Equivalency cost of car and mortgage

[Goldeneer]

A while back, I did a simple calculation of the opportunity cost of having a car and living further from down town as opposed to buying more house within the city. It is enlightening to see how much more of a mortgage one can afford by giving up the same payment on a car cost all else being equal.

The following is an analysis of two categories of cars that we typically buy. The costs are based on living in an Ontario town in Canada.

Good value car aka 5 year old Honda, Toyota, Mazda3 etc, bought with cash
-   Depreciation                      $2000/yr (typical for good value car)
-   Insurance                          $1100/yr (liability only)
-   Gas, reg                             $2100/yr (based on our consumption and travel, not used to commute to work)
-   Oil, tires, maintenance       $1500/yr
TOTAL                                    $6700/yr or $560/mo
Mortgage equivalency        $120 000 (3%, 25 yrs)
*It is possible to buy a better value car with lower insurance and maintenance. Values based on our experience.

New fancy $40k car aka Subura Impreza WRX, 3 yr lease
-   Depreciation                      $6000/yr ($500/lease)
-   Insurance                          $2000/yr (full insurance for higher amount)
-   Gas, premium                   $3000/yr (lower efficiency, based on our travel, not used for commuting)
-   Oil, tires, etc                     $2000/yr (based on required maintenance and expensive tires)
-   Opportunity cost               $0 (lease therefore no opportunity cost)
TOTAL                                    $13000/yr or $1080/mo
Mortgage equivalency        $230 000 (3%, 25 yrs)
*For this mortgage amount, I can buy a nice town house within city limits

As you can see, it is equivalent for a family or individual to spend $120 000 more on a house that is closer to work instead of spending the same on a first or a second car. Families that have 1-2 new cars are spending ridiculous amounts of money on cars when there are better value options.

We have a good value car and need one at a minimum for our business. We decided to buy within the city while spending $50k more for a similar car in order to not require two cars.

[SpicyMcHaggus]

You are assuming that you only own it 1 year.

[I'm a red panda]

I owned my last car for 14 years. It was a gift, so it was free to me, but the people who paid for it paid $15k, cash.  The cost per year of the purchase price was MUCH lower than what your estimate is.

[Goldeneer]

You are assuming that you only own it 1 year.

My assumption is that the good value car is run into the ground while the new car is continuously leased.

I have owned 2 good value cars and so far I have seen a typical depreciation of $2k/yr based on how long I have owned both of them. For the next car, I hope to further reduce the depreciation and maintenance costs. For this analysis, I am basing the calculation on my history.

[Goldeneer]

I owned my last car for 14 years. It was a gift, so it was free to me, but the people who paid for it paid $15k, cash.  The cost per year of the purchase price was MUCH lower than what your estimate is.

That is great that you got a free car therefore you had no depreciation. iowajes, I'm curious how much you were actually spending on insurance, gas and maintenance in the last few years.

My analysis is conservative compared to what my friends and coworkers typically spend on a car in our town.

[SpicyMcHaggus]

OP, YOUR situation is unique to YOU.  Maybe you have $2,000 / year depreciation, but I am seeing a fraction of that. Perhaps you should shop for cars harder, or keep them longer.  Depreciation is a logarithmic curve. On a long enough scale, it drops to zero. If you buy old enough, you can avoid the majority of the depreciation costs. Your depreciation factor is constant (which is not how the market works), so I would eliminate it from the used car equation.


The vehicles may not be mustachian, but consider my circumstance:
Bought brand new off lot 2011 Nissan Frontier 4x4. Sold 3 years later for $3,000 loss ($1,000 / year depreciation)- and I bought it new at a dealer (ouch!) and sold it to a dealer (ouch!).
Replaced with 2006 Saab 9-3. Sold later for $900 profit.
Replaced with 2001 Saab 9-5. Replaced window rollers. Sold later for $900 profit.
Replaced with 2006 Audi. Paid $6800. Worth $9000.

insurance: $560/6 mo for full coverage.
Gas:  $1500 (high estimate)
Oil,Tires: $400
Maint:  $400
Depreciation: $0
= 3420

While I always recommend the average person to buy a cheap hatch back and make it work, if you are a risk-taker like me, you can effectively negate many of the costs of car ownership. You buy something with a little know how, replace minor items, own it a year or two and sell for more or equal to what you paid.

Also, if you are spending that much on oil, tires, and upkeep, you are being ripped off or driving a Range Rover.  My tires last me ~3-4 years, my oil changes happen 3x per year, and I rarely take a car to a dealer/mechanic for repair. 

[I'm a red panda]

That is great that you got a free car therefore you had no depreciation. iowajes, I'm curious how much you were actually spending on insurance, gas and maintenance in the last few years.

My analysis is conservative compared to what my friends and coworkers typically spend on a car in our town.

My 2014 gas costs were $304.68  (which actually includes the trip to Chicago that I was reimbursed for by my employer, but that was by mileage not actually for gas- it more than covered it though).  I did two oil changes at home last year and had no other maintenance. I don't know what my insurance was, but I didn't have collision on such an old car, so it wasn't that high. Registration for an old, light car was cheap.

I bought a new car this year- I'll have to see how it compares overall since this time I had the initial expenditure too- but if it lasts even 6 years cost per year for the "car payment" (it's already been paid off) is something I'm quite comfortable with  I plan to keep it for at least as long.  I think it's a huge assumption to think a new car will be continuously leased. Most people I know buy cars, not lease them- and even those who take out loans keep the car 3-5 years.  I think rolling into a new loan is not as common as radio commercials will have us believe ("we'll pay off your old car!")

[2Birds1Stone]

My total cost of ownership on a very reliable nissan sentra with only 58k miles has been $295/month for the past 4 years including all repairs, maintenance,  depreciation,  gas, insurance,  etc. Averaging 12,000 miles/year.

[Hurley82]

Also, if you are spending that much on oil, tires, and upkeep, you are being ripped off or driving a Range Rover.  My tires last me ~3-4 years, my oil changes happen 3x per year, and I rarely take a car to a dealer/mechanic for repair.

I've got an older range Rover and it's costing next to nothing in maintenance, outside of typical expenses.

[GetItRight]

While you aren't explicitly stating your numbers as the only choices, you seem to present a false dichotomy. Cost of the vehicle can be around $2k or less for a nice good condition used car and it will not depreciate further so long as you maintain it. I pay well under half your figure for insurance in one of the more expensive states for vehicle insurance. My fuel and maintenance costs average out a bit under your $3600 figure, and that's including fuel used in my <20 MPG truck towing a large load for recreational (i.e. unmustachian luxury) purposes. So in my case cut your figure in half on the used car. There are plenty who do it way cheaper than I do, so there are better value options as well for people who do not want to live or work in the urban environment of a large city.

[Goldeneer]

I would expect many southern Mustachians to have a lower cost of ownership for cars than regular users. Cost of ownership varies based on state tax, insurance requirements, winter tire requirement etc. My analysis is based on being a regular user in my Canadian town which may be a reason why it seems high.

OP, YOUR situation is unique to YOU.  Maybe you have $2,000 / year depreciation, but I am seeing a fraction of that. Perhaps you should shop for cars harder, or keep them longer.  Depreciation is a logarithmic curve. On a long enough scale, it drops to zero. If you buy old enough, you can avoid the majority of the depreciation costs. Your depreciation factor is constant (which is not how the market works), so I would eliminate it from the used car equation.

The vehicles may not be mustachian, but consider my circumstance:
Bought brand new off lot 2011 Nissan Frontier 4x4. Sold 3 years later for $3,000 loss ($1,000 / year depreciation)- and I bought it new at a dealer (ouch!) and sold it to a dealer (ouch!).
Replaced with 2006 Saab 9-3. Sold later for $900 profit.
Replaced with 2001 Saab 9-5. Replaced window rollers. Sold later for $900 profit.
Replaced with 2006 Audi. Paid $6800. Worth $9000.

SpicyMcHaggus, your depreciation is great. I agree that cost of ownership has a unique component. Are you including all of the costs of changing ownership (aka sales tax, new tires, required maintenance etc) in your depreciation?

I think many people don’t account the true cost of ownership which is what I aim to expose. In my province, we pay sales tax (13%) on used cars even when bought privately. In addition, there’s the potential cost of safetying/certifying the car if you are going to sell. We also need to pay for winter tires which adds to maintenance cost. Salted roads runs down the car sooner as well.

I bought a new car this year- I'll have to see how it compares overall since this time I had the initial expenditure too- but if it lasts even 6 years cost per year for the "car payment" (it's already been paid off) is something I'm quite comfortable with  I plan to keep it for at least as long.  I think it's a huge assumption to think a new car will be continuously leased. Most people I know buy cars, not lease them- and even those who take out loans keep the car 3-5 years.  I think rolling into a new loan is not as common as radio commercials will have us believe ("we'll pay off your old car!")

I would argue that the depreciation cost of owning a new vehicle with a loan would come close to leasing it once you factor in the interest payments, taxes and fees. My assumption is based on someone who buys a vehicle new is likely to keep it for 2-4 years and then upgrade to another new vehicle. If someone is to buy a new vehicle cash and then run it into the ground, then the cost of ownership would be obviously lower.


I have much improvement to make for the next car myself which will be a better quality hatchback that doesn’t require as much maintenance. We also have much room to reduce our fuel consumption. In the past, we have bought 10 yo cars but ended up spending much money on maintenance. The first car was run into the ground but we still averaged $2k/yr for depreciation. I’m hoping this car lasts longer. We have done a lot of the maintenance ourselves but parts still are a significant cost to us.

[dragoncar]

I don't think there's much reason to stray from MMM's methodology here:

http://www.mrmoneymustache.com/2011/10/06/the-true-cost-of-commuting/

I'll note, however, that paying more for a close-in house gets an extra boost from mortgage interest deduction if it applies to you.

[SpicyMcHaggus]

13%  sales tax? Obscene.
No- those are not accounted for. I paid the tax on the first vehicle, and then "traded" for the others.
I registered 3/4. one of them I didn't drive often enough to worry about getting an expired plate ticket.

I am going to register my cars elsewhere under an LLC to avoid the taxes and annual registration fees.
I'm sorry; I thought my taxes were high. Yours would make me strongly reconsider what I'm doing.

[gimp]

Wow, your numbers are much worse than mine, and I love to drive. I feel for you. Good that you've identified how much you'd gain by changing some stuff around.

For what it's worth, on a 15-year-old car:
- Gas: $3k (around $1k, plus or minus, for work - the rest for pleasure)
- Maintenance: $2k (aggravated by age, relative scarcity of some parts, high labor costs, and my aggressive maintenance schedule to get the car to survive multi-thousand mile road trips every so often, and of course the way I drive it and the ridiculous places where I drive it - off road, snow, whatever - shit tends to break a bit)
- Insurance: $700
- Depreciation: none (good condition old car, pretty much troughed the depreciation curve, and of course it's entirely paid for)

Total: $6k or so, at least half of which is entirely voluntary if not more

In exchange, I go hiking or exploring or photographing pretty much every weekend, plus five to ten thousand road trip miles to see the country.

Assuming that I would be content to not go anywhere far, or be able to bum rides all the time, if I managed to get rid of that $6k a year, I would save about 10% more than I do currently. With your math, that would be "equivalent" to about 10% of a mortgage or less, where I live.

Assuming that I would not be content to never be able to go places, I would probably make up a decent amount of the cost through renting and flying. I figure that would result in saving about 6-7% more than I do currently, and be about 6-7% of a mortgage, in exchange for the freedom a car gets me for all of those years. It's funny how some people get freedom with a car, and others freedom by not having one. So it goes.

Now, if getting rid of a car would cover the entire price of a house (or a very large chunk of it), my feelings on the subject would be very different...