June 8, 2010

Figuring Your Real Automotive Spending and Cost Per Mile

Transportation is often the second highest expense in a household after housing.   We Americans spend a lot on our cars. 

Since spending on transportation is such a large portion of our budget its important to have a clear understanding what we're spending.   You might be surprised how much your car is really costing you.    In addition it is useful to know what each additional mile costs you.   For example, knowing your cost per mile can be used as a basis to decide if driving your car to visit relatives in another state is more or less practical than taking a plain or train.

Average Spending in America
According to Bundle.com the average household spends $486 per month on transportation which is primarily automotive expenses.  That comes out to $5,832 per year.   There are about 2 cars in an average American home so that means the average American home spends roughly $2,916 per year per car.
The average American drives about 12,000 miles a year so this means Americans are spending about 24.3¢ per mile driven in our cars.   This is an extremely rough average.  But you and your car aren't average.   The range of spending per mile for various cars is likely somewhere between 10¢ and $1.

How to Figure What YOU Spend

Edmunds.com and Yahoo's auto site both have estimates on the total cost of owning cars.   Edmunds calls it the 'True Cost to Own" and Yahoo's name is 'Total cost to own".   So looking up your car on those sites would give you a good starting point.   Edmunds has listings for used cars going back several years.

Your own car may not be on those lists or your own spending may differ from what they assume.  To figure your own total cost you need to consider and add up all of the different costs that a car has.  The major categories of costs for your automobile are as follows:

Depreciation : this is the amount your car drops in value in a given year.   You could roughly approximate this by assuming 10% depreciation for used cars and 25% depreciation for the first year of a new car.

Fuel costs : This is the cost of gasoline and should be pretty easy for you to find from your own spending records.   You can also approximate it by using the MPG rating on your car, the amount you drive in a year and the average gasoline costs.

Financing expense:  This is the interest you pay if you have an auto loan.

Insurance:  Your total auto insurance cost.

Maintenance:   This category includes any routine maintenance such as oil changes, new windshield wipers, new battery, etc.  I'd also put car washes in this category if you spend on that.

Fees and taxes:  This is sales tax on car purchase plus any annual fees or taxes on your car.  This category will vary considerably from state to state.

Repairs:   This is unexpected costs from break down of your car.   If you have to take your car to the shop to get it fixed then that bill would go into this category.

Opportunity Cost:   This is an economic term that refers to the loss of what else you could do with your money.  In otherwords it accounts for any profit you lost from not using your money for something else.  Simple way to look at it is to think of how much money you could make on your money if you had done something else with it.   Say your car is worth $10,000 market value right now, if you had instead put that money in a savings account then you could be making 1-2% interest on it.  So this means you're losing $100 to $200 in opportunity cost.

Other:   Anything I don't cover above.  It doesn't really matter how you categorize your spending as long as you add it all up.   If you have spending that doesn't fit in one of these categories then put it in a separate category.

Once you figure out and add up all these categories the total sum will give you the total amount you spend on your car in a given year.    You can also then figure your cost per mile by dividing the total spending by the total number of miles driven.

Cost of Marginal Miles

If you spend $5,000 on your car in a year and drive 10,000 miles then that means you spent 50¢ per mile.  But that doesn't mean that you will spend 50¢ more for each additional mile you might drive on top of that 10,000.    A portion of your spending on a car are basically fixed costs that don't vary based on the number of miles drive.   For example your finance costs and annual license fee are going to be the same  whether you drive 10,000 miles or 15,000 miles.   TO figure the cost of additional miles you need to figure out what your variable spending costs are and then also add in increased depreciation based on high mileage.    Your variable costs are primarily made up of your fuel, repairs and maintenance costs.   Figuring the mileage depreciation is a little trickier.  I would do this by looking at the market value of the car on Edmunds and comparing the value for a car with +/- 10,000 miles.   So for example if your car currently has 100,000 miles on look up the market value of the car with 90,000, 100,000 and 110,000 miles and compare the different values.   You might have other costs that vary based on your actual driving so you should account for those as well.

What do I spend?

My wife and I have three cars.  Thats 1.5 cars per person in the household.   We certainly do not need three cars.  In fact we don't need any cars.  We want three cars.   One of the cars is a fully restored classic that I keep garaged most of the time and drive a bit when its nice out.   The other two cars are our daily drivers.   We have two cars for daily drivers since it is very convenient and we have the income to easily support it.

Looking at my daily driver: 
I paid about $14,000 for my car and its now worth around $8,000.

Costs for my car are :

Depreciation $800
Fuel Costs $600
Financing $0
Insurance $650
Maintenance $360
Fees, taxes $55
Repairs $0
Opportunity cost $480

This gives an annual total = $2,945

I'm assuming 10% depreciation for this year and opportunity cost return rate of 6%.   Those are not exact but close enough.   Fuel costs and maintenance costs are averaged annual rates based on spending over the past couple years.

 I drive about 10,000 miles a year so this means I have a total cost per mile of 29¢.

The variable costs are $960 total so additional miles would cost me about 9.6¢ each.   I looked up the value of my car with different mileage totals and it looks like each mile adds about 4¢ to the depreciation. 

My total marginal cost per mile is 13.6¢.

You can use these same methods to approximate your own automotive spending total and cost per miles.  If you haven't looked at your transportation spending then it would be a useful exercise.  I think chances are fairly good that you're spending more than you realize.

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