facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search

The True Cost of Car Ownership

One thing that most Americans have in common is car ownership.  Demographics really don’t matter, you can ignore race, religion, income, education, and pretty much everything else.  Americans love and need to drive. 

According to the Bureau of Transportation, in 2013, there were more than 234 million cars and light trucks registered in the United States.  In 2013, there were just over 316 million people in the United States, so we have 3/4 of a car for every person in this country.  When you consider how many of those people are either too young or too old to drive, it is easy to see that just about everyone who can drive owns a car. 

I found a really good website called Governing.com that broke the 2013 survey data into all the cities in the United States.  I found that in Jacksonville, there are 1.6 vehicles available per household.  For every 10 adults, we own 8.3 vehicles, and that only 8.3% of households in Jacksonville do not have a vehicle.  These ratios were all right in the middle of the national statistics.  This was a little surprising as I thought Jacksonville would have been ranked a little higher based on how spread out the city is and our lack of public transportation. 

My point in bringing all of this up is that Americans love their cars, but I think we are all guilty of underestimating what it really costs us to own them.  I am constantly surprised by the amount of nice, new cars on the road.  I purchased my current car in 2003 (yes, 13 years ago), and have been looking at buying a new (or at least new to me) SUV.  Needless to say, a nice used SUV costs substantially more than the SUV that I purchased new 13 years ago. 

Based on my research, a decent used, low mileage, late model SUV will cost between $25,000 and $40,000.  If you buy the same models new, the cost will be between $35,000 and $50,000 if you stay out of the luxury SUV market, where the prices can get into the $70,000+ range. 

So what are you really paying for a $35,000 SUV?  The best metric that I have found to measure the true price of a car is the 5 year cost of ownership.  This metric takes into account all costs of owning a car, including the actual cost of the car, the interest you will pay on a loan, sales tax, registration, tag, depreciation, insurance, maintenance, fuel, and the various other hidden expenses that we don’t always think about when buying a car.  It then looks at the residual value of the car after 5 years, or what you could recoup by selling the car.  Kelly Blue Book.com has a free 5 year cost to own calculator on their website, and Edmunds.com has their own metric called True Cost to Own which is also based on 5 years of ownership.  Just to compare them, I looked at the Total Cost to Own vs. the 5 year cost of ownership for a 2015 Ford Explorer Limited, a car that has a fair market range between $35k and $37k in Jacksonville.  The results were actually quite different. 

On the KBB site, it estimated the 5 year cost to own this vehicle to be $52,163, which was about $15-$17k more than the purchase price of the SUV.  On Edmunds.com, the TCO for the same vehicle was $48,412, a difference of over $3,700.  Most of that difference is in the depreciation, where Edmunds estimates the total 5 year depreciation at $22,640, and KBB estimates it at $25,237.  Regardless, over 50% of the value of your car will be gone in the first 5 years.

The average of these 2 estimates is $50,287 to own this vehicle for 5 years.  That is $10,058 per year for transportation.  In 2014, the median household income in the United States was $51,939, which means that in order to afford a new 2015 Ford Explorer, the average household would have to spend 19.4% of their total income on this one vehicle.  We know that the average household in Jacksonville has 1.6 vehicles, so I would guess that the average household spends more than this every year on their vehicles.  There will be some differences as not everyone buys a new Ford Explorer or makes the median household income, but I’m sure you can see my point.     

As a financial planner, I would like to see that ratio substantially lower than 19.4%.  The national average is actually 14% according to the BLS, and some financial planners recommend 10% to 15%.  I personally would like to see that ratio around 10% or a little below.  I love my car, but I am not a flashy car guy (you probably guessed that by my 13 year old car).  At the end of the day, a car is a means to get from point A to point B, and nothing more.  So don’t make a big mistake and get caught up paying for more car than you can afford!