Saturday, September 1, 2007

Driving a Car to Death Saves You ... How Much?

The headline of this CNN article says that it's $31,000. Compared to the cost of trading in and buying new every 5 years, keeping a Honda Civic EX for 15 years saves you $20,500. The car used in this example is a Honda Civic EX -- the Civic is one of Honda's cheaper models and the EX is a package that adds power windows, automatic transmission, etc. The other $10,300 comes from interest before inflation on your savings, savings at 5% and inflation at 3%. Personally, I prefer to leave inflation out of it -- but the $20,500 of savings is enough motivation. That's over $1300 per year that can be added to retirement savings.

I have a Honda Civic DX which has basically nothing extra, except for air conditioning and a CD player. I don't mind cranking up the windows by hand or shifting the transmission myself. My other vehicle has power windows two of which have required expensive repairs. I get better gas mileage with standard transmission, in the mid 30's around town and easily over 40 mpg on a long trip. The only feature I miss in my basic car is cruise control when on a long trip. I considered Honda's hybrid model, but estimated that the $5000 extra it cost would not be repaid by reduced gas consumption, even with rising gas prices.

In order to keep your vehicle for 15 years, it has to hold up. Regular maintenance goes a long ways, some of which is relatively simple such as checking your fluid levels regularly. The make of the vehicle is a factor: some of the longest running cars are made by Honda. On the other hand, some luxury vehicles such as BMW, Jaguar, and Mercedes are less likely to last 200,000 miles. (Here's the other assumption in the article: driving around 13,000 miles per year.)

I've had my Honda for almost 3 years and have put over 36,000 miles on it. I've had zero problems with it, compared to an American vehicle that required several trips back to the dealer for repairs, the first within 30 days.

Most people make car payments and view the cost of ownership as the amount of the monthly car payment (after you've paid off the note it's free). Their view of the cost to go on a trip is the cost of the gas. I have a different model. I've paid cash for my last two vehicles. I estimate the depreciation as the cost of the car divided by 100,000 miles. Each month I look at the odometer and plug the number into my spreadsheet. The spreadsheet calculates how much I need to set aside to buy the next car. I expect the car to last more than 100,000 miles, but also expect that repairs will be needed more frequently as the miles pile up. And when it's time for a new vehicle, I have the money to pay cash for it. And with my financing model, I think a bit more about the cost before deciding to take a trip.

Perhaps some people look at me as I drive up in my appliance-white small vehicle and assume that I don't have much money. But I don't care about impressing anyone. I get more satisfaction from a higher balance in my 401(k).


Duane said...

I like your idea about calculating the depreciation and anticipating the replacement cost. Would you mind posting the spreadsheet you use? Thank you.