Wednesday, September 5, 2007

Saving over $456k on cars

Consumer Reports wrote how y0u can save $31K by buying a car and driving it for at least 200k miles. Many people are looking at ways to save nickles and dimes while ignoring a potential windfall by buying and maintaining their cars correctly. Most people look at cars as too costly or feel a need to get rid of them when they reach 100k miles.

This is really an outdated view of the quality of today's cars and reflects thinking from the 60's. Some say "they don't build them like they used to". Well thank God for that. Today's cars are vastly superior to what was built in the 60's and 70's. Most cars today can easily go 200k miles and many probably 300k. Most cars today need only minimal maintenance before 100k miles (like oil changes). I think all cars can go over 100k without a tune-up which is a big switch from the days I bought my first car. I have written here and here about how I save money on cars.

Of the dozen cars I have owned I have only had 2 that I sold before they had 200k miles - a 92 Ford Club wagon and a 98 Dodge Intrepid. I would have kept the Intrepid. It was in great shape, I loved the design and when it was running, it ran very well. Unfortunately, it had 3 sudden electronic failures while I was travelling several hundred miles from home and it cost me ~$3k each time to have it fixed since I had to rent a car, travel home and then drive back to pick it up. So I unloaded it mostly out of frustration. The Ford was just a poorly built vehicle.

So how do I save more than $31K on a car? I only buy cars with at least 90k miles on them. So I avoid the following costs:
  • I pay cash (I buy on Ebay), so I have no interest charges (saves $10k per Consumer Reports)
  • I buy after the car is nearly completely depreciated. So I pay $4k Vs $30k. If I only keep my used vehicle 7 years, I pay $8k to compare with the CR example - a savings of $22k over 15 years
  • I don't carry fire, theft or collision ( I pay less than $500 a year for liability coverage on my 2 vehicles - this saves $1000 a year (that's $15k in CR's example)
  • By maintaining my vehicles I avoid costly breakdowns (e.g. changing the timing belt)

I also use synthetic motor oil, which I believe substantially reduces engine wear (and improves gas mileage). The biggest obstacle to keeping a car here is rust (they use a lot of salt on the roads in Buffalo!)

The best (and cheapest to maintain) cars I have had were Honda's, Toyota's and Cadillac's. My 2 Chevy Ventures have also done well. I think the Honda could have gone 500k miles.

Based on the CR example of saving$31k, I save an additional $45k over the 15 year example period for a total of $76k. So if you are the average family that has 2 cars for 45 years that is a savings of $456k that you can bank for retirement. This is big money. Maybe you can afford to splurge on a couple of Latte's to reward yourself and stop clipping coupons.

Is my math right? Some question it.

First, I am assuming Consumer Reports math is right. If so, that's $93,000 of savings per car over the 45 year period that is my base case (your working years). The average American family has 2 cars simultaneously during that time so that's $186,000 in savings based on CR.

Second, Consumer Reports states that you pay $10,000 in interest per car, so if you pay cash for a used car you will save another $20,000 every 15 years. As cars get more expensive and people finance them for longer periods this will go up. For the 45 year period that's $60,000 in savings. So we are up to $246,000 in savings.

Third is purchase price. I assumed that you bought a new car for $30,000. I own a mini-van and a 4 door Toyota Camry. The van retails for $35,000 plus sales tax, while the Camry retails for $24,000 plus taxes (Sales taxes would add another $5k here in NY, but I''ll ignore that for now). On average, ~$30,000 in 2007. I purchased my van on EBay for $3500 and the Toyota for $4000 - no sales taxes. Now to get the same mileage, I'll probably have to buy 2 used cars rather than the one car CR uses in their 15 year example. So my savings over 15 years is ~$44,000. During the 45 year period the price of a new car will inflate much faster than the prices of used cars. But to be conservative I'll keep the differential the same. For the two cars I will own simultaneously, that's another savings of $132,000. Now my total savings is $378,000.

Fourth is savings on auto insurance. I never buy collision or theft insurance. But if you have a loan you must carry it. How much you pay for collision insurance depends on the type of vehicle you drive, where you live, your age, gender, driving record and even credit score. So, I am only guessing about the extra cost here. But for most people, I would guess the surcharge may be $1000 per year. This will also increase as cars get more expensive. But for my example, this is $45,000 in savings.

Total savings is now $423,000 over the typical way people buy cars. Will I pay more in maintenance. Maybe, but except for 2 cars that has not been the case. The only non-routine maintenance I did on my Honda Prelude was to replace a water pump which I drove over 250,000 miles!


manuvns said...

i like the idea . but $465K is over exaggeration . Old cars requires more maintainence ( thinks tires etc ) . Old car can consume more gas . What if you are in an accident and you have to replace a car ( when you don't carry coverage ) . But yeah you save more .

Paul said...

I actually think $456 is a conservative estimate. The cost of maintainance on new cars is getting higher. Consider "no-flat" tires. They only last about 30k miles and cost 2-3 times what a conventional tire costs to replace.

The price of a new vehicle is also rising faster than the cost of a fully depreciated vehicle, so the differential will grow over the next 45 years.