Car Trek IV: The Unknown Costs
So far in our car buying experience, we have looked at purpose, wants and needs. Here in the fourth installment, we will look at what I think is the most critical of the whole process, the budget. It is important to move with purpose, it is essential to have a defined goal, a concise list of mandatory requirements and an idea of some fluffy creature comforts, but none of these can come to fruition without spending some money. To fill this list you need to write the check, and if you do that without a well thought out budget and a clear spending plan, you are building in failure. When I give my children a task to complete, I find it best to make sure that I give them attainable goals and lofty aspirations. Your budget should be considered the same way. We need goals. We know what we want, but do we know how we are going to get them? The main reason I decided to write this was that I talked to many young parents about this process before I ventured into it. While almost all had some recommendation for a feature I would want or a brand they preferred, very few had any clear idea of how to budget for a new car. When I asked them or pressed the issue, the response I got the most often was, “well I will just find one I like then see if I am approved for the financing.” This response struck me as a critical flaw not just in their family financial planning, but in the fabric of American life today. We have no idea if we can afford something, we just try to buy it and see if we fail. When you baseline your outcome with probable failure that makes immediate success a coin toss and future success nearly impossible. When we rely on the credit companies to decide how much of our income we should keep and how much we should blindly give away each month to pay for the things we think we need, then the only one getting to plan success is the credit company or bank. Instead of planning our financial course and then setting the budget so that we control our spending and our saving in such a way to make that plan come to life, we don’t budget at all, just living paycheck to paycheck. We then claim that bad luck, an economic hiccup, or oppressively low wages are to blame for our financial failure. If this sounds familiar or seems like the path that you find yourself on now, let me make a recommendation to you. Dave Ramsey. Please understand, this is not a paid ad, not even an approved solicited name mention. It is, however, something that will help. Bearing in mind that I have steered this site clear of brand promotion, and I want to stay clear of recommendations or entanglements, I want you to know that Dave Ramsey is a valuable asset to the young family and their financial security and freedom. My wife heard Dave speak back in about 2006, she checked out his books, and we learned a lot about taking responsibility for our financial situation. I do not adhere to all his principals, I don't even agree with everything he says, but there are enough eye-opening information and things that will make you think about your money in a more responsible way that I find it important to mention it here. I mention Dave by name because I want you to be able to access any help easily you may need during this process or with your families finances in general and so far, I have found no one as simple, straightforward and painfully honest as Dave. I would not be at the position of financial security that I have if I had never heard of him or read his material. Again, he is not a sponsor (however, Dave, if you read this, I am open to the idea… just saying :) ). I am not being paid to include this and I have nothing to gain from passing this info on to you, this is just my opinion. Now back to the budget.
When you look at the budget the first time, don't just look at how much you are spending right now on transportation. Most people that even bother to make a budget just use the existing amount of their auto loan to decide how much they can spend on the next one. Instead, look instead at all the factors. Most importantly, what is your actual cost per mile? Be sure to include the hidden costs, in my case; I work by the hour as a consultant. If I waste an hour messing with my car or finding a taxi or ride-share, or I bike or walk, that time spent is now unbillable, and therefore money lost out of my income and budget and is, therefore, part of my cost per mile. Some call that your opportunity cost, the money you don’t actively spend on something, but that comes our of your budget in another place because of it. Also look at how much you are spending on consumption items like fuel and maintenance. How does that change how much you can spend? Combining all these separate, seemingly unrelated and innocuous costs together in a budget spreadsheet shows you how much you are already actually spending and therefore can give you a clear picture of how spending differently can seem like more or less but may not be.
Here is an example: Perhaps right now, you have a compact sedan, like an older Honda or Toyota. Let us assume a few things about it. First, it is paid off, but your car payment used to be $300 a month. Second, it gets about 28Mpg. Third, it has well over 150k miles on it and costs about $100 a month in mechanic bills to keep it on the road. (That may sound like a lot, but one issue with the fuel delivery system or exhaust will cost you over $2000. If you do that only once a year, that's about $100 a month. Also, a real mechanical problem like an engine issue or a transmission can be twice that, so if you have no issues at all with your car then spend $3600 on a transmission, that is still $100 a month over the three years it was trouble free.) On top of that, you spend about $50 a month on wear items like oil and tires. Now, most of the young couples I interviewed when asked how much they could spend on a new car would quickly tell me that they were comfortable spending the same $300 a month they spent on the last one. A few assumed they would spend slightly more than the previous car payment “because their income had increased.” None of them could tell me how much they were currently actually spending on a vehicle. The main reason was that most people didn’t know how much they are spending daily or weekly on the variable items. Thankfully almost everyone now uses some online or software based system to balance or track their finances. With just a few clicks, everyone could search up how much they spent last year on transportation and most of them were very surprised. You see, the general advantage of a newer vehicle is that the maintenance costs are much lower. Newer vehicles are more energy efficient, and most are less money to insure. Therefore, while you may have paid that $300 a month for the last one, it was only efficient for the first few years you were paying on it, and by the end, your paid off vehicle is often costing more a month than a new one.
So how do we figure that? In my case, I broke it down not by the month but by the mile. I am a very high mileage driver for my work, and also that gives me the advantage of tracking my mileage also. I had good logs and could dive into the numbers, in your case, you may not have all that data, but you can still get an average with can still be very helpful. Figuring out the cost of the old existing car is the easiest part of this, you simply add up all the amounts you can compile, keeping the time increment the same. If you can pull monthly totals on loan payment and insurance but have yearly totals on mileage, fuel and maintenance costs, pick one of those time frames and convert all your units to it. I had yearly mileage report totals that were the easiest to get. Therefore I converted everything to a yearly cost. Multiply the monthly auto loan payments and insurance payments by 12, add to that the yearly fuel and maintenance costs and you have a yearly cost for that old vehicle. Divide that total by the number of miles that year, and you have a cost per mile, your "cost per use" that I mentioned. Now, to compare a new vehicle to that, compile all the data. Your new auto payment, your new yearly insurance rate, and your best guess on the fuel cost depending on the listed and tested fuel economy numbers of the new vehicle. (This is an area where you may be very surprised. You see, all things break down over time, and that old compact sedan in our example may have gotten 28Mpg at the time of sale, which would have been considered excellent compared to the 15Mpg of other larger vehicles of its era. Now, with wear, that 28 could be degraded to as low as 22Mpg. Compare that to the average compact in that space today which will average 35Mpg and you could have 30% increase in fuel economy. If you are high mileage like I am, that alone could equate to an extra one to two hundred dollars a month saved and therefore brought back to the budget.) Finally, look at your yearly maintenance cost for a new car, which will probably be very low. Many dealerships do oil and tire rotations for free on a new vehicle you purchase from them. Some cars even have a maintenance plan included at no charge at the time of sale. Add this new maintenance cost to the other guesses you made above and divide it by the same number of miles you used on your old vehicle. While this may be an inaccurate number, it gives a fair baseline to compare the costs by. Now you have a fair cost per mile comparison of the old vehicle and the perspective new one and you can see just how much more or less it actually is.
After you have this data, consider its affect on all your other budget items. Are there goals you have for your families finances?(there better be! Debt Free by 30 maybe?) If so, weigh how this new expense advances or delays those goals. This will give you an objective look at the true price over time of that new car and even give you some budget perspective on some of your wants. If the car you NEED is affordable and can get you to your family financial goal sooner, but there are WANTS that will delay that goal, how much are you willing to pay, in money, time, and your families financial security to have those wants? Can you get a few of them and still be close enough to your goal to justify them? Probably, but isn't it better to decide with real thought and hard data, moving with purpose and planning instead of guessing and flailing blindly through your financial future? To help you through this process, I will make my excel sheets available for view and download so you can see how I made my choices. I will change the names of the cars to not promote a brand, that isn't my job.
Good luck and please add to this in the comments. I am always open to suggestions and want to make this as helpful to everyone as possible.