How to understand the true cost of car ownership
Americans in general – and Californians in particular – love their cars. Given the abysmal public transportation here when compared with the rest of the developed world, a car is seen as a necessity, and an expensive one at that.
How expensive? Let’s review the numbers to operate a car for a year in California. Let us assume that the vehicle is a late model purchased for $30,000. The car is driven an average of 10,000 miles every year. Even if your driving is mostly suburban or within the city, taking care of the kids and going to work, you will be very surprised to note how quickly the miles add up.
Following is a very conservative and approximate annual and monthly cost of operation breakdown. Actual costs will probably be higher.
If you drive a car that gets 25 mpg for 10,000 miles, you are using approximately 400 gallons of fuel. If gasoline costs $3 per gallon, which is a fair-enough estimate, you are spending $1,200 per year – or $100 per month – on fuel.
But more than that goes into a car. Insurance costs approximately $800 per year. Parking can reach up to $30 per month (or $360 annually) in some places. Add in approximately $600 per year in maintenance, $120 for car cleaning and a $300 DMV registration, and a car can cost $3,280 annually just to keep running well.
Depreciation
There is also depreciation. Unless the car is a limited-edition collector’s item, every car and automobile is a depreciating asset. This means any brand-new car you purchase will be worth less next year, and even less the year after, and so forth.
Unless you love driving so much, want to make an impression, plan to live in your car or are wildly wealthy, it is not a good idea to spend too much money on a car. A general rule of thumb is that most automobiles depreciate 30-40 percent over a four-year time span under normal wear-and-tear conditions, and assuming an average of approximately 10,000 miles driven every year.
A car you purchased for $30,000 in 2016 will be worth roughly $18,000 in 2020, assuming a 40 percent depreciation. Under that scenario, you are losing approximately $3,000 of the automobile’s value to depreciation every year, and there is nothing you can do about it.
The total cost of owning and operating an automobile (luxury or otherwise) is the combined operating cost and depreciation cost. If that vehicle is not operated for legitimate business reasons for your own business, it is unlikely that you can deduct depreciation from your individual taxes. (You may be able to deduct actual miles driven – check with your CPA.) From our calculations, the total cost of owning and operating this automobile annually is the operating cost plus depreciation. That means $3,280 plus $3,000 equal to $6,280.
Whew! As in most day-to-day expenses, this is all post-tax expenses, and lopping off at least $10,000, if not more, of your annual, gross, pre-tax income. Remember, this is just for one car.
There is always the option of leasing a car. One way to compare costs is to calculate total leasing costs over a three-year period and compare that to the depreciation plus operating costs of owning the vehicle over the same period, which I discussed here. There will be more on that later in another column.
ARVIND VEN is Founder/CEO of the Capital V Group. He has an MBA from MIT Sloan. Arvind Ven is a Registered Representative with and Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA & SIPC. Financial planning offered through Capital V Group, a registered investment advisor and a separate entity from LPL Financial.
Note: This write-up is for educational purposes only and should not be considered financial or tax advice. For questions, please reach out to Arvind Ven: 408.725.7122 or arvind.ven@lpl.com.