The Cost of Owning a Car: Budgeting & How To Save Money

Car Expenses: What’s Included & How To Save

Save Money On Transportation: Gas, Tolls and Maintenance

Cars are a necessity. Without one, most people couldn’t hold a job, buy groceries or shuttle kids to school. But cars are also a major expense, devouring a large chunk of their owners’ incomes.

Before jumping into the car market, you need to honestly decide what you can afford, a calculation that includes more than sticker prices.

Other costs include:

  • Insurance premiums
  • Taxes
  • Dealer and registration fees
  • Maintenance costs
  • Highway tolls and parking expenses.

Most people finance their purchases, taking on years of monthly loan payments that could cause more problems than owning a car solves.

Creating a realistic (not optimistic) budget is the key to making it work. Car costs shouldn’t exceed 20% of your income. Since insurance, maintenance, tolls, parking expenses and other costs are part of that 20%, you should limit your car-loan payment to less than 10% of take-home pay.

Remember that car values rapidly depreciate and the vehicle you bought new last year would be worth far less today if you had to sell it. AAA says depreciation typically accounts for about 40% of annual car ownership costs – more than $3,000 a year on average.

Although new cars lose value quickly, buyers often finance them with pricey long-term loans. In March 2020, the average new car loan term was 70.6 months at $569 a month. Those who own more than one car face an even larger burden.

If you go overboard on automobiles there might not be enough left over to fund emergency and retirement accounts. That’s why budgeting is crucial.

Buy a Used Vehicle with Cash

You can save the most transportation dollars by buying an inexpensive used car or truck with cash. Some drivable vehicles can be purchased for a little as $4,000 — less than one year of $569 payments for the average new model.

Let’s look at some pros and cons of buying used:

  • If you pay the average $569 a month to finance a new vehicle, you’ll spend $6,828 a year. If you have a 70-month agreement and keep the car until the end, it will lose a great deal of value through depreciation, so you won’t be able to recoup much of the nearly $40,000 you paid just to own the car.
  • Paying cash for a $5,000 used car means no monthly loan installments. Since the car probably has high mileage, maintenance costs most likely exceed the average. The average cost of car maintenance was almost $1,190 a year in 2019 but can run considerably more for older models.
  • If you lose a job or suffer some other major setback, you might not be able to make car-loan payments. You could lose your car if it is financed. That won’t happen with a car you bought with cash.
  • Insurance costs will be higher on a new car. You will need to carry collision insurance to repair the car if you have an accident. If you own a used car outright, you might forgo collision insurance, saving additional money.

Here’s a quick comparison: A new car comes with high financing costs but low maintenance expenses, especially while under warranty. A used car purchased with cash could have high maintenance costs but no monthly payments. If the $5,000 used car cost $2,500 a year to maintain and you kept it for six years, it will cost $20,000. After 70 months – two months short of six years – the new car under finance will have cost $39,830 plus maintenance costs.

You easily could save more than $20,000 over six years if you buy a $5,000 used car instead of a new car with a $569 monthly payment. That’s money that you could invest, pay off debts or buy a home.

Save Money on Car Loans

If you opt for a new or slightly used car and need a loan, the goal is finding financing that doesn’t stress your budget. Auto loans are a numbers game, and it’s important to know your numbers before you visit a car dealership.

The first thing to know is new cars lose value very quickly. The minute you drive that shiny vehicle off the car lot, its value falls, often dramatically. Within a year, it will be worth about 25% less than you paid. Unless you make a large down payment, you can easily own a car worth less than what you owe, a condition known as being underwater.

If you need to sell the car to cover a personal emergency, or you get in an accident and the vehicle is totaled, you might not realize enough money left over to pay off the loan. Most insurance policies don’t cover replacement costs, only the value at the time of the accident, and buyers won’t pay you more than the car is worth.

Consider how much car debt you can afford. One of the best ways to avoid an underwater loan is to make a sizable down payment – probably around 20% of its value.

Other considerations include:

  • The interest rate on the loan, also called the APR: The lower your interest rate, the more principal you pay every month. A lower interest rate can substantially cut the amount of time required to pay off the loan and trimmed thousands of dollars from your total cost. Your interest rate is linked to your credit score. If you have a low credit score, try to increase it before taking a loan. You might consider talking to a nonprofit credit counselor for advice on how to improve your credit score.
  • Length of the loan: The length of car loans has increased in recent decades. Loans of six years or more for new cars are common. Buyers opt for longer payment periods of reduce monthly costs, but in the long run they pay more for the car than those who opt for shorter repayment periods. You should try to limit your loan to five years for a new car and three years for a used one.
  • Online loan calculators are useful: An auto loan calculator will allow you to consider different options. Play with the variables: See how a lower interest rate could reduce the time required to pay off a loan and how a larger down payment would mean smaller monthly payments.

Fuel Costs

Create a fuel budget. Start by documenting regular weekly fuel needs including commuting to work, grocery shopping, 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.

Other money-saving strategies to consider:

  • Buy a car with a high gas-mileage rating: You can research estimated gas mileage for most vehicles online. Large SUVs tend to burn much more fuel than gas-sipping compacts, and hybrid models tend to be the most fuel-efficient. All electric cars don’t use any fuel at all, but tend to cost considerably more than gas-burners.
  • Have a strategy for gas and miles: Shop around for the best gas prices and plan your errands and driving destinations to eliminate unnecessary miles.
  • 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.

Auto Insurance Costs

There are a lot of variables that go into determining car insurance premiums. If you know what to look for, you can customize your policy to lower the bill.

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. You will likely still need liability coverage, as many states require liability insurance.

Another option to save money on your car insurance is to assume a higher auto insurance deductible. That would mean you would pay more in the case of an accident, but your monthly premium may be reduced by as much as 30%. This might be a good idea if you have enough savings to cover a potential deductible and would like to benefit from the monthly savings.

Other factors to consider:

  • Where you live: Insurance premiums vary widely by state and by locations within states. Insurance companies consider many factors when setting rates. They often charge more for policies in urban areas which higher accident and theft rates. Each insurer uses its own formula – you might not want to move for a cheaper insurance policy, but you should consider the company you choose and the extent of coverage you require.
  • Your age and driving record: Young, newly licensed drivers almost always pay more than older ones for an equivalent policy. Your track record also counts: If you have accidents or multiple traffic tickets, insurers move you into a high-risk group and your premium costs can skyrocket.
  • Your car: Insurance companies worship statistics, and your vehicle model offers a pile. The risk of a big insurance payout is far higher if you carry comprehensive and collision insurance on an expensive sports car than on a 10-year-old clunker. Car thieves also target some car models, and those with the highest theft rates are the most expensive to insure. Safety records are also important. Some cars are better in accidents and their injury rates are lower. Insurers consider that when setting rates.
  • Finding the best rates: Start with the large auto insurance companies in your area and collect quotes. Contact insurers online or by phone. Remember to provide information that might lower premium costs. If you have homeowner’s insurance, consider starting with that insurer since you can often get discounts for bundling auto and homeowner’s insurance. If you have more than one vehicle, try use the same insurer for coverage – you can often get a discount.

Auto Maintenance Costs

The adage an ounce of prevention is worth a pound of cure applies to both people and their cars. Taking care with regular maintenance can extend its life, avoid repairs and contribute to its safety.

You should refer to the vehicle’s owner’s manual for a recommended maintenance schedule and stick to it. If the manual suggests changing the oil every 5,000 miles, that’s what you should do. Many cars have timing belts and water pumps that need to be replaced at certain intervals – do that too. Rotate tires and check their pressure, inspect windshield wipers and look for burned out headlights and taillights.

Change your air and fuel filters. The air filter you can do yourself for $7 or so, but the fuel filter may be trickier. Both will add to the life and performance of your engine.

Though this might strike you as common sense, a lot of people skip maintenance to save money. It might mean small savings in the moment, but a big loss if your vehicle breaks down. If a recent Car Care Council study is any indicator; many drivers are rolling the dice. The study showed that a full 8% of vehicles on the road need service, including parts replacement, service or fluids. 10% of the cars studied had their check engine light on.

Though new cars tend to cost much more than used ones, they come with an important advantage, a warranty. Factory and extended warranties now cover years of ownership and remove headaches from car ownership since they cover many common repairs. Still, warranties end eventually, so regular maintenance is still needed to avoid future problems.

If your car no longer has a warranty or you bought it used without one, you should budget for repairs, setting aside money every months for inevitable problems.

Maintaining your car before things break is always the best strategy and comes with an additional bonus: If you keep your car in good running order and maintain a record of repairs, it will protect the resale value and be worth more when you try to sell it.

Registration, Fees & More

Some states charge ad valorem/excise taxes on the depreciated value of your car annually, but in many states the only repeating cost is an annual registration fee, which can be quite small. In Florida, for instance, annual registration of a passenger car is less than $40 a year.

You should learn what registration and possible taxes are in your state and include those costs in your automotive budget.

Ask for Help

Sources for learning to make a budget are plentiful, from books to websites to personal financial software. Developing financial literacy is an important first step in managing money and planning for the future. A solid budget balances your total income against all the expenses you’ll incur every month, including food, shelter, transportation childcare, dining out, saving for retirement and managing an emergency fund. Your income needs to cover all these expenses.

If you plan to buy a car, use a budgeting program to figure out what it will actually cost. You’ll need to factor in purchase costs and taxes, insurance, maintenance, tolls and parking, gas and sundry costs. It’s a good idea to create a separate an emergency repair fund just in case. If you have money left over, consider setting aside funds for your next car purchase – the more you save, the larger your potential down payment.

If you have existing credit problems or find budgeting on your income daunting, consider talking to a nonprofit credit counselor. You can often get useful advice at little or no cost.

Remember vehicles are necessities for many Americans, but they shouldn’t be a financial burden. Careful budgeting will help you cover transportation costs and keep you on a path to financial success.


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