Analysing the cost of owning a carApril 2016
My Honda Civic 1.8L auto was bought new in 2008 and is still going strong. All the costs of operating and maintaining the car have been faithfully recorded, so here is a snapshot of the real costs of owning a car.
I did write about the running costs after 2 years of ownership and then again after four years, so in keeping with the binary sequence, this is the 8 year guide.... Will it be the last?
Table of costs
This table shows costs for each of the eight years of ownership. These are NZ dollars and at this time 1 NZ dollar buys US 70c. All costs shown include GST. First the fixed costs, including registration, warrant, insurance and servicing. The car has been routinely serviced by Honda NZ, except in early 2015. The car had travelled so few kilometres that year so the service was omitted.
Next there are direct running costs. This car uses 91 octane petrol. In 2012, four new tyres were bought and in 2015, a new battery was required. These are typical expenses for a car so are included in the totals. Minor parts and consumables such as filters, oil and windscreen wipers are included within the maintenance charges shown.
Totalling the fixed and running costs in each column, we find it takes between $2000 and $3500 per year to own and operate the vehicle. My annual mileage (kilometreage?) is somewhat lower than average, so you could recalculate your costs knowing your mileage and using the per km cost of petrol shown.
Alas, those are not the only costs of owning a car. Depreciation is a large factor. This is the difference between what the car is worth at the start of a period and what it is worth at the end of the same period. In this case, I have used the values calculated by my insurance company. These numbers may not be exactly what the car would sell for, but insurance companies are quite savvy about such things. I was able to cross-check their figure at the end of 2012. The insurance company estimated $17,800 and Turners Auctions quoted $17,600 so there is high confidence in the figures.
Adding depreciation to the fixed and operating costs brings us to the bottom rows in the table, showing totals of $6335 p.a after the first year, reducing to $3795 in year 8.
This is the depreciation curve for the car. You can see at year 8, it would fetch about $11,000. In another 6 years the sale price would be around $6500. The curve clearly shows the rapid initial rate of depreciation and the same trend applies to all new cars.
When we add one year's costs to the next and so on, the numbers become a little scary. The simple table below helps to explain.
The first column is just the year number. Year 0 is the car purchase. You can see the purchase price new was exactly $30,000 at that time. The second column gives the resale value for each year. By end of year 8, the resale value is down to $11,100. Next, the third column shows accumulating operating costs (just the fixed and direct operating costs only). By the end of year 8, the total spent was $20,619.
The last column represents the total cost of ownership at the end of each year on the assumption the car was sold for the depreciated price at the end of that year. For example, take the data in year 5. Initial purchase was $30,000 and after the 5th year, $13,232 has been spent operating the car. It is sold then for $15,600. That means it cost $27,632 to own and run this new car for 5 years. That amount keeps increasing, year after year, but at a lower rate due to reducing depreciation. This is a lot of money, but is still not the whole cost of owning and operating a car as explained below.
An accountant would point out around now that these calculations are not a complete comparison between owning the car and not owning it. The $30,000 spent on buying the car could have been earning interest instead. Even at a modest 3.5% rate of interest p.a, that $30,000 would earn $9,504 (compounded before tax) in 8 years. So instead of spending $39,519 by buying, operating, then selling the car after 8 years, I would now have $36,652 in the bank (using 30% tax rate on the interest). Assuming of course, that I didn't need to use that money to travel anywhere... So, if I hadn't bought the car and saved the $30,000, I would, after 8 years, be $76,171 better off. If you were struggling to build up the money for deposit on a house, then buying a car, well at least a new car, is not a good option.
Could be worse
The cumulative costs over 8 years of ownership have surprised me, and I suspect most people don't have a full idea of the costs of owning a car, but there are plenty of reasons why these calculations are the low end of the range.
This Honda car is a small-medium 4 door sedan and is reasonably fuel efficient. Bigger vehicles usually mean more fuel for the same distance travelled. Bigger vehicles have higher maintenance costs and higher parts costs. Private NZ vehicles average about 12000km per year and their operating costs will therefore be about 20% higher than mine. Then, there could be accidents, which come with costs of repairs amongst other things. I had two careless moments in 2014. I drove into one of the low kerbs at Thorndon New World carpark; the tyre went flat and Beaurepaires told me the tyre was unrepairable. That cost $324 with alignment. Then, just a few months after that, I gently backed into a colleagues car in the carpark and split the Honda plastic rear bumper. That repair and paint job cost $550. I didn't include these two events in calculations because they were accidents. More major incidents could result in loss of no claims bonuses on insurance, helping to push costs of ownership even higher.
Then there are costs like parking. In a large city, parking can cost the commuter over $200 per month. That is another $2400 p.a to be saved. I didn't mention parking in the table, because usually that cost has to be offset against public transport costs.
The numbers are not in favour of car ownership from a financial viewpoint. I now find it hard to understand how some households can afford two or even three vehicles. The least worse option if you must have one, is to buy an older vehicle in good condition, which has lower capital cost and which suffers much lower depreciation. The maintenance costs are likely to be higher than for a new car, but even with that, you will be better off overall.
It is all about convenience, of course. To give up car ownership means you have to plan ahead to use public transport. Travel could be less comfortable if the weather is inclement. You would be better off hiring a car for the occasional holiday away from home. Without a car, it becomes hard to pop down to for a picnic on the beach on a whim and tasks like grocery shopping or going to the home improvement centre, or just taking a load of garden clippings to the landfill become problematical.
I make it my mission to find an up-side. This time, it's tax. I have done my part to help fill the government money bin and along the way, help make better and safer roads for my fellow travellers. All those dollar amounts include GST. So, when I bought the car, I gave the government $3,900. Then, of the $20,619 spent running the car for 8 years, the government got $2,689. But that's not all. There is, in fact, more. The cost of every litre of petrol includes fuel excise tax and emissions trading scheme tax. Currently that comprises 37% of the cost of every litre of fuel at the pump. I have spent $11,182 in petrol for those 8 years, so $4,137 went to the government. And yes, the GST was added to the excise and ETS tax as well. I trust they put my $10,726 to good use.
Axino-Tech Consulting & services; April, 2016
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