Back when I needed a smaller vehicle, I had a Toyota RAV4. I kept it well maintained and when I traded it in for my minivan, my RAV4 was still worth $10,000.
I loved this car. I had purchased it new and it was my first car. Had it been economical to buy new? Looking back, I think not. As soon as I drove that car off the lot with one mile on the odometer, the value of the car decreased. Depreciation makes up almost 60 percent of the cost in the first year. That initial loss in value explains why new cars are so expensive to own.
Other carrying costs—those tied to vehicle purchase—to consider are sales tax and interest. These costs diminish significantly over time. In the first five years, carrying costs outweigh operating costs by 20 percent.
Even if I could afford another new car, I’ll have to consider operating costs (ongoing driving expenses) over time into my financial equation—cost of fuel, insurance, maintenance and repair. These costs rise slightly due to increasing maintenance and repair. However, after five years these costs are less than carrying costs.
Depreciation, insurance, maintenance and repair, fuel cost, interest when financing and sales tax are all hidden costs over the life of car ownership. With increasing cost of gas, fuel has become the second largest cost of ownership at 24 percent over five years.
By keeping operating costs in check and holding on to my minivan for eight years, I can reduce my median ownership costs significantly compared to only keeping it five years, primarily due to lower depreciation costs and financing being paid off. On average, car owners keep their cars for five to eight years.
By trading-in my RAV4, making car payments to myself, and buying used, I was able to have a paid off minivan. I’ll continue to make car payments to myself so that when it is time to buy my next “new-to-me” vehicle, it’ll be bought free and clear, too. Check out one of my previous articles, Savvy Ways to Purchase Your Next Car Free and Clear.
Nikki is a budget-savvy Fredericksburg mom teaching her two young sons that you can afford nice things without accumulating debt.