Okay, so if you are reading this site, I'm guessing you really don't to worry about the cost of ownership of your airplane, and no one really owns a train, so I'll just skip to the TCO (True Cost of Ownership) of automobiles.
Before I get started, I should tell you more about TCO. TCO is a concept that frugal people should become familiar with. It applies to all sorts of things, from appliances to pets, from autos to vacation property, from RVs to just about everything else. Even something as simple as a printer has a TCO, but it's probably not a whole lot of money so we don't really worry about it. TCO is the amount of money it costs to actually own something. Say you buy a boat for $20,000. Not only do you have to pay for that boat, but you have to pay to store it in the winter (maybe $300/year), register it ($50/year), insure it ($400/year), and then you have to pay marina or dock fees. On top of that, you have to buy fuel and you have maintenance costs. Your $20,000 boat is going to cost you more than $20,000.
I'm bringing this up because I just had to take my car in for service. It's rare that I have to spend any money on my car, outside of fuel and windshield washer fluid. I drive a 2001 Honda Civic EX coupe that I bought new when I graduated from college and TCO wasn't a concept I was familiar with back then. I've been very fortunate that it's been a very inexpensive car to own (it's a gas sipper, which is very important when you have a 60 mile round-trip commute), and with over 70,000 miles on it, it is still as dependable and reliable as it was the day I bought it. Even if I won a new luxury car today, I'd probably sell it and keep my Civic, due in part to it's low cost of ownership.
So, what is involved in finding the TCO of a car? The TCO for a car includes all variable costs related to the model you are purchasing. Fuel, auto insurance, monthly payments, maintenance, and registration fees all make up the TCO of a car. Edmunds.com has a great tool for comparing the TCO of auto models from recent years. You plug in the make and model, and your zip code and it gives you a break down of how much the car will cost to own and operate for the next five years. It has some limitations... you can't adjust the purchase price, interest rate, or annual mileage in the tool, but you can take the some of the information out and make a spreadsheet with your own finance costs and purchase price. You can also see how much it costs to operate per mile, as well as how much it depreciates yearly, which is great for comparing multiple cars and seeing how your car stacks up against the competition.
Anyone who's in the market for a new or used car should read Bankrate's recent article on auto affordability. It briefly discusses the misperception that cars are an investment, when in fact they are a liability, as well as some guidelines for finding out how much car a person can afford. Personally, I'd would love to never have another car payment so my own rule of thumb is if I can't afford to pay cash, then I can't afford it.
2 comments:
Good post! If you really wanted to be picky, you could also factor in the opportunity cost of the money when making these decisions. For example, if you were looking at two cars with TCOs of $20k and $30k over 5 years, and you had a mortgage at 5% interest net of tax, you could estimate 5% of $10k for 5 years ($2500) as additional savings from choosing the cheaper car (simplifying the NPV calculation). Or if you thought you could earn 8% in the market, your savings would be even higher.
As for new cars, depreciation is by far the largest cost driver. My advice is to either buy a modest new car with good reliability and keep it for 10 years or if you really have to have a fancy/luxury/sports car, get a used one thats 2-3 years old and in good condition. That way, you avoid the monstrous depreciation in the first few years of ownership.
Murray
http://capitalideas.blogspot.com
Good advice. I plan to keep my car as long as possible... ten year or more would be great! I'm not sure that I will ever buy another brand new car, especially if I can pay cash. One of the reasons I bought a new car the last time was the interest rates were much lower on new vehicles as opposed to used, and the price differences on the model I wanted weren't that big.
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