Saving money on your car

For many people, cars are the #2 most expensive item in their monthly budget behind housing costs.  Here is how to save money on your car, even while driving the car you want to own.

A few weeks ago, I wrote this article on whether or not buying a Prius will save you money.  In that article, I calculated that buying a new Prius, driving it for 24,000 miles over 2 years and then selling it would result in a total cost of about $.64/mile.   Now I own a Prius that I purchased brand new, but it costs me a lot less than $.64/ mile.  In fact, I calculate that my Prius only costs me about $.28/ mile.  To understand how I drive a new car for so little money, let’s first look at how the costs for driving the $.64/mile Prius break down:

The variable costs are the additional costs you incur for driving one extra mile.  The fixed costs are the costs that are the same no matter how many miles you drive.  As you can see by this chart, by far the biggest cost of driving your car is depreciation, which is the amount of your car’s value you lose for every mile you drive.  So how do you reduce the amount of depreciation?

Reducing depreciation expense

First, we must understand how depreciation is calculated.  In my cost of driving calculator, depreciation expense is calculated as (purchase price of car- sales price of car)/Total number of miles driven.  There are three ways to decrease your depreciation expense: decrease what you pay for a car, increase what you sell a car for, or increase the number of miles driven between the time you buy it and sell it.  The selling price of your used car is mostly set by the market, so there isn’t a whole lot you can do to increase that. Let’s focus on decreasing the purchase price or increasing the number of miles driven.

The first way to reduce depreciation is to buy a cheaper car.  Buying a cheaper car is an excellent financial decision.  In addition to saving on depreciation your fixed costs will also be much lower.  There is a pretty good chance you will pay more for maintenance, but the savings you will get from every other area should more than make up for that.  So if you have the discipline to drive around an old beat up car then you will save a lot of money, and you have my respect.  Buying a cheap car just isn’t fun though, most people want a cool new car.

If you want to drive a cool new car you can still lower your depreciation expense and have reasonable transportation costs if you drive your car a long, long time.  I plan to drive my car for 200,000 miles, which I believe is reasonable given the reliability of the Toyota Prius.  Because I will put so many miles on my car before I get rid of it, it will be worth practically nothing when I get rid of it, but that is OK.  Since I bought my car for $22,000, then I expect the total depreciation expense on my vehicle to be $22,000/200,000 miles or just $.11/mile.  You can see that by driving my car until the wheels fall off of it, I have reduced my depreciation expense from $.28/ mile to $.11/mile.  When you drive about 25,000 miles per year like I do, that makes a big difference.

Other ways to decrease driving costs

Although depreciation is the biggest expense, other costs can have a significant impact on your transportation budget also. My fixed costs are a lot less than the example in the chart above, mostly because I drive a lot of miles in a year.  Property taxes on my car would cost $300/ year no matter how much I drive.  Because I drive so much, that $300 per year amounts to about $.01/mile instead of the $.03/mile in the above example.  We all know that driving more miles will cost you money, not save you money, but it will make your per mile costs look better.

You can lower your fixed costs by shopping around for insurance the next time your insurance expires, but the easiest way to reduce your fixed costs is to refinance your car loan to a lower rate, as discussed in this article.  As for sales tax, you only pay that when you buy the vehicle.  The way to lower sales taxes then, is to buy cars infrequently.  Once again, I am recommending that you drive your car a long time.

When it comes to the other variable costs of gas, maintenance, and tires picking the right car is the way to reduce your costs.  I recommend checking consumer reports to identify which costs are known for good fuel economy and high reliability which will drive down the costs of gas and maintenance.  If there is a good way to save on tires, I don’t know what it is.  The last couple of times I have looked for tires I searched high and low for the best price, but it seemed to me the cheapest tires at each store were all priced about the same.  Using all of these ideas, here is what the cost of my car looks like:

How much can you save by keeping your car longer?

To find out, I recommend playing around with my mileage cost calculator to see how much you could save.

Photo by Rich Brooks