How much does your car really cost? Really, that much?!?!

Alfa Romeo 8C

Alfa Romeo 8C

I love cars. I mean, I really love cars and always have. I’ve read and dreamt about them, researched, modified, restored, bought, sold, driven, broken, fixed and loved cars for as long as I remember, and it’s a passion I look forward to indulge in increasingly when I retire

Totally against the usual raw ethos of early retirement, our household currently has 4 cars – daily drivers for my wife and I, a Caterham 7 replica in the garage (co-owned with my brother in law and used for summer/track day fun), and a Mazda Bongo campervan (now for sale as it’s not practical for our now family of 4, and we’re really not using it as much any more)

Despite my love of cars, I think I love the idea of early retirement even more, and I try to get all the thrills for as little cost as possible (hence the Caterham 7 replica for around a third of the price of an equivalent Caterham). Despite this, cars are expensive – there’s no two ways about it. They tie up capital and/or cost us interest on loans, they have maintenance and running costs, they depreciate, and occasionally they break down or are damaged, causing unexpected emotional and financial expense

So they’re expensive. We get it. I need to quantify this – How expensive is my car, and how does this compare to other options?

Tax Ins. Breakdown cover Fuel / 1k miles Maint. Depr. Loan interest Cost of capital* Total
Annual £240 £400 £35 £3,636 £200 £700 £0 £150 £5,361
Per month £20 £33 £3 £303 £17 £58 £0 £13 £447

* Cost of capital is the amount of money you would earn if the money was in a bank account paying 5% gross (3% net) instead of sitting on your driveway

So we can see that my car – a 2006 Mazda 6 MPS, also known as Mazdaspeed 6 in the US – costs £447 per month, mainly driven (pardon the pun) by fuel – a shocking 21mpg!!! (note:Imperial gallons, not US Gallons) However I only do 300 miles per month in this car which means the real cost is £91 instead of £303. This low mileage is the only way I can even begin to justify this car and if my mileage needs to increase then the car will have to go.

£5,361 to run my car for a year seems like a lot already, but factor in 2% National Insurance and 40% income tax, and it means I actually need to earn £9,243 a year or £770 per month gross, just to pay for my car!

Let’s hope my wife’s 2004 Honda Civic works out cheaper…

Tax

Ins.

Breakdown cover

Fuel / 1k miles

Maint.

Depr.

Loan interest

Cost of capital*

Total

Annual

£195

£300

£0

£1,704

£150

£300

£0

£54

£2,703

Per month

£16

£25

£0

£142

£13

£25

£0

£5

£225

Phew – the running costs are half that of my silly gas-guzzler, which is why the vast majority of our family travel is in this car (keeping mileage on my car down to 300 per month). Still, £2.7k per year is another £4.7k of higher rate earnings needed. I would suggest that this is much more representative of the type of car owned by someone striving for early retirement. Someone who doesn’t have an unhealthy affection for fast cars!!

So let’s use the Civic as a benchmark and move on to look at an example of a newish £20k car, with a £15k 6% loan over 3 years and simplified straight-line depreciation of £3k pa (ie the car will be worth £11k in 3 years)

Tax

Ins.

Breakdown cover

Fuel / 1k miles

Maint.

Depr.

Loan interest

Cost of capital*

Total

Annual

£200

£500

£65

£1,908

£250

£3,000

£476

£150

£6,549

Per month

£17

£42

£5

£159

£21

£250

£40

£13

£546

The new car costs £320 more to run every single month – almost 2 and a half times more than the Civic – which is £11,500+ over 3 years, excluding any cumulative interest you could make on the savings. Using this savings philosophy when choosing your car purchases, and allowing your £320 monthly saving to compound at 5% interest, you could look forward to a pot of over £45,500 after 10 years

I still love cars, but doing this exercise really brought home the modern costs of fuel consumption, following years of above-inflation tax and oil price rises. For most people the big “pain points” from motoring are usually the highly visible lump sum costs when renewing insurance, buying your tax disc or paying for a service. In reality, although they are big one-off bills, they look relatively inconsequential  when spread across the year and lined-up next to costs such as depreciation, fuel costs and interest payments

Important assumptions:

Tax – I’m talking about a UK tax disc here. The amount of tax varies considerably depending on the age and CO2 emissions of the individual car so I’ve made an estimate for the hypothetical “new car” example

Insurance – also variable. I’ve included a higher amount for the new car as the financial risk of a “total loss” is much higher for the insurer as the car is worth more. This may be a bogus assumption, so feel free to substitute this with any number you feel more appropriate

Breakdown cover – cost depends on your provider, level of cover and is optional. The cover I have covers both my wife and I as drivers so effectively covers both cars

MPG – I’m in the UK so this is Imperial Gallons, not US gallons which are smaller. Apologies to any readers from the US!

Fuel per 1,000 miles – Using a cost of £1.40 per litre (early 2013) and 4.546 litres per imperial (not US) gallon. My car 21mpg, Civic 45mpg, new car 40mpg

Maintenance – there is a good argument that older cars cost more to maintain as more things need replacing. Although I agree with this, the costs of using local independent garages is much lower than main dealers. During the first few years of a car’s life I’m assuming that the vehicle is maintained by the manufacturer dealer network to keep the warranty active. This is very expensive and is why I believe, on average, it’s more expensive to maintain a newer car than an older car. Obviously I need to be prepared for a major mechanical failure of a vehicle outside of it’s manufacturer warranty, but cars built in the 21st Century are generally very reliable even when old and high-mileage.

Depreciation – my favourite way to quantify this is to look for your exact car in the classified ads, but a model that is 3 years and 30k miles older. Not always possible with model changes, but it gives a very accurate indication. In this instance, my car is expected to lose £2k in 3 years, the Civic £900 in 3 years and the new car £9,000 in 3 years. Represented as a percentage of current values this is actually very similar – the cars are all projected to be worth between 50-60% of their current value in 3 years time

Interest on loan – £15,000 over 36 months at 6% interest = £1,427.85 interest. Divided by 3 for simplicity = £476

Cost of capital – calculated by taking todays equity in the car and investing it at 3%. My car and the new car both have £5k equity, the Civic has £1,800

Total costs – for a more personalised view it can be useful to conduct a “cost per mile” calculation to show what the most efficient strategy is if you need particularly high or low mileage vehicle. For instance a very high mileage car that depreciates heavily but does 70mpg might be better than a car that depreciates more slowly but only does 35mpg. Or a low mileage car that has low fixed costs (tax, insurance, depreciation) but high fuel costs can work out cheaper than a new efficient car that depreciates whilst sitting unused for days at a time

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3 responses to “How much does your car really cost? Really, that much?!?!

  1. The Alfa 8C is one of the most beautiful cars ever. While I completely agree with your philosophy on cars, if I ever happened to come into a ridiculous sum of money, I’d have one these. Nothing else mind you; I’d keep my ratty clothes, live in the same house and still use my phone with a cracked screen, but the 8C would be mine.

    • I love the thought of you getting out of your 8C in tatty clothes and with a cracked phone screen 😉
      I have a feeling that the 8C might actually be an appreciating asset rather than a depreciating one (not many cars have the potential to appreciate instead of depreciate, but I think this one might be a winner). Now if only I had £174k to speculate on that today – I don’t mind being proven wrong, we all make mistakes!!!

  2. Greetings! Very useful advice in this particular post!
    It’s the little changes which will make the biggest changes. Thanks a lot for sharing!

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