After housing, transportation is one of the biggest expenditure in a household budget. Financial planners recommend keeping transportation costs to 10 percent or less of your take-home pay. That means if your monthly household take-home pay is $4000, you should spend $400 or less per month on the following:
According to Edmonds.com, the average monthly car payment is $475 (that’s for a single car) and the Federal Reserve reports average household take-home pay at around $4000. Based on those financial data points, a large percentage of Americans are paying significantly more than 10 percent on transportation.
The problem is that if you pay too much for your vehicle, gas or car insurance (or all three), there won’t be enough money left over in your budget for emergency savings or retirement. Let’s look at some ways to save money within the transportation category of your budget.
You can save the most transportation dollars by buying an inexpensive used vehicle with cash. A drive-able vehicle can be purchased for $4000-$5000. That’s less than one year of $475 payments. Let’s look at a scenario.
You pay the average $475 a month for a financed new or newer vehicle. Your contract is for sixty months (5 years). After 5 years, you will have paid $28,500 for this car. Let’s assume that this car costs you $800 per year in maintenance fees (average sum as per AAA). After 5 years, you will have paid $28,500 in payments and $4,000 in maintenance fees: total costs for this financed car are $32,500 over 5 years.
Now consider that you purchased an older, less desire-able car for $5000. And let’s also consider that this car to maintain this car is double what it costs to maintain the newer, financed vehicle: $1600 per year. After 5 years, this car will have cost you $5000 to purchase and $8000 in maintenance costs, totaling: $13,000.
You will have saved $19,500, over 5 years, by purchasing a used vehicle in cash. What else could you do with nearly $20,000? Get out of debt? Pay for college? Save for retirement? Pay off your mortgage faster?
If you are struggling to pay your bills and lack an emergency fund, figure out a way to save enough money to buy your next vehicle with cash.
Create a fuel budget. Start by documenting regular weekly fuel needs including: commuting to/from work, grocery errands, shuttle trips for children (school, activities, etc.), and plans for short and longer distance trips. For each pay period, consider ‘automatically’ setting aside the needed amount for fuel expenses, as one would for rent/mortgage, utilities and other top-tier items.
Shop around for the best gas prices, and plan your errands and driving destinations to eliminate unnecessary miles.
Pump your own gasoline and use the lowest-octane suggested in your vehicle’s owner manual. You can also save on gas by getting your engine tuned up as suggested and keeping the tires properly inflated.
Observe the Speed Limit. While each vehicle reaches its optimal fuel economy at a different speed (or range of speeds), gas mileage usually decreases rapidly at speeds above 60 mph. As a rule of thumb, you can assume that each 5 mph you drive over 60 mph is like paying an additional $0.20 per gallon for gas.
Lower your car insurance premiums. If you have an older car—one that’s worth less than 10 times the amount you’d pay for coverage—you may want to consider dropping collision and comprehensive coverage altogether. If any claim payment you’d receive wouldn’t substantially exceed your premiums minus the deductible, then it’s probably not worth it to get the insurance. You will likely still need liability coverage, as many states require liability insurance.
Assume a higher auto insurance deductible, which means you would pay more in the case of an accident, but your monthly premium may be reduced by as much as 30 percent.
If you drive an automobile, learn how to change the oil rather than paying someone else to do it. Changing the oil yourself every 3,000 to 5,000 miles can save up to a few hundred dollars per year and help preserve the life of your car. If you are unable or not willing to perform this task yourself, seek out coupons in the mail and newspapers for reduced-price, oil-change deals.
Preventative care can save a great deal of money and headaches in the long run. However, if a recent Car Care Council study is any indicator; many drivers are rolling the dice. The study showed that a full eight percent of vehicles on the road need service, including parts replacement, service or fluids. Ten percent of the cars studied had their check engine light on.
Change your air and fuel filters. The air filter you can do yourself for $7 or so, but the fuel filter may be a bit trickier. Both will add to the life and performance of your engine.
Maintain the exterior and interior. Use a headlight polish to avoid the need to replace yellowed lenses, use a protective spray cleaner on the dashboard so it doesn’t dry and crack. Stay ahead of Mother Nature and her sun!