Should you keep your old car or buy a new automobile? (Part 1 of 2)

In our family, we own cars for well over ten years and run them into the ground. Of course, we take care of them and do all required maintenance along the way. However, when a car gets near the end of its life, repair expenses can escalate dramatically. This is similar to what happens to healthcare costs when people age. Most higher cost healthcare expenses occur near the end of life.

With your own life, you probably want to spend as much as you can afford to keep yourself going, when you are old or at any age. However, keeping an aging car on the road can be a very expensive proposition. Extended life support for a car might not be the best idea economically, despite how much you might be in love with your old car. So how do you decide where to draw the line?

Since I was unable to find any very useful models for the full life cycle costs of car ownership, I decided to develop one myself. It has helped me to better understand the financial implications of extended car ownership, and it may be of interest to you. I have a background in long-range financial planning, and I have developed lifetime personal financial planning software for home use.

In this article, I analyze the 15-year life cycle costs of owning a $25,000 mid-priced, mid-sized sedan. In addition, I also apply the same 15-year life cycle cost modeling method to owning a $45,000 mid-range luxury sedan. From these ownership modeling exercises, I draw some conclusions about long-term car ownership and discuss them.

How much does it cost to own a $25,000 mid-sized sedan over fifteen years?

The three tables below summarize the average annual cost of owning a $25,000 mid-sized sedan over three consecutive five year periods. Purchase taxes, fees, and other acquisition expenses are assumed to be an additional $3,000 for a total acquisition cost of $28,000.

Representative basic models of mid-range sedans with a few bells and whistles would be the Chevy Malibu, Chrysler 200, Honda Accord, Hyundai Sonata, Mazda 6, Subaru Legacy, Toyota Camry, VW Passat, etc.

(Note that the section that follows will present three more tables that summarize the fifteen year life cycle cost of owning a $45,000 mid-range luxury sedan over three consecutive five year periods. Then, the subsequent section will explain the development of this life cycle model and the meaning of each line in tables below.)

Overall, during the first five-year period, the purchase cost and investment opportunity costs exceed 50% of the total ownership cost of this mid-sized sedan. Total annual costs including all operating costs are roughly $8,000. Assuming 12,000 miles driven per year, the full cost per mile is about two-thirds of a dollar.

Obviously, using average costs within the first five years will mask the more dramatic decline in market value that occurs during the first year or two compared to the latter part of this initial five year period. Nevertheless, five years is appropriate period of analysis, because most people do not buy a new car every year or two. If people do not intend to hold a car for an even longer period, they at least tend to hold the car for several years until the warranty has expired, until the lease it up, or until they have paid off the car purchase financing debt.

During the third and last five-year period, the total cost of ownership begins to escalate as more components need repair and replacement. Operating costs become about two-thirds of the total ownership cost, and cost per mile rises about 80 cents per mile.

Just like you should regularly use some method to track living expenses so that you will understand where you spend your money, you should also keep track of your car maintenance and repair expenses. It is too easy, especially with an older car, to spend money on repairs, but not see the bigger picture. When you track and add up your auto maintenance and repair costs at least annually, you can help to avoid getting into the trap of spending too much on an old car. You should keep track, because it is too easy to forget some expenditures and mentally under estimate how much you have been spending to keep that old clunker on the road.

To the owner of an older car that has proven itself to be reliable and durable for many years until it starts to break down more, the cost of ownership in later years might seem to be lower than earlier in the car’s life cycle. Car debt or lease payments are long past and few people think about the escalating investment opportunity cost associated with past capital purchases. In addition, although this life cycle cost model assumes that this older car will continue to be driven 12,000 miles per year, very often older cars become “second,” “third,” and “fourth” cars in a household and are driven less. Less driving and less mechanical stress also contributes to the impression that old cars can be cheaper to run. To a degree this is true, if lower annual mileage rates push out the time that wear and tear and mechanical flaws are revealed requiring more expensive repairs.

What does this cost of ownership model help us to understand about owning a $25,000 mid-sized sedan over fifteen years?

Some of the major lessons that might be drawn from this financial model relate to decisions made when buying the car at the outset. First, patience and care taken when buying a car can pay off handsomely over the long-term. While there are differences in operating efficiency related to miles per gallon that will build over time, you can speculate about the cost of these differences. You can price the cost per mile of gasoline and speculate about the future of gasoline price inflation over your expected holding period. However, in most cases where the MPG difference between competitive models is in the single digits, which is normally is, the long-term mechanical reliability of the car can be an even more significant factor.

I always find out how many years a particular car manufacturer’s model has been on the market, and I check the historical repair statistics for that particular model. I have been a decades long subscriber to the print edition of Consumer Reports magazine, and the cost of my subscriptions have been repaid many, many times over just to have the auto reliability data at hand. I habitually hold on to the past five or six years of Consumer Reports issues, so that I can have historical car reliability information easily available, as well.

This Consumer Reports data is vital to deciding on which car to buy, especially if the goal is to own the car for a long time. You can get some of this information from the Consumer Reports website, but I have found that the printed issues have more details that are more easily found. Across all the products and services that Consumer Reports evaluates, in my experience this magazine does not always lead me buy the cheapest product. However, it have helped me to find more reliable and reasonably priced products, whether then are cars, TVs, tools, appliances, etc.

Another decision relates to whether to buy a new car or to buy a used one that is two or three years old. Again, gas mileage efficiency and model repair histories are important factors. In addition, since cars depreciate the most in the first couple years, it is possible to buy a relatively new used car with much lower cash outlay. This can lower both the capital cost and the investment opportunity cost significantly.

In addition, with newer used cars one often finds that they have more optional accessory bells and whistles that you might have decided to buy, if you would have had to pay full price for them on a new car. This is especially true when buying used cars that have come off leases. Many people do not renew leases, but instead move on to a new car and a new lease. Frequently rolling from one car lease to another may not be the most economical way to own cars, but many people who lease do so within a business and get a tax write-off, which can cloud their economic decision-making.

Also, frequent purchases of new cars — whether on leases or bought new for cash or with financing will drive up the total capital cost of your cars. The tables above reflect capital costs and investment opportunity costs over fifteen years for a single car. When new cars are purchased ever three years, for example, proper long-term financial modeling practices would require the model to reflect the higher capital costs of frequent new car purchases. Since capital costs would be higher, then the long-term investment opportunity cost would also be higher, as well. Earnings, expenditures, and savings are the most important determinants of most family’s financial wealth. Because your savings determine your wealth, the less you consume the more you can keep as savings, and the quicker you can grow your investment assets and wealth.

Finally, if you are going to own old cars and buy cars used, you need to have a reliable, cost-effective and trustworthy mechanic. You find such mechanics through trial and error over the year, but good honest mechanics are out there. The more knowledgeable you become about auto mechanics without getting your hands greasy, the better able you will be to work with a good mechanic.

Independent mechanics are usually better and less expensive than those affiliated with a dealership. Independent mechanics should have been in business for many years and have a good reputation. Look for stability of personnel and straightforward dealings. A good mechanics will understand that you represent repeat business and understand that they will make a reasonable profit over the long-term when dealing with you. Once you have a good mechanic, then you are also in a much better position to buy the right used cars. You should pay your mechanic to inspect any used car that you intend to buy and not depend upon the word of the seller.

>>>>>>>>>>Here’s part II of this series