- Total cost of ownership is an important but often overlooked Operations and Supply Chain Topic. This article brings the topic down to a personal level. Study the article and consider how this idea is applied to material purchase decisions in a company.
- How can cost of ownership be considered in the design of a firm’s products? How important is this to the success of the product?
- Consider the idea of “value” to the customer, how does the total cost of ownership impact value?
Mercedes or Ford, It Costs a Lot More Than You Think
Your Car Could Be Driving Your Budget Into the Ground
By Andrea Coombes
March 15, 2014 8:26 p.m. ET
Ever wonder where your money disappears every month? Take a look in your garage.
Your car could be driving your budget into the ground.
If you’re driving 15,000 miles a year—not uncommon for an American worker—in a midsize sedan such as a Toyota Camry or Ford Fusion, you’ll spend more than $760 a month on average, or $9,150 a year, on gas, maintenance, tires, full-coverage insurance, license and registration costs, depreciation and finance charges.
That’s according to an annual report by AAA, the auto club, on driving costs in 2013, based on buying a new car and driving it for five years and 75,000 miles.
But your costs easily could be higher.
Got an SUV? It will cost you about $967 a month, or $11,600 a year, according to AAA.
And don’t forget those one-time and infrequent costs not included in the AAA report—say, $10 a pop for a carwash every other month, an occasional parking ticket of, say, $40. Perhaps you’re also shelling out for paid parking at the baseball game or a downtown garage. Add $300 a year for those types of charges. Let’s just say you avoid budget-busting speeding tickets.
We could add in the square footage of your garage—say 400 square feet at $100 a square foot. That’s $40,000 of your mortgage that’s going to the car.
Plus, if you’re like 76% of Americans, you drive to work alone—and it takes you about 50 minutes a day round-trip on average. Your driving costs are counted in AAA’s estimate, but what about the value of your time?
Toyota cars at the company’s showroom in Tokyo last year. Bloomberg
Let’s say your time is worth $25 an hour. Add up that 50-minute commute every weekday for all but two weeks a year and you’re spending about $5,200 a year.
After 10 years, that’s $52,000 worth of your time, gone, not to mention the $94,500 in direct car costs, without even including your garage financing costs.
Realize, too, that where you choose to live also plays a part. “Transportation costs vary by region,” says Linda Young, research director at Center for Neighborhood Technology in Chicago.
Some of the most expensive U.S. housing markets, including San Francisco and New York, rise high in the Center’s affordability rankings when transportation costs are factored in, and more spread-out places such as Houston or Tampa become less affordable.
“In places that are compact, close to jobs, with a variety of transportation choices, people spend less. In dispersed areas, people need to own a lot more autos and need to drive them farther, so hence the costs go up,” says Ms. Young. For more, see HTAIndex.cnt.org.
Take a look at these tips for ways to reduce your automobile costs. (Clearly, avoiding costs such as time spent commuting entail major life changes. The point is: Don’t ignore these expenses in your decision making.)
1. Don’t buy more than you need.
Before you rush into a car purchase, consider your long-term finances. The difference in annual cost between a small and medium-size sedan driven 15,000 miles annually is more than $2,000 a year; there’s a similar difference between midsize and large sedans, according to AAA.
“In the showroom it might be a $5,000 difference, but in the long term it’s a five-figure difference,” says Michael Calkins, manager, technical services at AAA in Heathrow, Fla. Mr. Calkins compiles the figures in AAA’s annual “Your Driving Costs” report.
Why not put that money into your child’s college fund or your mortgage?
Making an extra $2,000 house payment once a year can slash your interest payments by more than $40,000, plus reduce your loan term by about seven years, assuming a 30-year, fixed-rate $200,000 loan at 4%.
2. Don’t buy new.
Buying a car new is a losing bet.
“The single biggest expense is depreciation—and that’s probably far and away the most overlooked cost of vehicle ownership,” says Mr. Calkins.
Cars depreciate at different rates, but generally, “in the first year it’s going to depreciate by roughly 20%,” says Ron Montoya, consumer-advice editor with Edmunds.com in Santa Monica, Calif. Check out their True Cost to Own tool to see depreciation and other costs for particular models: www.edmunds.com/tco.html.
To reduce costs, buy used—and look to cars that hold their value, such as a Honda Accord or Toyota Camry, Mr. Calkins says.
“Mercedes, BMW, Lexus: These are wonderful cars, but they take big hits in the first couple of years in depreciation,” he says.
3. Read the manual.
The good news is that even though repair costs rise as cars age, “the longer you own a car, the less it costs to own and operate,” Mr. Calkins says. “Today’s cars are pretty darned reliable and most will go 100,000 miles without needing a major repair.”
But don’t overmedicate your car with oil changes and the like. Cars have changed a lot in the last couple of decades—engines are stronger and lubricants work better now, he says.
Instead, read your owner’s manual.
“There’s always a section on the upcoming services that are needed,” Mr. Montoya says. Call your mechanic for a cost estimate and figure that into your budget.
Also, various apps can help you track your gas mileage and improve your budgeting. Fuelly is one. Mr. Montoya uses Road Trip.
4. Ask about insurance costs.
Before you buy a new car, ask your insurance company for a quote on that model. You may be surprised at your insurer’s response.
“You’d think that a subcompact economy car would be really cheap to insure, but that’s not necessarily always the case,” Mr. Calkins says. “Conversely, with an expensive car, say, a Mercedes, the cost may actually be fairly reasonable because the people who own those cars tend to drive them very carefully.”