The car is a wonderful invention. We can travel great distances with it, albeit slowly. It may not be the fastest travel method, but that hasn’t stopped our love of cars over the past century. While US wealth has grown over the last century, car prices have grown to match it.
Find your way around:
Question: Should you trade in your expensive imported car for something more economical? Or ditch your car altogether?
Answer: It depends on your situation. Owning cars costs money, and as most Americans use auto loans, they don’t have this money in their bank accounts.
Choosing the right car for you
Car ownership provides great opportunity, but choosing the right car will determine how much car you need. Location, purpose, and frequency of use are all things to consider. The main purpose of a vehicle is to reliably get you from point A to point B. It is up to you how much you choose to spend to achieve this outcome.
Audi vs Prius Case Study
Let’s take a look at the 5 year cost of ownership of a 2020 model cars:
A 2020 Audi Q8 55 TFSI Premium has a fair purchase price of $67,000 dollars, while a 2020 Toyota Prius L Eco has a fair purchase price of $23,000. This is a difference of $44,000!
In addition, there is a significant difference between the two cars in the loss of value over time. It is true that you pay more for the Audi initially and should be able to get more during a resell. However, since the depreciation is higher for the Audi than the Prius, the value of the Audi will not remain $44k more than the Prius.
Note: Remember, ALL vehicles are depreciating assets!
Depreciation
Depreciation is the loss of value of an asset over time. Car values depreciate over time, whereas other assets such as investments, appreciate (grow) over time. The example above illustrates how much depreciation affects a new car purchase. The Audi suffers from a $44,361 loss in depreciation, where the Prius suffers from $15,166. That’s a difference of $29,195, without even considering the initial purchase price.
Reducing Depreciation
You can escape this large loss of value by buying used cars. Generally speaking, you would want to look for a car that is 3-5 years old, with around 50,000 miles on it. Possibly you could find an older car with less miles, but those are rare! (Example: We were lucky to find a 8 year old 2nd generation Prius with 32k miles, and were able to purchase it outright).
Looking for used vehicles in this way allows you to not suffer the same depreciation of buying a new car. You still get the benefit of a quality car that will last for multiple years. You get safe travel for you and your family, while not paying for the privilege of being the first owner.
Maintenance and Repairs
Cars are great machines, but even the best machine will break down over time. It is the nature of cars, and any other depreciating asset. The examples above show the extra cost that a higher depreciating asset costs over 5 years: The Audi costs $4,626 while the Prius costs $2,098 in maintenance over 5 years. The longer a car is owned, the more expensive the car becomes to maintain. This is due to the fact that larger parts on the vehicles need servicing (e.g. engine, transmission, suspension, etc). Over 5 years, repairs on the Audi total $1,917, and $1,825 for the Prius. Both are very low, as they are new cars and should not need much repair. Adding the maintenance and repair costs together equal $6,543 for the Audi, and $3,923 for the Prius, with a difference of $2,620.
Monitoring Cost per Mile
The 2020 Prius has a 5 year cost of ownership per mile of $0.41, compare this with a 2020 Audi which has a 5 year cost of ownership per mile of $1.03. The difference is $0.62/mile, based on15,000 miles/year or 75,000 miles over 5 years.
An additional $0.62 may not sound like much, but that adds up to over $9,300 per year, or $46,500 over 5 years!
If you want to track your own vehicle, we highly suggest signing up for Fuely.com. This website will allow you to put in the total costs of your vehicle, and help you determine what your cost of ownership per day and per mile are. Take a look and let us know what your running costs per day are!
Car Sharing: From two car family down to one
My first vehicle purchase as an adult was a traditional purchase from a car dealership. I did not have the have the cash to purchase the vehicle outright, so I got a 5 year loan from the dealership. Over this time I paid double the amount of the loan to the bank (Interest and APY). After this was paid off over the next 5 years, I decided that my next car purchase would be more in my favor than in the banks.
Selling and Buying Private Party
A friend was selling their vehicle, so I was lucky enough to be able to purchase my 2nd vehicle for a fair price (after some negotiation of course). I then was able to sell my 1st car to our neighbor who was in the market for a vehicle. I was lucky enough to sell my old vehicle for the purchase price of my new vehicle, essentially paying only the tax, tag, and title fees at the DMV for my 2nd car purchase.
After owning my 2nd car for a number of years, we moved to a location with great public transportation. It became obvious to me that owning two cars was not actually necessary where we lived. I decided to sell my 2nd car to family members for a fair price, and we became a one car family. This is just one example of being able to take depreciating assets and make the best out of them. You get to enjoy owning a fancy piece of technology that can take you across the country, and then turn around and sell it to recoup most of the initial cost. While this is not easy to do, I am proof that it can be done with patience and a little luck.
Alternative Options
While it may seem impossible in the US to get around without a car, (depending on where you live), that is simply not true. It may be more difficult, but it can be done. Alternative options for not owning a car include public transportation, walking or biking, and car sharing.
Public Transportation
Public transportation includes any form of transportation that is open to many people. Typical examples are the bus, subways, and trains. These options transport a large number of people with much less cost over time, both financially and environmentally. If you live within a city center, then monthly buss passes may be for you. These passes cost anywhere from $68 in Baltimore, MD, to $122 for Los Angeles, CA (Best Cities for Commuting). This totals to $816 to $1464 for a year. Your job can sometimes give a discount rate for a yearly buss pass. Our University worked out a deal with Madison Metro Service to offer us employees a buss pass for $48 per year ($4/month), while it is included in the fees for all students.
Subways are another great way to get around if your city offers them. They are not the cheapest public transit option, however they can allow you to travel much farther and faster then a bus. The costs vary from $1.25 per ride in Houston all the way to $16.65 per ride in San Francisco (Metro Comparison).
Human Power
Biking or walking give you dual benefits if you live downtown or near a grocery store that you find yourself frequenting on the weekends. The first is they are very low cost, with the cost of a used bike and a helmet totaling less than $250, and walking being free. Second, both of these options give you exercise with a purpose. I feel that this exercise in our daily lives is very important, and often overlooked by most Americans.
It’s no wonder that 50% of Americans admit to a sedentary lifestyle, not even walking 5,000 steps ( ~2miles) per day. Biking 5 miles round-trip burns ~300 calories, while walking the same distance will burn about the same. Biking has the advantage of being much faster than walking, but walking has the advantage of being free, just slower.
If you are one of the Americans that is walking less than 2 miles per day, then think about how can you add more activity back into it. This will not only reduce your reliance on a car, it will also pay future dividends in you maintaining your health into old age.
Final Thoughts
Cars are wonderful machines that allow humans to travel great distances, which a few short generations ago was impossible, but remember “Not every decision is a financial one, but we should always be aware of the financial implications of our decisions” (Author: Jim Collins, aka The GodFather). Make sure that your transportation choices align with your values and come from a position of financial strength not weakness. You don’t have to be the one to pay for depreciation if you are willing to buy a quality used vehicle instead of one brand-new off the lot .
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Good article. Thanks. Debdeb