The High Cost of Automobiles

One thing that has defined Americans for the past 100 years is our love of automobiles.  We didn’t invent cars, but we quickly adopted the lifestyle.  We created drive-ins, drive-throughs, car hops and motels.  We designed our cities around freeways.  We went from cowboys riding horses to commuters driving cars, because freedom is the American way of life.  We want to come and go as we please, on our own time and schedule.  We are not giving up our cars for anything, except possibly flying cars or personal spacecraft.

It Costs a Lot of Money to Drive

Lamborghini LP640
Image by Damaian Mory

For many Americans, cars are their second largest monthly expense, after housing.  For families with two or more newer cars, this can cost thousands of dollars per month for loan payments, gas, insurance and maintenance.  Even after a car is paid off, driving is an expensive luxury.

According to AAA, it costs an average of $9,519 to drive a midsized sedan 15,000 miles per year.  This was calculated in 2010 with gas costing $2.60 per gallon.  If you drive an SUV, luxury car or pickup truck, these costs go way up.  Check out the brochure Your Driving Costs on the AAA website for detailed information.

Some People don’t have a Choice

Unless you live in an area with good public transportation, it’s nearly impossible to live without a car in America.  If I lived in a city like Boston or New York, I would skip the car and take the subway.  Here in sunny Southern California, it seems like a two-hour bus ride to go two miles, then a five mile walk from the bus stop.  In many rural areas, it can be a half hour drive, just to get to a store or a gas station.  In vast places like Texas and Montana, it takes almost a whole day just to drive across the state.  So, the decision to purchase a car is often more practical than personal.

Go Insurance RateI believe the high costs for automobiles hit the younger generations the hardest.  This comes from my own experience, as well as from watching others.  Young people are so image conscious that they often buy cars they can’t afford on their limited incomes.  And, they do it at a time where they really need the money for more important things.  But, a new car shows they have arrived.  So, it always seems to be high on the list of wants.  Banks, car dealers and insurance companies are happy to take advantage.

What about Opportunity Costs?

If the average American saved just half of the money they spend on cars in their lifetimes, they would almost certainly become millionaires.  Take the example above.  If a person saved just half of the average cost of $9,519 per year, they would have an investment worth $2,173,441* at retirement.  A two-car couple would have saved well over $4 million.  That’s a lot of money to give up for a fancy set of wheels.

*This amount was calculated at $396.63 per month over a 50-year working life and a 7% rate of return.  It doesn’t include inflation or future value.

The reason I brought this up is because most of the people I know who are cash poor have some pretty nice cars.  I have nothing against nice cars for people who can afford them.  But, they don’t make a lot of sense for people who are barely scraping by.  If someone has a lot of debt and can’t seem to save any money, their biggest problem may be parked in the garage.

Money Saving Strategies

Optimized Purchase – Two effective ways to save money are; buy new cars and keep them for 10 years or buy used cars and keep them for 5 years.  It’s considerably cheaper than buying or leasing new cars every 4 years.  Investing the savings could make a huge difference in their  financial future.

Vintage Rides – My favorite strategy is to buy older cars for cash and drive them until they die.  This works for me, because I drive basic American cars and I’m able to maintain them.  Used cars are cheap.  So, I can get a pretty nice ride, without spending a fortune.  I save a lot of money on interest, insurance and registration.  If I get tired of a car or run into some maintenance hassles, I just get another one.  If it gets scratched or dented, I’m over it.

Limit your Commute – For 25 years, I commuted 40-60 miles per day, round-trip.  Anyone who has been to California knows what rush hour on a freeway looks like.  In 1996, I had a job 28 miles away that was a 90 minute drive on a bad morning.  After I left that job, I refused to commute more than 20 miles each way.  I now work 3.2 miles from home.  I save thousands of dollars and hundreds of hours per year.  The lifestyle change is amazing.

Use your Feet – People are questioning the wisdom of living in suburbia.  In some master-planned communities, you have to drive for miles just to get out of the neighborhood.  I live downtown, so I can easily walk to shops, restaurants, stores, my bank and the beach.  A few years ago, I would drive these short distances.  Now, I walk more and enjoy the scenery.

Alternative Energy – For the past 20 years, my dream has been to own an electric car. Ever since I saw the Chevy Impact (GM EV1) in Popular Science, I have wanted one.  A low-maintenance vehicle that doesn’t use gas or oil makes a lot of sense.  Once people realize it costs 3 cents per mile to charge a battery, they may reconsider the high price of gasoline.  Like computers, EVs will definitely get better and cheaper.  I have my eye on a Ford Focus EV.

Go Insurance Rates

The Bottom Line

The bottom line is that cars are a depreciating asset.  They lose up to 20% of their value in the first year and cost a small fortune to own and operate.  The less you spend on cars, the more you will have for other purposes.

“We are the first nation in the history of the world to go to the poorhouse in an automobile.”

Will Rogers – American Humorist

Recommended Reading

Get Rich Slowly – How to Dispute Your Mechanic Bill
Invest it Wisely – Three Reasons I Squirrel away My Money
Yahoo Auto (Kiplinger) – 10 Cheapest Cars to Own

This post was featured on the Carnival of Personal Finance over at Stupid Cents.  This is the Greatest Blog Carnival on the Net.  Check it out.

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19 comments to The High Cost of Automobiles

  • I agree that suburbia is poorly planned and I think that some people are realizing this. Hopefully communities in the future will be planned for a more walkable area. I’d also say bike, bike, bike! It’s quick and easy and you can bike 4 miles within half an hour or so. I love my bike and try to ride as much as possible.
    Little House recently posted..It’s Never Too LateMy Profile

    • What I have noticed in California is a return to urban style settings that were popular near the turn of the last century. This is where the storefonts are at street-level and there are walk-up appartments above them. A prime example are the new Stadium Lofts they are building around Anaheim stadium.

      I think this is happening for two reasons: 1) Developers are running out of land and 2) Younger people like an urban setting, with night-life around them. They grew up in the ‘burbs and think it’s boring.

  • I really liked this article. We buy new and keep them forever!!! For the past 16 years we have limited our commutes too. I hate auto expenses, as I look at cars as transportation only and don’t get any residual enjoyment from what I drive.
    Barb Friedberg recently posted..My Biggest Financial Mistake – Opening an eBay Store and Using CreditMy Profile

    • Thanks Barb.

      I’ve never ownwed a new car. When I do buy my new EV, I plan to keep it forever. Or, at least as long as is practical for an electric car. I’m looking forward to the low maintenance, since I’m the one who changes the oil and brakes. I definitely don’t miss the commute.

  • The thing is cars are much cheaper in the US than other parts of the world. Gas is cheaper, the cars themselves cost less, and plus with the government subsidizing the construction of highways, living further out is somewhat subsidized, too.

    Even with all of this cars can still be quite expensive. 🙂

    The funny thing is those urban cities like Boston, New York, or the one I live in have suburbs much more sprawling than cities like Los Angeles. Lots of cul-de-sacs, low population density, etc… Personally I prefer living closer into the city, but I definitely do see the reasons why people would want to live further out where there’s more space and green. I’m just not prepared to pay the price in terms of commute time.

    With energy prices rising I think more and more people will be reconsidering long trips into the city and houses 50 miles out, and will be looking at places further in. That’s a good thing because cities thrive on the energy of residents and are more efficient when people are in closer proximity with each other. It’s not good to be packed in like sardines, either, but at the same time I don’t know if we would have had as much sprawl had the highways been paid for more directly.

    Interesting post, and thanks for the mention!
    Invest It Wisely recently posted..Three Reasons Why I Squirrel Away My MoneyMy Profile

    • We have a lot of “bedroom communities” which is code word for, no industrial areas or jobs. They are nice places to live, but it forces everyone to commute.

      When I moved to San Clemente, it was like this. But, they have built two small industrial parks in the past two decades and now there are places to work. It is so much nicer working in town than driving to Irvine.

      In the future, I hope cities consider more balanced use of space in their planning. All of the driving doesn’t make sense. It’s a complete waste of time and money.

  • All this driving we do makes it’s own footprint in the environment, so we’re not doing any long-term favors by living a car-centric lifestyle.

    This is the type of lifestyle I lead, but it’s the way it is considering my locale. It’s expensive no matter how I look at it. I agree with you that there are better things to spend money on than transportation.

    People who splurge on big brand name, upscale cars and consider them a “need” are not thinking big picture. I’ve seen this most commonly with younger folks, but people make these mistakes at any age.

    • I forsee more telecommuters and contractors in the future, as we move to an information economy. This won’t work for every business, but many are leaning this way. It’s not cheap for companies to put up big buildings and house everyone in offices and cubicles. They are starting to look at the inefficiencies of travel and commuting.

      • I agree with your assessment. So many people in major metroplitan areas are so far from workplaces, due to suburban sprawl, that it just gets expensive in terms of money and time to commute. There might be a tipping point that pushes things to much more working remotely, as it’s actually more realistic these days due to the information economy you noted.

  • I definitely thing you’re better of taking that car money and buying a more expensive house (if necessary) closer to resources. At least you have a (generally) appreciating asset.

    • Hey Ben, I heard you Aussies passed us Americans for having the biggest houses. We are finally starting to scale back after decades of bigger and bigger homes. I have a medium sized house and don’t see a need for a bigger one. I’m going to put my spare change into rental property, instead of upgrading my residence.

      • Yup giant houses everywhere. I think the standard new home is 215 m2 is 15m2 bigger than the average US home. We also emit more CO2 and are fatter:) There’s a big debate at the moment here about the “cost of living” going up. If however you “settled” for a 3 bed home with 1 bath, 1 car, public schools, small tv etc, costs have gone down appreciably.

        I’m discussing at the moment with my fiance moving downtown so we’re closer/walking distance to the inner city and getting rid of a car. Even if I spend the same as i would on the car every year on extra repayments, my figures put me ahead in the long term.
        Bankruptcy Ben recently posted..Are cuts to public transport really what we need?My Profile

  • Matthew Bacon

    A very insightful blog. The cost of buying new vehicles is very high now a days and I certainly can’t afford to buy a new car right now. However looking around it seems like a good option, in these uncertain times, to get a leased vehicle. With a brand new vehicle and on low monthly payments, you cant go wrong can you.

    • There are three problems with leasing a car.

      1. A lease creates a 3-4 year liability for thousands of dollars and all of the related expenses, such as registration and insurance. If someone loses their income, these payments can be a huge problem.

      2. Peope who lease never own a car, so they may wind up leasing (renting a car) indefinitely. Most dealers want to sell new cars before the lease is up, so they wrap the residual costs into the new lease.

      3. If the lessee goes over their alloted miles, they can wind up with a huge bill at the end of the lease.

      Leasing is great for some businesses that require vehicles and some professions, such as salespeople. But, for most people, it’s a very expensive way to drive.
      Bret recently posted..The High Cost of AutomobilesMy Profile

  • I fully agree with you that cars are very costly to drive.With the rising prices of gas it is becoming more and more difficult.I like the idea of buying old cars and use then until they die.
    Shivam Garg recently posted..SupplementsToGo CouponsMy Profile

    • I don’t think the high price of gasoline is fair. There are a lot of speculators pushing up the prices. But, even if they change the futures markets, I don’t think gasoline will be cheap in the future. We are probably getting near peak oil production and demand is increasing.
      Bret recently posted..The Four Seasons of Personal FinanceMy Profile

  • A thoughtful post. My commute to work is 24 miles round trip, and our vehicle are 10 years old. In looking around the parking lot at work, I notice that I’m in the minority, as co-workers upgrade to newer models. There is also that distinct minority thought that drives older vehicles, almost classics, and maintains them in shiny neat-as-a-pin condition.
    101 Centavos recently posted..Random Bits and Bobs (and Links)My Profile

    • My F-150 is 11 years old and my Chevy Cavalier (daily driver) is a ’96. I am definitely in the minority where I work. Not only do most of my co-workers have nice new Mercedes and BMWs, they also have big mortgages and lots of bills.

      When I bumped up my 401K contribution this year the HR Manager asked me, “You do know this is per paycheck and not per month?” I told her, “Yes mam, I certainly do.”
      Bret recently posted..The Four Seasons of Personal FinanceMy Profile

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