Important Calculation for Buying a Car

Second to buying a home, buying a car, whether it be used or new, is one of the most expensive purchases that you will make. Considering that the average family will buy several within the same decade, it’s an important step for every young family to conquer. I have already talked about tips for buying a car before. As well as how to make sure that you are getting the most valuable car. This is one area that I am convinced young families struggle with.

Too many people think that they need a new car, when in reality, they need to get their car replaced. Even I have this stigma of used cars, even though I bought a new car. I am hesitant to buy a used car from someone I can’t trust because you never know what happened, right?

As it turns out, my wife and I have been considering buying a second car. Currently, we share one and most of the time that means that I take the good ol’ train. That’s not something that I long to do for a long time, especially in the 15 degree winter days. So, we’ve been thinking about buying a car.

The Cost of Buying an Extra Car

The first thing that I do when I think of a big change like this is see how much it is going to cost me. Most people, when they go to do this calculation, look at the sticker price and think only about that. This is a huge mistake. That is not the true cost of your car. In fact, there is one way that everyone should look at the car they are about to buy – annual cost of owning/operating the car. This is the single most important calculation that you can use because it tells you so much more about the car than the sticker price. More importantly, it keeps you focused on how much it will affect your net worth.

So, how do you calculate the annual cost? I’m glad you asked…

To figure out how much a car is going to cost you, you need to know several things:

  1. Selling Price – including taxes, fees, etc.
  2. Fuel Efficiency or MPG AND expected annual mileage
  3. Cost of insuring the vehicle – the best way to get this number is to get a quote from your auto insurance provider.
  4. Estimated maintenance costs – cars cost more to maintain as they get older. It’s as simple as that.
  5. Depreciation rate or the expected value of the car in X amount of years. An easy way to determine its value at a future date is to look at an older year of the same make and model (assuming it isn’t the first year of this model).

Let me give you an example. I am currently considering a 2002 Toyota Corolla. It has 61,000 miles and is listed for $5,400. I think I could bid it down to $4,500, so I would pay somewhere around $5,000 after all the registration fees and taxes. It gets about 30 MPG (city and highway combined) and I expect to drive it 900 miles a month. So, I would spend approximately $120 per month on gas ($1440 per year). With an additional $400 per year (guessing here…) for insurance and $500 per year for maintenance, the total is racking up. Let’s break the annual cost down.

$1440 + 400 + 500 = $2340 (annual costs without considering price and depreciation)

$5,000 – $1,500 (estimated resale value in 5 years) = $3,500 / 5 years = $700 per year

Total annual cost of owning and operating car: $2340 + 700 = $3040

While these figures are just hypothetical, it gives us a better picture of what this extra car is going to cost us. What’s surprising to me is that this is an expensive luxury. While $3,030 may not sound like a lot, spread over 5 years, it will be an additional $15,000. That is a huge expense for something that is not necessary.

What do you think? Is it worth buying the extra car?

Leave a Reply