereas buying a new car every ten years, or a two-year-old car every two years, may lower your average annual cost of depreciation to under 10%.
If you want to see for yourself just how drastic of an effect depreciation can have on your potential future wealth, be sure to experiment with various new and used car buying scenarios using the Car Depreciation Calculator.
If you finance a car purchase, you will increase the cost of the car by the amount of the interest charges and loan fees that will be tacked on to the principal borrowed.
Of course, you will also need to make insurance premiums on your car. Typically the more expensive and more sporty the car, the higher your insurance premiums will be. Even higher if you are forced to purchase full coverage to qualify for financing.
The more you drive your car, the more it will cost you to fuel the vehicle. If you want to calculate MPG and compare car gas mileage expenses, be sure to try out the Fuel Mileage Calculator.
Maintenance & Repair Costs
On average you can expect to pay 3% of the purchase price per year to repair and maintain your car (less in early years, more in later years). If you do the repairs and maintenance yourself, the cost would be what your time is worth if you had instead used that time to earn an income.
If you park your car in a garage, any utilities attributable to the garage -- along with the depreciation of the garage structure and fixtures -- are all part of the cost of owning the automobile.
Ownership Cost Meter Needed
Everything you own that can wear out or become obsolete is doing so at this very moment. If it were possible to install a cost of ownership meter on your life, you would be shocked at how much value the whole of your possessions loses daily. Unfortunately, these costs accrue without a meter to track them, and often only come into light as each asset needs replacing.
When it comes to buying and owning assets that wear out or become obsolete, the bottom line is that if you are not setting aside money to replace these items as they wear out, your financial net worth is likely losing ground, not gaining ground.
Finally, once you become fully aware of the costs associated with buying and owning depreciable assets, you also need to realize that to pay for these costs, you must trade free time for work time.