Thriving Millionaires

By Eric

This post is part two of a two-part series of the costs of a car. Check out Part 1 on the overt costs of a car here.

When calculating the cost of a car, it’s easy to run through the mental check list of expenses you’ll incur relative to your car: Car Payments, Gas, Insurance, Oil Changes. But there are many more expenses that come along with the vehicle that aren’t as obvious. Unfortunately, just because they aren’t obvious, doesn’t mean you don’t incur these costs. For that reason, we want to explore the hidden costs as well.

AAA publishes an annual report on the cost of car ownership which breaks down each expense by car type. With some reasonable assumptions in place and a little quick math, we can begin to assess the various hidden costs on a per-mile basis to make an easy point of comparison. While I won’t go through every car type in the AAA report – I’ll pick two common types: Medium Sedan (think Toyota Camry) and Medium SUV (think Honda Pilot). As it relates to the reasonable assumptions I mentioned above, let’s move forward with the national average of annual miles driven as our denominator in these calculations: 13,500.

Maintenance, Repair and Tires

This category is often viewed as an unexpected expense – but if you really think about it, your maintenance, repair and tires costs are almost always a direct output of your miles driven. The more you drive, the more wear and tear you’re putting on the car, and therefore the more likely something is to wear out or break. This leads directly to increased frequency and cost of both preventative maintenance and repairs. As for tires, the rubber wears out at a calculable rate. Each mile driven equals one mile off the remaining life of the tire.

The cost per mile of Maintenance, Repair and Tires is 8.58 cents for a medium sedan and 8.66 cents for a medium SUV. That means that on an annualized basis, the Medium Sedan will incur about $1,160 in expenses in this category and the Medium SUV will incur about the same ($1,170).

It’s worth noting that the cost per mile on Maintenance, Repair and Tires is almost as big as the operating costs for fuel. For reference, the estimated fuel costs for the Medium Sedan is 9.18 cents/mile and the Medium SUV is 12.43 cents/mile. Because these per-mile rates are surprisingly close, you may want to take a look at your annual fuel costs and ensure that you’re beginning to budget a similar amount for this category if you’re not already. This will help you avoid the feeling of surprise when repairs or tires are eventually needed.

License, Registration, Taxes

This one is hard to look at without drilling down into your individual situation. Licensing and registration fees can vary significantly by state as can taxes. Without getting to a state level, based on the national average, you can expect to spend $690 in this category on a Medium Sedan and $845 on a Medium SUV.

Although these expenses are fixed, not variable, we can back into a per-mile cost to maintain the ability to assess costs in common terminology. For the Medium Sedan, this equates to 5.11 cents/mile. For the Medium SUV, this equates to 6.26 cents/mile.

Depreciation

While not technically an expense to be incurred if you own a car, the fact that an owned asset is losing value is worth noting. You won’t need to build a savings plan to pay for depreciation – because the car’s decrease in value doesn’t require you to remove money from your wallet – but it will impact the resale value and your net worth if you include cars in your net worth calculation (I don’t, but that’s a topic for another day).

Based on the average Medium Sedan, the annual deprecation will add up to $3,580. The average Medium SUV will incur $3,714 per year in depreciation. Thinking about this in a per-mile basis will net a per-mile depreciation of 26.52 cents/mile for the Medium Sedan and 27.51 cents/mile for the Medium SUV.

It’s worth noting that these per-mile depreciation numbers are based on average annual depreciation divided by annual average mileage. That means that the cents/mile figure is an average based on the average car and driver. If you drive significantly less, your depreciation per mile may increase because regardless of how little you drive, the car is a year older every year. It’s also possible that your depreciation per mile may decrease because when you look to resell the car, it will have lower mileage than comparable used cars. The same is true if you drive significantly more each year. You can make the argument either way – but the amount of value a car loses through depreciation is only an estimate until a buyer and seller determine the actual price.

To put all of this together, below is a summary table of these three hidden cost categories all equated to a per-mile basis. I’ve included fuel costs as well for reference. Note that this table does not include the overt costs of a car and is therefore not representative of true car ownership costs.

Cents/Mile	Medium Sedan	Medium SUV
Fuel Costs	9.18	12.43
Maintenance, Repair and Tires	8.58	8.66
Licenses, Registration, Taxes	5.11	6.26
Depreciation	26.52	27.51
Total Hidden Costs (does not include Fuel Costs)	40.21	42.43
Annual Hidden Cost Estimate	$5,428	$5,728
Annual Hidden Expenditures (Row Above less Depreciation)	$1,848	$2,014

Patrick’s Thoughts:

When you look at the annualized “hidden costs” of a car above, it’s hard to imagine these as hidden. The yearly figures are so big, yet most of us, including myself, don’t think of the impact little trips in your car can have on your budget.

You see, that’s the thing about car ownership – it’s a big purchase, but it’s the little things that will get you. You’ll plan for the regular maintenance but it’s the surprises that will throw your budget off. You’ll allocate money for the monthly payments, but when personal tax time comes, you’ll scramble to pull together the funds.

Eric does a great job showing us how seemingly small per-mile payments really add up over the course of a year. While we are calling these “hidden costs” I would almost call them “lack of analysis costs.” Most car owners are aware they exist, but they just don’t do the analysis like Eric did above to understand the budgetary impact.

But what are some other hidden costs of a car? Below, I’m going to discuss two important areas. Instead of call them costs, I’m going to call them risks. Not planning for risks can be even more costly than the car itself, and oftentimes, most car owners aren’t thinking to much about them.

Liability

This is one people don’t often think about. We’ve all seen the commercials telling us that we need to stay away from cut-rate car insurance. While it’s a great tagline, it’s also true. Driving your vehicle with a low-level of car insurance, or without car insurance, for just a few days puts you at incredible risk. What if you got in a major accident and there were hundreds of thousands of dollars of medical and property damage bills? If you’re like most of us, that could lead you straight to bankruptcy.

Another thing people don’t always think about is the immense responsibility when driving a car. On my way to work, I see dozens of people texting, doing makeup, or just straight up not paying attention. You should take the responsibility of driving a several thousand pound metal object seriously. If you do something wrong that causes someone else harm, you will be held liable.

Negative Equity

For those that purchase a new car entirely with financing, there is generally a period of your loan where you have negative equity in your car (where your loan amount is actually greater than the car’s value). This in and of itself has inherent risks. 

Let’s say you total your brand new car two months after purchasing it. Due to the massive depreciation your car undergoes as soon as you drive it off the lot, you could be in a situation where your payoff from the insurance company is significantly less than what you owe on the loan. Now you’re in a conundrum. You can’t pay off your loan, but you also won’t be able to replace your vehicle with a new car. This is where gap insurance comes in. In the instance above, gap insurance would make up the “gap” between what your car is worth and what you owe. 

While these are just a couple examples, I think it’s important to understand these risks (and others) when owning a car. Sure, they are not regular costs or things most of us will experience, but they are risks that could lead to significant costs – financial or not.