How to Budget for a Car

Middle Age – When you want to see how long your car will last instead of how fast it will go. 

The Major Vehicle Costs

There is no tool that can just blindly give you a prediction of your actual vehicle costs. In addition to your initial cost to purchase (which includes the purchase price, shipping, and sales tax), you have to add the following eight types of ongoing costs:

  • Depreciation
  • Interest
  • Taxes/Fees
  • Insurance
  • Fuel
  • Maintenance
  • Repairs

Some Finer Details About Vehicle Costs

This Edmunds tool has been featured on many other blogs and we have sifted through many of the reader comments in preparation for this article. We are going to work through the most common complaints as a way of discussing some of the finer points of vehicle costs. Some complaints seem quite valid to us. Others do not.

 The tool does not include older models.

In our opinion, this criticism is totally valid. The tool will only accept model years six years old or newer. Now you could actually cobble together a lot of this information manually from other parts of the Edmunds website. For example, you could look up the l/100 km of older cars to calculate the fuel costs, and you could look up the resale value of different model years to approximate the depreciation cost. However, the tool is automating the process of looking up all that information and performing the calculations for newer cars. It does not seem like there is any reason it could not be made to work for older cars.

 Depreciation is not a real cost.

Well, what more can we say about this? Claiming it does not exist does not make it so. You can read our thoughts on this topic in a previous article about depreciation.

 I did not like the assumptions.

The tool had to use something as a base case. At least they break out the different costs separately and clearly spell out the assumptions. It does, however, seem like they might have allowed you to tweak the assumptions. For example, it could have let you enter the number of miles you expect to drive (to better calculate fuel costs) or your age and region (to better calculate insurance costs). As it stands, you will have to manually adjust for things like that.

 My experience with the cost of repairs was not the same.

A lot of people seemed to think that if the tool told them that the average cost of repairs for their vehicle was €500/year, and they only spent €100 last year, then the tool was “wrong” or “useless”. It is not a crystal ball. In fact, the tool was not even intended to be predictive. It was designed to facilitate comparing different models. For some car models, there are literally millions of these vehicles on the road. The calculated cost is intended to be the average. Obviously for any given year, many cars will be way over or way under the average. Furthermore, large repairs are infrequent and irregular. The same car may be way under the average for several years and then be way over one year because of a major repair. The average may turn out to be way off for your vehicle, and yet the average is still your best guess.

We roll over unspent repair money into the next year because it seems to us it is more likely that things will average out over time. It is also a more conservative approach. In other words, if we budget €400/year for repairs but only spend €100 on repairs this year, then we budget €700 for repairs next year. (If you followed your budget last year, you will have that extra €300 you did not spend on repairs, right?)

You may be interested in knowing how Edmunds determines the average cost of repairs. They use the cost of a bumper-to-bumper warranty for the vehicle in question. This makes sense because it leverages the findings of a whole industry that examines these costs. Insurance companies are not in the charity business. They make sure that the cost of these warranties covers the cost of repairs. Edmunds then subtracts the overhead and profit of the insurance company to arrive at the average cost of repairs. Note that this is very similar to the method we suggested in a previous article about unexpected costs. In fact, if you want to make your repair costs almost entirely predictable, you can simply purchase one of these warranties for your vehicle.

Depreciation does not matter because I paid cash and I am never going to sell the car.

You can certainly account for your car purchase by simply expensing the full price in the year you bought the car and then using zero for every year after that. But we have warned about this approach many times because it is way too easy to frame things badly. We then imagine our costs are low and our savings are high, only to be blindsided by the next vehicle purchase. Ironically, it is just the opposite scenario where depreciation might not need to be explicitly calculated. For example, if you plan to buy a car with a five-year loan and sell it after five years, then your monthly payments are actually a rough approximation of your depreciation. Why? By spreading out equal payments over five years, you are essentially accounting for a five year complete depreciation of your car. In fact, if the finance rate was 0% and the loan term was the same as the life of the vehicle, then your monthly payments would be exactly the same as straight-line depreciation costs. Now usually there are some finance costs, the car is still worth something after the loan is paid off, and depreciation is not linear. Still, monthly payments do give you a similar view of the ongoing costs just to keep the vehicle. Depreciation costs are just more precise.

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