Understanding Auto Costs of Ownership

According to the American Automobile Association, if you are an “average” sort of person and you drive 20,000 miles per year, your total auto ownership costs will be about 51.9 cents per mile or about $10,374 per year to own your vehicle; that’s a calculated average for a hypothetical low-risk driver with a good driving record who lives in a small city and commutes three to 10 miles a day to work.  Why, it could even be here.  Still using the same assumptions, your costs might be as low as $7900 if you drive a small sedan or as high as $13,000 for an SUV.  Understanding the components of auto ownership can help you make intelligent decisions about your car purchases and use.     

You can look at your annual automobile costs as the sum of a set of items that includes your direct operating costs for fuel, maintenance and tires and your indirect or “overhead” costs that are necessary to auto ownership – insurance, licensing, registration, taxes, finance charges and depreciation.  While most of us worry about the price of gasoline, in fact, the overhead costs of auto ownership outweigh the direct operating costs, usually by a lot.  In the AAA study, average gasoline costs came to about 14 and a half cents a mile ($.1445) or $2890 for the 20,000 miles of driving – a little under 30% of the $10,374 cost of ownership.  Adding maintenance and tire wear to the mix just tacks on another 6 cents or so, bringing the direct operating costs to $4085/years a fraction less than 40% of total costs. 

Obviously, these direct costs are something a driver has at least limited control over.  Choosing a car with higher gas mileage or finding the least expensive gas in your area will help bring down the cost per mile of gas and choosing to drive less often or less far will help reduce your annual costs.  Maintenance and tires are also a matter of shopping for the best prices you can find, though as a much smaller component of costs, savings here do not have as much effect on the total.  

Insurance is one component of overhead costs – about 11% of the total cost of ownership in our hypothetical example.  We are fortunate here on the Peninsula in Washington that our state ranks 43rd in the nation for costs of auto insurance and – if you read our blog regularly, you already know that strategies like bundling your home and auto insurance with the same carrier can lower your rates even more. With a little effort you should be able to beat the average. 

Finance charges are another substantial component of costs in the average costs of ownership and one that you may have some control over by choosing when you replace your car, its cost and shopping for your interest rate.  Taxes, license and registration fees are set by the state and except for your choice of a more or less expensive vehicle may be difficult to control.  

The big gorilla in auto costs is depreciation – the amount of value your car is losing as it ages over time.  Depreciation begins the minute you drive a car new or used, off the lot and continues.  The standard for car depreciation is that all cars, in general, lose about 15 to 20 percent of their value each year and that holds true for new or used cars. A two years old car will be worth about 80 to 85 percent of the value the car held as a one-year-old car; next year it will be worth 80 to 85 percent of its current value.  There’s a nice infographic at Edmonds.com that illustrates this.  

The average deprecation in our AAA example was $3571 / per year, making this the single largest component in the costs of ownership at 33% per year of total ownership costs.  So, what can you do to mitigate the amount of depreciation? First, you can look at some of the variables that determine car depreciation.  Some automobile brands depreciate less than others – a fact you can understand by comparing the resale values of cars to their original selling price at different year assumptions.  The condition of a used car will affect its resale value, so the care you take to preserve the value in your car will help reduce your depreciation.  Finally, cars that are in low supply but have an intrinsic demand often have better resale values.  The problem here is that they may not be the best choice as a family car.  

If you want to calculate your personal cost of ownership, you can do that using the same method Triple A does.  Look through their pamphlet on the subject here.   

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