Status Quo
For decades, car manufacturers have marketed their products to the point that owning a car became a social status symbol. A symbol that made people eager to buy luxury cars even if they weren’t in a stable financial condition or had no clue of the true cost of car ownership. You may be familiar with many people that buy a new car and shortly regret having purchased it. Or at least for me, it’s all too familiar to see someone buy a brand new car after either graduating or getting a new job to feel like they are moving up in life, but in reality they are taking 3 steps back. There are many justifications that you can come up with for buying a new car, but unless your financially comfortable, I’d recommend knowing the true cost of car ownership before going to the buy a car.
The Purchase
You walk into the dealership to buy a car not knowing what car you want to buy and the price the dealership paid for it. You soon walk out with a brand new car that got marked up more than 25% the manufacturing price and a 5-year term loan with an above 5% interest rate. This scenario seems unrealistic, but in reality its very common for those that are ill prepared and eager to buy a new car to flaunt on the block. Before buying a car, always look up the cost that the dealership buys the car for so that when you are in the dealership, you can negotiate close to that price. Use Kelly Blue Book.com to gauge the value of the car, but also look into the difference between the manufacturing and retail price so you can negotiate closer to the manufacturing cost. Avoid add-ons that the sales person tries to tack on to the vehicle and pay attention to the dealership fees that the salesperson will try to sneak into the final price. Getting the price closer to the manufacturing cost is important as it will reduce the sales tax you have to pay. If you are in the negotiating table and you forget all the tips above then just remember to focus on the total cost over the life of the car rather than the monthly payment. In the case that you really want to buy a car that you really can’t afford then at least buy right.
Insurance
You see an advertisement for a new BMW for $400 / month and decide to go to your dealership to buy one. After negotiating close to the manufacturing cost, the salesperson discloses that you need insurance. After getting quotes from several insurance agencies at the dealership, the quote for a brand new BMW to fully cover the vehicle in case of an accident comes out to be $400 / month since you have little driving history, no car insurance history, and live in a high claims (high accident) neighborhood. So just the car payment and insurance alone is about $800 / month which is the equivalent of flying from Los Angeles to New York first class round trip every month for the next 5 years. Before purchasing a vehicle, get several quotes from different insurance agencies for different car makes, years, and mileage history to gauge which car is the least to insure or if the car you were thinking of buying is the right car for you to buy. Note that your age, driving history, car insurance history, and zip code are factors in your insurance rate. The average annual full coverage insurance for an 18 year old driving a BMW M4 is roughly $1,150/month. The scenario is extreme, but may happen more often than we think but the point is that your insurance cost is one of the largest costs of owning a car.
Maintenance
Maintenance costs vary depending on usage and make of your vehicle. The newer the car, you may not need to go in for repairs as often as someone with a car that is over 10 years old. However, repair costs for newer or luxury brands tend to be more expensive than everyday type car makes. It’s recommended to change the oil of your vehicle every 5,000 miles where on average an oil change costs roughly $50. Meaning after having driven the car 100,000 miles, you would have spent roughly $1000 for oil changes not including all the other items you would need to either replace or renew including air filters, brake fluids, transmission fluid, power steering fluid, and coolant. Including tires, the average maintenance for cars are roughly $112/month. The cost may or may not seem much to you, but these costs add up. Another factor to consider is the quality of your mechanic. Depending on the integrity, reputation, and skill of your mechanic can determine the overall longevity of your car and ultimately the maintenance cost. You walk into the mechanic not knowing how to change your oil and the mechanic comes out and tells you, you need to replace the timing belt which is going to roughly cost $1500. In this situation, you may not know what a timing belt is not know that your timing belt is completely fine and that $1500 to change a timing belt is a scam. This scenario is very common and is another factor you need to consider in buying a car. If you know a great mechanic or maybe you know how to replace things yourself, then you can bring the cost down, but consider these costs before purchasing a car
Gas
On average, car owners spend $250 / month on gas which is roughly $3000 a year. Depending on how often you drive and the distance determines how much gas you put in your car. If you decide to buy a brand new BMW M4, you’re getting about 16 miles per gallon in the city while a 2008 Toyota Prius still gets your roughly 45 mpg. I’m no luxury car hater because I’d love to own one, but knowing the difference in the fuel efficiency, I’d stick with the humble Prius.
Worst Scenario
You graduated with a job paying $75K pretax meaning your taking home roughly $4,370 / month. You buy a brand new BMW M4 through financing. The car payment came out to be $650 / month, insurance roughly $400 / month, Maintenance is $112 / Month, Gas is $250 / month. Assuming you don’t pay for parking, your total cost per month is $1,412 / month roughly 32% of your monthly income which in several states is the equivalent of a mortgage payment. Overall, this scenario makes both conservative and ballpark number assumptions, but the point is the true cost of car ownership may be more than you think. If the numbers work out for you, then by all means, buy that car, but if it doesn’t, then consider alternative makes, years, and mileage.
