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Some of the Personal Finance content I will be writing about in this series of articles may be obvious or rudimentary to many of my readers but it also may be of great value to young people you may know. Please share this information with those you believe will best benefit from it.
Owning an automobile has gotten very expensive. There are many factors to consider when it comes to an automobile:
- Purchase vs. Lease
- New Car vs. Old Car
- Manufacturer Warrantees and Extended Warrantees
- Affordability
- Repair and Maintenance Costs
- Auto Insurance
- Electric vs. Hybrid vs. Gas
- Car Dealership vs. Auto Mechanic
Purchase vs. Lease
Deciding whether to buy or lease a car depends on how long do you intend on holding onto your car. Saver-Investor Self-Made Millionaires in my Rich Habits Study typically purchased a new car because they intended to drive it until either the engine died or the transmission failed.
Purchasing a car eliminates the need to worry about how many miles you drive in a given year or worry about minor dinks, scratches or paint pealing that accumulates while driving a car.
Leases limit how much you can cumulatively drive a car during the term of your lease. If you exceed that cumulative mileage, you will be assessed a surcharge when your turn in your car at the end of your lease. Typically, a three-year lease will limit that cumulative mileage to 36,000 miles. Car dealers will allow you to purchase additional miles, but that ill increase your monthly lease payment amount.
Leases also penalize you for dinks, scratches and paint repairs, unless you purchase wear and tear insurance, which will also increase the monthly lease payment amount.
Leasing makes sense when:
- You cannot afford to purchase a car or
- You do not have much money for a down payment on a car or
- You do not intend to put many miles on the car during the term of the lease or
- Interest rates are high
The reason leases are less expensive than the loan payment to purchase a car is that in a lease you are essentially leasing half a car, meaning there is significant remaining residual value on a leased car when you return it to the car dealership. The monthly lease payment calculation by the car dealer will only factor in the lost residual value (depreciated value) of the car that occurs during the term of the lease – you’re not paying for that remaining residual value.
New Car vs. Old Car
Many of those self-made millionaires from my Rich Habits Study opted to purchase a quality used car over purchasing a new car. The reason is that old cars are less costly and, if properly maintained, will last many years. New cars have premiums priced into them because they have never been used. Old cars have discounts priced into them because they have been used.
Smart old car buyers look for quality cars coming off a lease. These old quality cars will still have manufacturer warranties that can last up to 100,000 miles.
Many self-made millionaires who opt to purchase a new car, do so because they know they will take very good care of the cars they drive and intend to drive those cars for ten years or more or until the engine or transmission fails.
Manufacturer Warranties and Extended Warranties
Warranties are insurance to protect a buyer or lessee from major car parts failing. Manufacturer warrantees typically cover major problems that occur during the first 50,000 to 100,000 miles. What’s typically covered under a manufacturer warrantee?
- Engine Failure
- Transmission Failure
- Battery Failure
- Serpentine Belt Failure
- Water Pump Failure
- Air Conditioning Failure
- Seat Belt/Air Bag Malfunction
- Steering Column Failure
- Shocks Failure
- Windshield Wiper Malfunction
- Computer Systems Malfunction
- Other Miscellaneous Parts Failures
Extended Warranties are separate Warranties you purchase to cover parts that break down after the Manufacturer Warranty expires. Lie Manufacturer Warranties, Extended Warranties also have a mileage or time limit.
Affordability
As a general rule, the annual cost of purchasing or leasing a car should not exceed 5-7% of your annual Net Pay Check. For example, if your annual net pay = $70,000, your annual loan or annual lease payment should not exceed $3,500 – $4,900 a year ($291 to $408 per month).
Repair and Maintenance Costs
Here’s a list of typical Repair and Maintenance Costs:
- Oil Changes – Approximately $50 every 4,000 miles or every 8,000 miles, if you use synthetic oil
- Brakes – Brakes will need to be changed every 25,000 miles or so. The cost? Front Brakes approximately $450. Back Brakes, same. If you purchase or lease a luxury car, add 20 – 30% to the cost of new brakes.
- Windshield Wipers – You will need new wipers every 15,000 miles. Cost is approximately $50.
- Tires – Tires last approximately 30,000 – 40,000 miles. The cost to replace each tire is approximately $100 – $150 per tire, depending upon the car.
- Headlights – Headlights last approximately 75,000 miles. The cost to replace is approximately $50 per light.
- Radiator – Radiators can last forever. If you do need to replace a radiator, it will cost you approximately $700 – $1,000, depending upon the car.
- Gas Filters – Gas Filters should be replaced every 25,000 miles. The cost is approximately $125.
- Starter – Starters can last forever but if they go, they go at about 100,000 miles. the cost to replace is approximately $350 – $500, depending upon the car.
- Alternator – Alternators can last forever. If they do go, they typically go after 100,000 miles. The cost to replace is approximately $350 – 500, depending upon the car.
- Air Conditioning (AC) System – If your AC goes, it will cost you about $1,000 – $1,500 to fix, depending upon the car.
- Serpentine Belt – Serpentine Belts last approximately 75,000 miles or more. The cost to replace is expensive – approximately $1,250 – $1,500
- Water Pump – Water Pumps cool your engine. They can last forever, but most typically need to be replaced around 125,000 miles. The cost to replace a Water Pump is expensive because it requires the removal of the Serpentine Belt and may warrant a new Serpentine Belt. This cost is approximately $1,500.
- Exhaust System – Mufflers last about 150,000 miles. The cost to replace is approximately $400-800, depending upon the car.
- Batteries – A battery lasts about 50,000 – 75,000 miles. The cost to replace is approximately $125.
- New Engine – If your engine goes, it costs between $4,500 – $7,500 to replace it.
- New Transmission – Transmissions are fluky. Some last forever and some will fail at approximately 100,000 miles. The cost to replace a transmission is approximately $3,000 – $4,500, depending upon the car.
- Hybrid Battery – Hybrid Batteries last approximately 100,000 miles. The cost to replace is approximately $4,000 – $7,000, depending upon the Hybrid vehicle.
- Electric Vehicle (EV) Batteries – EV Batteries should last between 100,000 – 150,000 miles. If your EV battery goes, the cost to replace ranges from $20,000 – $35,000, depending upon the car.
- Other things that can go wrong are: fuel pump, fuel sensor, manifold, internal lighting, turning lights, hatches, power windows, cameras, voltage regulator, fuel gauge, engine pistons, various sensors, thermostat and some other parts.
Automobile Insurance
Automobile Insurance is expensive. Depending upon your age, driving history and where you live, it can range from $700 a year per person to $4,000 per year, per person. Automobile Insurance covers the costs of being in an accident or damaging property with your car. There is always a Deductible, which means you will cover all costs up to that Deductible amount. After the Deductible, the Insurance Company will pay for remaining costs. Deductibles range from $250 to $2,000, depending upon what works for you. The higher the Deductible, the lower the Insurance.
Auto Insurance Companies typically bill you twice a year. Some offer more frequent billing cycles. Each Insurance Company has their own set Insurance Premiums. Some Insurers are less expensive, some more expensive. The best Insurance Companies charge the most. The worst, charge the least. By Best or Worst, what I mean is the quality of the service they provide. Top Auto Insurance Companies step up to the plate when you need them. Inexpensive Insurance Companies are not as responsive in a time of need and can make coverage difficult for you when you are in a time of need.
With Insurance Companies, like everything else, you get what you pay for.
Electric, vs. Hybrid vs. Gas
The main benefits of buying or leasing an Electric Vehicle (EV) are the lower maintenance costs and lower fuel costs. The main downsides of an EV are: the limited driving distance (200 to 300 Miles/Full charge), the time it takes to fully charge the EV and the astronomical cost to replace EV Batteries, which can range from $20,000 – $35,000.
Hybrid Vehicles offer both an EV Component and a Gas-Powered Component. Both Power Systems work in unison to help increase MPGs, which range from 30 – 58 MPGs, depending upon the vehicle. So, Hybrids can cut your fuel costs in half. The downside of a Hybrid is that the EV Battery typically only lasts about 100,000 miles and the cost to replace a Hybrid EV Battery is expensive – $4,000 – $7,000. So, with a Hybrid you now have three reasons that would force you to purchase or lease a new car: Engine Failure, Transmission Failure and EV Battery Failure.
The benefits of Gas-Powered cars is that they are less expensive than EV Vehicles and Hybrid Vehicles and they do not have any of the EV Battery issues mentioned above. The downside is the higher fuel costs and higher repair costs.
Car Dealership vs. Local Auto Mechanic
The upside of using Car Dealerships to service your vehicle is that they have more Master Mechanics who are trained to service the specific automobiles sold by the Car Dealership. A typical local Auto Mechanic will have one, maybe two Master Mechanics. If a Master Mechanic is not available, it may take more time to service your car with a local Auto Mechanic. Another benefit offered by Car Dealerships is the use of a courtesy car by the Dealership’s customers, while their car is being serviced. This is something not typically offered by local Auto Mechanics.
The downside of using a Car Dealership to service your car is that they are typically about 10% – 30% more expensive than a local Auto Mechanic.
Tom Corley is an accountant, financial planner and author of “Rich Kids: How to Raise Our Children to Be Happy and Successful in Life”, Effort-Less Wealth, Change Your Habits Change Your Life, Rich Habits Poor Habits and “Rich Habits: The Daily Success Habits of Wealthy Individuals.”
