The real cost of car ownership is one of the trickiest expenses to determine. Unlike predictable expenses such as public transport, renting a place to live or food costs, it is impossible to accurately estimate the true cost of motoring. This can be a problem for financial independence planning because you need to be reasonably certain of what your expenses are. Previously, I tried to ignore this paradigm but the relentless rules of simple arithmetic will always come out on top.
This post is timely as I will be going into a period of being car free. This is involuntary as I had no intention of getting rid of my car until the reality of car ownership hit me with a bang. While driving from work a few weeks ago, I was involved in an incident with another vehicle at a mini-roundabout. This resulted in my car getting written off and getting sent off to the scrap heap for just £100. I was shocked at how quickly things can change; I purchased the car (a 2007 BMW 118d) 6.5 years ago for £9,500 which has virtually gone down the drain in an instant. The car’s value had depreciated substantially since so it would not be worth much anyway.
This situation presents me with several options.
Option A: Normally I would attempt to immediately reinstate my previous position by getting a like for like replacement vehicle. Obviously, this is not as simple as it seems as it would mean acquiring a used 12 year old similar model with over 100,000 miles on the clock. This is very unwise due to the amount of potential problems with such a car. At least I knew what work had been done on my previous car.
Option B: Alternatively, I could follow a similar approach to how I purchased the previous car by looking for a 4 or 5 year old used vehicle. This would have a huge impact on my finances as the cost would be way in excess of my emergency fund. The shortfall could be made by borrowing extra funds which I would not do. Alternatively, I could dip into my investments or other savings. This is unwise; a classic case of swapping assets (investments) for liabilities (car ownership and purchase), therefore would leave me a lot poorer in the long run.
Option C: This is really hard to take personally; car ownership is often associated with status and a sense of freedom, but going car free has to be a consideration. A few weeks ago this option was unimaginable but after doing an in-depth analysis of what it entirely cost me to run my previous car this is not such a crazy option. I had to ask myself of what my real needs of transport are and unreluctantly concluded that for me, car ownership had been a nice to have, a very costly one at that. Here is why.
The true cost of car ownership
Over this 6 year period, owning and running the car cost me a total of nearly £30,000 (US$40,000), which is around £4,500 (US$5,900) a year or £370 (US$480) monthly. Costs equated to 44 pence per mile over an average of 10,000 miles a year which could be used to calculate a reasonable estimate of a journey’s true cost. This is an astonishing amount as I had considered the car, from an era when diesels where still being promoted by the government, to be well made, fuel efficient and cheap to tax.
I listed all the line items of everything I remember spending on the car to reveal the harsh reality. Here is the result:
BMW 118d: Total Cost (£) Of Ownership 2012-2018
|32.75%||Fuel. 10k/y, 42mpg, 52L, 134p/L||1,450||121|
|2.26%||Brakes – £300 / 30,000 miles||100||8|
|2.64%||Tyres – £350 / 30,000 miles||117||10|
|0.90%||Brake fluid service – £80 / 2 yrs||40||3|
|2.26%||Oil service & filters||100||8|
|6.95%||Timing chain (N47) & clutch repair||2,000||308||26|
|1.39%||Oil filter housing – after oil leak||400||62||5|
|0.69%||Parking brake snap repair||200||31||3|
|2.26%||Parking & tickets & tolls||100||8|
|1.04%||Audio: head unit+tweeters||300||46||4|
|Overall Cost incl. depreciation||28,783||4,428||369|
|Running costs (cash flow)||19,033||2,928||244|
*The above list seems very long but it is the truth of the minimum spend on the vehicle. The figures would be higher or lower for other vehicles and usage. If I had bought it new, costs would have been north of £500 a month which could easily be more than rental/ mortgage costs.
Such figures don’t lie and I would ignore them at my own peril. Another possible option is to purchase an electric vehicle (EV) which has substantially lower running costs due to a simple design (electric motors have less than 20 moving parts) and does not emit harmful emissions.
However, EV purchase costs are still high, even on the used market. Despite the high initial purchase cost, I have calculated that there would be huge savings over the same 6 year period by purchasing an electric one. For example, an EV bought for £14,000 would cost a total of £20,000 to run over 6 years compared to nearly £30,000 for a petrol or diesel car purchased for £10,000.
For now I will go car free for a while as I actually do not need one. Commuting to work would be by a 20 minute train ride plus less than half an hour’s walk. Other trips would be by train, tram, taxi, coach or bus. This is not a problem in London. For inaccessible locations or other uses I will use rental cars or vans when needed. I estimate that these alternatives combined will cost me a quarter when compared to car ownership and the proceeds will be invested or put towards an EV.
I expect that this will also boost my savings rate by over 6%, alleviate the stress of having a metal box sat on the driveway, avoid aimless trips, parking, roundabouts, traffic lights, schools, fines, endless maintenance, break ins, road rage, scratches and prevent me from sitting in or battling rush hour traffic while risking a crash.
I have already saved an unexpected initial £50 by cancelling my breakdown cover; this will be promptly invested into Vanguard index funds. The benefits are substantial as I have not even gone into the impact of opportunity cost, where the above costs would be invested wisely. If car travel is really needed I will consider going electric in future.
It is incredible how such the seemingly innocuous decision of whether to drive or not can have far reaching consequences on your personal finances and possibly on when (potentially years) or if you will achieve financial independence.
*The AA has a useful guide about car running costs here.
What do you think? Are these costs realistic for you? What are the pros and cons of owning a car?
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