Someone in our meetup group asked the question: is it worth buying a newer car for x amount or should I keep my current car. Challenge Accepted!!
We have all wondered if it is time to get rid of our current car to buy a newer one. Not only to keep up with the Joneses but to feel good about ourselves as well. However, if we looked at this financially instead of emotionally we will find that the right decision may not be the one you expect.
I wanted to see for myself at what point does it make sense to buy a newer car; the maintenance cost of keeping the current car must at some point outweigh the cost of purchasing a newer car. Time to break open Excel and start pushing in numbers.
I was really interested in the finding out what the cost to benefit ratio was to buying a newer car. The first thing I done was to find what expenses I have for my current car, I looked at fuel, maintenance, tax, and insurance. I took the total that I paid over the last two years.
See the Excel file: https://drive.google.com/file/d/1bVeziJMHOv8Mf6VfBuUpJpQGVibZnLzu/view?usp=sharing
NOTE: Download the file, do not make changes to it directly.
Some of my thoughts prior to starting this were:
- Cars are lasting longer now, you can easily get 250,000 KM from a newer model car.
- Will maintenance of combustion engines get more expensive or cheaper with the onset of electric cars. I believe more expensive as mechanics / electricians focus on electrical parts and electrical training.
- As fossil fuel demands decrease there may be an increase in price
- We may see an increase in tax on fossil fuel by the Government as they discourage its use.
I decided to calculate this over the next five years as I have a 10-year-old car and I can’t see it lasting much longer than five more years. I pulled my total expenses from my expense file for both this year and last year.
Looking at the current car; my yearly expenses are maintenance, fuel, tax, and insurance.
Maintenance has been high on this car with an average of €1,200 per year. For the next five years I added an additional 5% per year. I’ve also added an additional €1,000 on year 5 for such items as new tyres, timing belt, etc…
The Fuel costs are a steady €950 per year. For now, I have kept it at this price for the next five years.
Tax is €200 per year and again have maintained that for the next five years but I think that may increase. We can only go with what we know right now so let’s assume that it’s going to be maintained at €200.
Insurance is scandalise in Ireland; I managed to shop around and get it down to €789 this year but I had been paying almost €1,000 per year. I have put the average of the two years in for the next five years.
So now, looking at the costs to run my current car for this year and the next five years, we are looking at almost €24,000. That is a lot of savings if I was to get rid of it and take public transport or a bicycle. Worth considering but mildly inconvenient.
Now let’s look at the new car; we will have the same yearly expenses except we may also have interest if we take out a loan. As an F.I. follower, we avoid needless debt so I should only buy a car if I have the cash for it.
If there is a loan on the car (fill in cells N3 & N4), We only
calculate the Interest on the Loan
as the principle goes towards the asset and we will calculate depreciation
later to counteract that. We calculate the total interest on the loan (cell N5)
using the car cost, the interest rate, and the total months of the loan. Once
we know our total interest that we will pay, we just divide that evenly by the
Note, you can change any of the values in the yellow highlighted cells to play around with that or to match your loan, if you have one.
I’m assuming the Maintenance should be lower on a newer car, assuming €250 per year, this could be higher or lower on your car. I’ve also added an additional €1,000 on year 5 for additional such as new tyres, timing belt, etc…
I’ve decreased the fuel a little here as I am assuming that a new model car would burn less fuel. Of course, if it is an electric car then this should be a lot lower. Feel free to adjust the yellow highlighted cell as you need.
Tax is €200 per year and again have maintained that same cost for the next five years but I think that may increase. We can only go with what we know right now so let’s assume that it’s going to be maintained at €200.
Insurance should decrease if the car is less than 10 years old. Again, feel free to adjust the yellow highlighted value.
That gives us a total cost of ownership for this year and the next five years of a little over €14,500. That sounds great, almost a €10,000 savings. But don’t run out yet and start test driving, we need to calculate a few other things; deprecation and opportunity costs.
What on earth are opportunity costs, I hear you say and why would it affect my car purchase. Opportunity costs are a way of calculating the money that you could have made from the cost of the vehicle. For example, if the vehicle costs €15,000 that money is locked up in our car for the next 5 years, at least, where it could have been making interest. To calculate opportunity costs we take the €15,000 that you used to purchase the car and assume that we invested it in an index fund making 6% per year. That would have given us €6,278. Instead of investing the €15,000 we bought a car so we lost out on making €6,278.
Line 19, show our total savings over the five years of €3,063. Still worth buying a newer car.
However, let’s put depreciation into this now. We have all heard that a car loses money as soon as you drive it off the lot. Every year that car is one year older and costs less than the year before. A car buyer will pay less for a five year old car than a four year old car. A car will normally lose about 10% of its value each year. I am being conservative here and assuming that I could immediately sell the car for what I bought for; you will see the resale value in 2019 is the exact same as what I bought it for. In reality, I probably would not get that much for it. Total depreciation over five years: €7,028, almost half what I paid for it L
Total savings/costs after depreciation: almost (-€4,000). Yes, buying a newer car would actually cost me €4,000 over five years.
I played around with the numbers a little to see where the change-over point is. At what point does it become worth it to buy a newer car. Once my maintenance costs goes over €2,000 a year then it’s time to start shopping for a new car.
I hope this helps someone to make that buy or hold decision. A newer car is nice to have but we need to think about how much it is going to cost us.