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How to Minimize Your Automobile Total Cost of Ownership

By: Steve Johnson

8/15/2008 - 38 Comments

Calculating how to minimize your automobile total cost of ownership can be complicated as each situation will have different elements in the equation.

Most of the time, the cheapest car you can drive is the one you already own.  But that is not always true for those that drive many miles or work long hours or do not have a convenient way to quickly repair their vehicle. 

To find the optimum vehicle for minimizing your total cost of ownership, here is what to do.

1. Calculate the miles you drive per year
2. List all your expenses (insurance, maintenance, etc.)
3. Find out the cost to purchase a difference vehicle? (sales tax, financing fees and interest)
4. Look at how your insurance costs factor into your vehicle and driving routine?

  • Do you drive part-time? Can you reduce your coverage of your second car to part-time?
  • Can you increase your insurance deductible? Is your risk low (history of accidents is low) and your savings higher than your new deductible?
  • Do you need comprehension insurance coverage?  What is you risk of needing this?  Is the value of your vehicle higher than your savings account or newer than 3 years old?

The idea is to find a vehicle with the lowest cost of ownership by looking at these factors.

Cost Per Year

For example, my father in-law drives about 250 miles a day (50,000 per year) commuting to work and his work day consumes 11 hours per day.  Given these factors, he needs a vehicle that is relatively new because it needs to be very reliable for his long commute and because his work day consumes 11 hours out of his day, he has little time for maintenance.  He also works in a construction site, which has a high risk for damage to his vehicle, making it necessary to have full insurance coverage.  In this case, his optimum choice for a vehicle that results in the lowest cost per year to own is a vehicle that is relatively new with low mileage so that he can put a lot of miles on before needing a different vehicle. His total cost of ownership would be something like this;

Annual insurance - $900
Annual maintenance (tires/brakes/cleaning/oil changes/etc.) - $800
Annual gas - $6000
Cost to purchase subtracted from selling price - $30,000 - $10,000 = $20,000
Yearly Cost of Ownership = $900+$800+$6,000 + ($20,000 / 3 years) = $17,000

Cost per mile = $17,000 / 50,000 miles = $ 0.34 per mile

This might seem like a lot of money and it is, but it could be higher if he purchased a vehicle with high mileage and needed to spend time away from work getting it repaired and paying for the repairs.

Here is another example. A friend of mine who drives about 30 miles a day (10,000 per year) commuting to work while his work day consumes 8.5 hours per day. He has a low risk of needed comprehension insurance coverage and more time during the day to maintain his vehicle when needed. In this case, he can save money by owning a vehicle that has high mileage and low insurance costs with a higher deductable and no compression coverage.  Buying a newer vehicle or a vehicle with low miles would result in a higher cost of ownership because the vehicle would cost more to purchase yet result in the value after ownering it for 7-10 years. The reason is that after 7-10 years, the age of a vehicle is more of a factor in determining it's value than the mileage. Low mileage or high, after 10 years most vehicles are only worth about $1000-$2000.  The optimum vehicle for him to own would be to purchase a 1-3 year old used vehicle with high mileage and own it for 7-10 years. This would save money when purchasing the vehicle and reduce the maintenance cost because it is fairly new, while maintaining its relative value upon selling. The longer he keeps the vehicle the more he will save. (This situation is similar to mine)  The total cost of ownership would be something like this;

Annual insurance - $600
Annual maintenance (tires/brakes/cleaning/oil changes/etc.) - $500
Annual gas - $1200
Cost to purchase subtracted from selling price - $12,000 - $2,000 - $10,000
Yearly Cost of Ownership = $500+$600+$1200 + ($10,000 / 10 years) = $3,300

Cost per mile = $3,300 / 10,000 miles = $ 0.33 per mile

If he purchased a new vehicle or a vehicle with low mileage, his cost of ownership would be much higher. It's important to buy the right vehicle for your situation to minimize the cost of ownership.

Other Factors to Consider

Maintenance – In order to get the most out of your vehicle, it’s a good idea to keep it running good with oil changes/tires/brakes/tire rotations/windshield wipers/transition checks/engine checks/etc.  Inspect it continuously to spot minor problems and get them fixed before they become major problems.

Rapid Depreciation – New vehicles depreciate by up to 1/3rd of their value in the first year and up to 2/3rds of their value after three years.

When To Sell – If you don’t drive a lot of miles, than you are better off keeping your vehicle for a long time. But, when the annual cost of repairs are close to exceeding the value, then it’s time to get another one.

Financing – Financing a vehicle purchase can drastically add to the cost of ownership, with interest and financing fees.  Eliminate these costs by saving for the next vehicle while driving the current vehicle.

Time the Market – The automobile industry goes through its ups and downs just like every other industry. If you can wait for the down turn in the auto industry, you can save a lot of money.  When everyone is buying, prices go up and when nobody is selling prices come down.

Sales Tax – When purchasing a vehicle many states have sales tax as high at 8%.  That’s a lot of money added to the cost of a vehicle. The longer you own your vehicle that fewer times you need to purchase a different vehicle the more you avoid paying sales tax. Another way to minimize this is to purchase a vehicle from a friend or family member.

Insurance Rates – Newer vehicles sometimes have higher insurance rates and sometimes they have lower insurance rates. Call your insurance company before purchasing to find out if your rates will go up or down.

Social Value - Sometimes a vehicle is such a powerful social statement that driving a newer vehicle will give you more respect with your peers and possibly get you a promotion. If that is the case, then this should be taken into consideration when purchasing your next vehicle. 

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