Car Cost Calculator

Automobile expense is the biggest issue that busts our budgets and prevents us from achieving wealth. We must learn how to understand and minimize these costs. The key to this is that we must understand that the cost of our cars is not the cost of the monthly payments. The purchase costs include the depreciation cost during our ownership period plus the interest cost. In addition, you must also include your operating cost: gas, repairs, etc. Chapters 10 and 11 in Poor No More will help you understand these issues and help you regain control over this part of your financial life.

Calculating your depreciation cost is important because it is the highest component of your cost of ownership. The downloadable Excel spreadsheet below will help you with this calculation that is so important to your future.

Examining the Cost of Car Ownership

Let’s admit it. Car dealerships are crafty and they are happy to separate us from our money. Their massive advertising campaigns are designed to make us believe their hype. This has been going on for multiple generations so that their lies have become rooted in our belief system.

So what is the biggest lie car salesman will tell? Here’s their classic lie: “It not the cost of the car that’s important, it’s the amount of the payments.” This is an absurd statement, but it has been told for so long that people believe it. So if we change the loan payments from 36 months to 72 months, has the cost of the car gone down as much as the payments. How ridiculous it would be to think that! Increasing the number of months just increases our total interest cost and total purchase price.

The cost of a car is not the cost of the monthly payments!

Many people incorrectly equate the cost of their car with the amount of their car payments. The payments are a measure of the interest rate, the number of months financed, and the down payment amount. Payments do not equate to the cost. Our true costs are much different when properly viewed.

The highest part of cost of car ownership is the decreasing car value, or depreciation, which has no relationship to the fixed monthly payments. This is true regardless of if the car is purchased or leased.

The largest cost of car ownership is the depreciation!

The true monthly purchase cost of a car is the average monthly value decrease plus the average monthly interest costs. Since depreciation is the largest cost of car ownership, estimating the amount of future depreciation should be the paramount issue when selecting a car. The descriptions provided in the book Poor No More and this web site makes estimating car depreciation much easier.

The decline curve varies a great deal based on the make and model. Thus, shopping for the best deal may have less to do with shopping for the best price and more to do with searching to find the make and model with the flattest decline curve.

Is it better to lease or buy a new car?
Many people believe it is cheaper to lease a car than to buy it. I often get asked if it is better to purchase or lease a car. My response to this question begins with my own question: Do you believe in Santa Claus and the Tooth Fairy? This question is not silly because I am really asking if you believe that car dealerships would spend money advertising a payment plan that cost less and gives them less profit. Not likely!

By examining lease payment amounts, we will discover that at best these lease payments equal the average monthly depreciation cost plus the monthly interest cost. Therefore, lease deals offer no advantages. Frequently, these plans also assume far too few miles will be driven and charge too much for extra miles. These plans often have very restrictive early termination fees. As in most “good deals” the devil is in the details and it is easy to miss some of these details. In short, stay away from these plans. They are money traps favoring the car dealerships.

Tax accountants like to discuss the pros and cons of leasing when the car is used for business purposes. If we lease, we can deduct the lease expenses as a business expense. If we purchase, we can deduct the interest costs and the depreciation as a business expense. Either way the total deductions are about the same. If an accountant can find a way that leasing has a small tax advantage it is not likely that this advantage will outweigh the flexibility of owning.