Author Topic: How do you budget for an eventual car replacement?  (Read 1865 times)

IrishFI

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How do you budget for an eventual car replacement?
« on: June 13, 2020, 12:38:27 PM »
Hello Everyone,

In my budget (notes on my phone) I have budgeted for depreciation at €11.12 a week. I find this money is building up in my current account and was wondering if I would be better off putting it into an ETF and getting it to work but then when the car does need to be replaced I'm not sure how I would pay for it without a loan.

The car is a 2015 hyundai I20 1.1 diesel that I bought last July second hand and has about 170000kms on it. I dont put huge mileage on it, I would say about 8000kms a year so I am expecting it to last 10 - 15 years. How would you budget for the eventual replacement of the car or would you bother?

Thank you.

Imma

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Re: How do you budget for an eventual car replacement?
« Reply #1 on: June 13, 2020, 01:02:13 PM »
€11.12/week is €578.24 a year. If your car dies in 5 years (the most negative scenario) would €2891.20 be enough for a replacement cat? If yes, I would put that money in my savings account. I'd probably round it up to €600/year or €50/month. I would not put this money in the market because you will need it one day.

On top of my emergency fund I also save for replacement items of big ticket items. I don't have a car, but for example I put €100/month in savings for home maintenance. I throw it all in one account but I know soms people who like to make several pots of money - in different accounts or tracked on a spreadsheet. So they have an emergency fund, a car replacement fund, a vacation fund, a downpayment fund etc. Whatever works for you.

ixtap

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Re: How do you budget for an eventual car replacement?
« Reply #2 on: June 13, 2020, 01:11:38 PM »
It depends on your financial buffer, your overall discipline, and your love of spreadsheets.

Oh, and how long you can reasonably expect the vehicle to last. It sounds like you could well be 10 years out from a replacement, in which case, I would chuck it in with the rest of my taxable investments and buy my favorite ETF.

habanero

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Re: How do you budget for an eventual car replacement?
« Reply #3 on: June 13, 2020, 01:13:19 PM »
I dont budget for items like a car. When the one Im currently owning isn't up to the task anymore, I will replace it. The net cost from that transaction will show up as big spending that particular month yielding a negative savings rate, but I don't bother spreading out the cost of owning it. I know it in reality costs me a decent sum per month despite no actual cashflow happening most of the time (i drive electric so I dont even buy gas). Insurance and other ownership costs goes under my fixed costs, new tires etc is ad hoc spending categorized as car expenses. But budgeting for its eventual replacement? Nope.

But if cash is tight I see the point of planning for it. Problem is your never know when exactly your sample of the specimen "car" dies on you and needs replacement. Can be next week, can be in 10 years.

Imma

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Re: How do you budget for an eventual car replacement?
« Reply #4 on: June 13, 2020, 01:19:40 PM »
Because OP writes that if they don't budget for a car, they need to take out a loan I assume they don't have a big savings account or high cashflow, so they couldn't just buy a used car without planning ahead. If that's your financial situation (nothing to be ashamed of! I would have to plan for such a purchase too) then I would not put this money in the market, even if your current car may last another decade. It could also need replacement or major repairs a lot earlier than that.
« Last Edit: June 13, 2020, 02:27:10 PM by Imma »

APowers

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Re: How do you budget for an eventual car replacement?
« Reply #5 on: June 13, 2020, 01:27:20 PM »
I am apparently an outlier here in how cheaply I find vehicles, but I generally just ensure that my emergency fund is sufficient to cover a car replacement. Then when it's time for a new (well, different) car, I maybe ramp up the emergency fund for about 6 months, just for extra padding. So, as an example:

Normal E-fund: $5,000
Current car value: ~$2,000
New car purchase price: ~$3,000 (including any missed repair items that inevitably pop up in the first few months)

Sequence of actions: Save an extra ~$1,000 in E-Fund. While doing that, do all due diligence and research to decide which new (used) make/model best fits your use-case. Then find suitable vehicle for sale by owner (usually craigslist/facebook mktplace). Buy vehicle [-$3,000]. Then sell old vehicle [+$2,000]. E-fund is back to normal levels, and you have a new (to you) vehicle.

I generally look for vehicles that are very popular with high reliability ratings (e.g., Honda Civic/Accord, Toyota Prius/Camry/Corolla) at the bottom of their depreciation curve (generally '90s-'00s), so for me, sale price of the old vehicle is generally equal to purchase price of the new, so any extra money saved "just in case" can be swept back into investments.
« Last Edit: June 13, 2020, 03:30:09 PM by APowers »

IrishFI

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Re: How do you budget for an eventual car replacement?
« Reply #6 on: June 13, 2020, 01:42:18 PM »
Because OP writes that if they don't budget for a car, they need to take out a loan I assume they don't have a big savings account or high cashflow, so they could just buy a used car without planning ahead. If that's your financial situation (nothing to be ashamed of! I would have to plan for such a purchase too) then I would not put this money in the market, even if your current car may last another decade. It could also need replacement or major repairs a lot earlier than that.

Some financials might help. I earn €24,440 a year gross which is about 4k above minimum wage. I have an emergency fund of 2800 roughly and pension deductions of 450/month gross. I have just this week started putting money in a taxable ETF (about 300/month).

I bought the car (used) for about 8700 by wiping out my savings and borrowing from my parents which looking back was maybe a mistake despite the low running costs of the car and its potential lifespan. Thank you for the feedback so far.

Steeze

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Re: How do you budget for an eventual car replacement?
« Reply #7 on: June 13, 2020, 06:51:06 PM »
I have a $100/mo car replacement fund. Another $75 for insurance, $50 for maintenance, $75 for gas.
I budget $300/mo for the car, plan on driving it for 10 years and spending $10k-$15k to replace.

I don’t really have set place to keep this money per se - it’s just accounted for so that my automatic investing doesn’t include this. Normally it would go into a savings account, but if that account gets too big I make an extra investment to knock it down.

ctuser1

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Re: How do you budget for an eventual car replacement?
« Reply #8 on: June 13, 2020, 06:55:45 PM »
In case your car breaks down much before you expect, is public transport an option for a few months to a year?

If yes, perhaps you can throw your depreciation budget + some more into ETFs. Yes, there will be volatility and the markets will go up and down. However, over a decade or more, that should net you much more than any other form of savings.

It is a high risk approach. In case you get into a pickle (car breaks down and markets are in doldrums right at that time) then you may need to figure out public transport/carpool/uber/something for a few months till the situation is favorable for you to buy a car again.

Also, a Hyundai I20 with 170k kms (i.e. 100k+ miles) for 8700 Euros seems rather high. I don't think that car sells in the US. Google lands me to this Indian website: https://www.zigwheels.com/newcars/Hyundai/Elite-i20, that suggests that the price for new is INR 650K-831K. I EUR=INR 85. So this translates to EUR 7.6k to 9.7k, new. Why would you pay 8700 Euro's used, with such high milate, for that car?

Are cars very expensive in Ireland? If there are no mitigating factors - then I'd suggest you need to find better car deal next time. :-)

Villanelle

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Re: How do you budget for an eventual car replacement?
« Reply #9 on: June 13, 2020, 07:07:50 PM »
I think this depends on how tight your finances are.

Generally I will relaize about a year out that it may soon by time to purchase a new car. (We drive our cars a long time but try to sell before they die, likely when they have a couple decent years left.)  So for the next 6-12 months, I just use cash flow to build up some $ in our account.  Where I'd generally scrape off excess cash and make additional investments, I don't do that.  When it's time to buy, we do, perhaps also dipping slightly into our usual cushion/EF.  Then we build that back up over the following few months. 

Imma

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Re: How do you budget for an eventual car replacement?
« Reply #10 on: June 13, 2020, 10:47:46 PM »
In case your car breaks down much before you expect, is public transport an option for a few months to a year?

If yes, perhaps you can throw your depreciation budget + some more into ETFs. Yes, there will be volatility and the markets will go up and down. However, over a decade or more, that should net you much more than any other form of savings.

It is a high risk approach. In case you get into a pickle (car breaks down and markets are in doldrums right at that time) then you may need to figure out public transport/carpool/uber/something for a few months till the situation is favorable for you to buy a car again.

Also, a Hyundai I20 with 170k kms (i.e. 100k+ miles) for 8700 Euros seems rather high. I don't think that car sells in the US. Google lands me to this Indian website: https://www.zigwheels.com/newcars/Hyundai/Elite-i20, that suggests that the price for new is INR 650K-831K. I EUR=INR 85. So this translates to EUR 7.6k to 9.7k, new. Why would you pay 8700 Euro's used, with such high milate, for that car?

Are cars very expensive in Ireland? If there are no mitigating factors - then I'd suggest you need to find better car deal next time. :-)

I know in the Netherlands it cost about twice that, new. I mean, realistically, how many cars sell for 8-10k new? Maybe in India but not in Europe.

I've looked at similar models with a similar amount of km's and from the same year and they are in the same price range as OP's car: https://www.autoscout24.nl/lst/hyundai/i20?sort=standard&desc=0&ustate=N%2CU&cy=NL&kmto=200000&kmfrom=150000&fregfrom=2015&atype=C
https://www.autotrack.nl/aanbod?merkIds=349b1a57-8c5c-401d-8412-eb9d883c8eb9&minimumbouwjaar=2015&maximumbouwjaar=2015&minimumkilometerstand=160000&maximumkilometerstand=180000&paginagrootte=30&paginanummer=1
 

IrishFI

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Re: How do you budget for an eventual car replacement?
« Reply #11 on: June 14, 2020, 12:43:34 AM »
In case your car breaks down much before you expect, is public transport an option for a few months to a year?

If yes, perhaps you can throw your depreciation budget + some more into ETFs. Yes, there will be volatility and the markets will go up and down. However, over a decade or more, that should net you much more than any other form of savings.

It is a high risk approach. In case you get into a pickle (car breaks down and markets are in doldrums right at that time) then you may need to figure out public transport/carpool/uber/something for a few months till the situation is favorable for you to buy a car again.

Also, a Hyundai I20 with 170k kms (i.e. 100k+ miles) for 8700 Euros seems rather high. I don't think that car sells in the US. Google lands me to this Indian website: https://www.zigwheels.com/newcars/Hyundai/Elite-i20, that suggests that the price for new is INR 650K-831K. I EUR=INR 85. So this translates to EUR 7.6k to 9.7k, new. Why would you pay 8700 Euro's used, with such high milate, for that car?

Are cars very expensive in Ireland? If there are no mitigating factors - then I'd suggest you need to find better car deal next time. :-)

Unfortunately public transport is not an option as I have two kids and a partner that wouldnt go for that ha.

A new I20 in Ireland sells for 17k. The deal i got was quite good at the time as most used ones the same year were 9 - 11k

IrishFI

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Re: How do you budget for an eventual car replacement?
« Reply #12 on: June 14, 2020, 01:45:01 AM »
I think this depends on how tight your finances are.

Generally I will relaize about a year out that it may soon by time to purchase a new car. (We drive our cars a long time but try to sell before they die, likely when they have a couple decent years left.)  So for the next 6-12 months, I just use cash flow to build up some $ in our account.  Where I'd generally scrape off excess cash and make additional investments, I don't do that.  When it's time to buy, we do, perhaps also dipping slightly into our usual cushion/EF.  Then we build that back up over the following few months.

I like this strategy as it would allow me to invest an extra 48.19 per month for maybe the next 9 years and then I would still come out ahead even if I make no additional investments in year 10 to build a car replacement fund.

Imma

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Re: How do you budget for an eventual car replacement?
« Reply #13 on: June 14, 2020, 03:19:26 AM »
@IrishFI you may be interested in this thread https://forum.mrmoneymustache.com/throw-down-the-gauntlet/saving-to-$10k/1500/   with lots of people who are just starting out.
« Last Edit: June 14, 2020, 03:21:04 AM by Imma »

IrishFI

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Re: How do you budget for an eventual car replacement?
« Reply #14 on: June 14, 2020, 04:09:56 AM »
@IrishFI you may be interested in this thread https://forum.mrmoneymustache.com/throw-down-the-gauntlet/saving-to-$10k/1500/   with lots of people who are just starting out.

Thank you

alsoknownasDean

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Re: How do you budget for an eventual car replacement?
« Reply #15 on: June 14, 2020, 05:11:11 AM »
I aim to keep about $10000-15000 in cash to cover things like car repairs/replacement, home repairs, etc.

Sub-optimal? Sure. However that bit of security sure is nice to have.

Retire-Canada

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Re: How do you budget for an eventual car replacement?
« Reply #16 on: June 14, 2020, 08:06:56 AM »
How would you budget for the eventual replacement of the car or would you bother?

My current vehicle is ~10 years old. I figure I have another 10-15 years of use before I'd need to replace it unless I get unlucky. So I don't bother budgeting for replacement. Any extra money I would have set aside for that purposes is in my investment accounts growing.

If/when my vehicles dies:

1. I don't need to drive much so I can walk/bike/bus as needed while I consider my options.
2. I can borrow a vehicle or rent one if I do need to drive once in a while.
3. I can buy a low cost used vehicle with investment account funds without stress.
4. If I want something more expensive [travel van] I have time to plan and make it happen.

What I expect to happen is in about 10 years I'll start to think about replacing my vehicle and start the process of figuring out what I want to get and how much it costs. I do have a soft spot for the idea of a travel van. It remains to be seen if I'll spend the $$ needed on one. If my investments do well over the next 10 years I'll probably be more inclined to do so than if they do poorly. If my investments have not done well and I feel like I need to be very careful with my money I'll just under spend my annual budget for that last five years and put the money aside to a vehicle fund. When I have enough I'll buy something. If money is really tight the correct answer is probably to not buy a vehicle and just live car-free for a while.

LightStache

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Re: How do you budget for an eventual car replacement?
« Reply #17 on: June 14, 2020, 12:48:56 PM »
IMO 10 years is too long of a time horizon to sit out investment growth. And because car financing is relatively affordable, it makes sense to take some risk by putting your car fund in the market.

My next planned car purchase is in 2029. If my current car is still running well, 12 months prior I'll switch my taxable contributions to a short term bond fund. If my current car were to get totaled tomorrow, given the low interest rate environment I'd finance a replacement even though I have enough cash to pay in full.

The_Big_H

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Re: How do you budget for an eventual car replacement?
« Reply #18 on: June 14, 2020, 10:24:41 PM »
$10,000 is the most I would ever spend on a car, ever.
$10,000 is the least I would keep in an E-fund.

Works out pretty well, also, if you are a homeowner, you have potential unexpected expenses larger than a major car repair/purchase.

Garrett B.

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Re: How do you budget for an eventual car replacement?
« Reply #19 on: June 15, 2020, 06:44:06 AM »
I've got a 2005 Toyota Corolla that I bought brand new. I paid it off around 8 years ago.  Recently I started a "new car fund" where I automatically deposit $300/month in a HISA.  The account now has $11,000 in it so I will likely start to lower the payments a little so I can contribute more to my retirement investments.  Once I do buy my next new car and it's paid off, I'll probably do the same, but only $100/month since I plan on keeping it at least 10 years. 

Greystache

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Re: How do you budget for an eventual car replacement?
« Reply #20 on: June 15, 2020, 09:11:24 AM »
When I was getting ready to retire, I decided to create a fund for large, infrequent expenses like replacing vehicles, major home maintenance issues, weddings, etc. I have about $60K invested in low risk fund that basically keeps up with inflation but does not grow much.  That was 5 years ago and I have tapped the fund once. My cars are 15 and 17 years old and still very reliable. When they do need to be replaced, I doubt I will spend more than $15K each. The only major home maintenance /improvement issue was installing solar panels on the roof. That should pay for itself in less than 10 years. I was going to contribute to my son's wedding this year, but that has been postponed due to corona virus.  I acknowledge that keeping a large sum of money in a low yielding account is not optimal, but it is simple and it is a tiny fraction of my total stash, so I am comfortable wit it.

IrishFI

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Re: How do you budget for an eventual car replacement?
« Reply #21 on: June 15, 2020, 10:41:49 AM »
$10,000 is the most I would ever spend on a car, ever.
$10,000 is the least I would keep in an E-fund.

Works out pretty well, also, if you are a homeowner, you have potential unexpected expenses larger than a major car repair/purchase.

10,000 seems like a lot to have in an emergency fund, although I can understand if your income is high you are probably not as concerned as myself with making every euro/dollar count.

Im not a homeowner either, I rent off the council so any major house related expenses (heat pump and such) will be theirs to sort.

American GenX

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Re: How do you budget for an eventual car replacement?
« Reply #22 on: June 15, 2020, 07:30:48 PM »

$200/mo sinking fund (budget items, but money is just part of my stash).

And I don't expect to need a car anytime soon since I have 50K miles on my current car and still going strong.

spartana

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Re: How do you budget for an eventual car replacement?
« Reply #23 on: June 17, 2020, 11:09:44 PM »
I don't budget for any one thing. I just have a liquid pool of money sitting in a money market savings account and draw from that as needed. All my passive income gets put into that monthly and I transfer whatever I need to pay bills to a checking acct. I'm looking for a vehicle now and will just use the money from my MM acct and replenish it over time from my passive income. This also functions as my EF. I keep it at $30k and that's enough to cover my bare bones expenses for 3 years if ever needed.
« Last Edit: June 17, 2020, 11:26:31 PM by spartana »

MissPeach

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Re: How do you budget for an eventual car replacement?
« Reply #24 on: June 18, 2020, 02:04:34 PM »
I am in the camp I don't budget for one thing but I like to have a decent amount of cash on hand in case the market is down when I need the money, I get laid off, I have large expenses, etc. I don't want to sell off any investments in these times. SO I probably keep more cash on hand than a lot of people on MMM.

My personal approach is I automatically pull money to the 401K, HSA, and taxable accounts. I want to make sure I'm making interest and dollar cost averaging. I also route a set dollar amount to a savings account I can transfer to my checking if needed. If I have money over a certain dollar amount in my checking account after paying everything I transfer that to the savings account too in addition to the set dollar amount. If I hit something unexpected it acts as my emergency fund.

Over time it's pretty easy for my to save up enough to cover a new car long before I need one. I let that go until I hit a ceiling of how much cash I feel I can leave around with poor interest rates and anything after that point is diverted into taxable accounts so I can make interest.

The_Big_H

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Re: How do you budget for an eventual car replacement?
« Reply #25 on: June 18, 2020, 06:26:36 PM »
$10,000 is the most I would ever spend on a car, ever.
$10,000 is the least I would keep in an E-fund.

Works out pretty well, also, if you are a homeowner, you have potential unexpected expenses larger than a major car repair/purchase.

10,000 seems like a lot to have in an emergency fund, although I can understand if your income is high you are probably not as concerned as myself with making every euro/dollar count.

Im not a homeowner either, I rent off the council so any major house related expenses (heat pump and such) will be theirs to sort.

Emergency fund amounts are very personal because they have to consider
1) household size versus number of incomes
2) own / rent and what kind of liabilities the house has.
3) # of cars owned
4) likelyhood of medical issues (in countries where you have to pay) for all in the household
5) stability of job (tenure, union, contract, or at will)
6) ability to shed lifestyle luxuries

Given many stateside own two cars, a house and have high deductible health plans and at will corporate jobs you’ll find plenty who say $10,000 is too little.

Did you know to in the USA when you get fired you go on COBRA which means you can keep your employers health insurance coverage but must pay full boat. Which typically means three to four times more.  So a family plan of 500/mo can balloon to 2000/mo .... while unemployed.

Also. Large emergency funds make people feel better about risking more in stocks which means longer term better gains.