Does a car really cost 25% of what’s in your purse?

Yesterday I said motoring costs can account for some 25% of a motorist’s take-home pay. Is this really true? Let’s find out.

You can remember your motoring costs by taking a DIM view of them. DIM = Depreciation, Interest, Maintainance.

Depreciation is simply the difference between what you paid for a car and what you get for it when you’ve finished with it and dispose of it.

If you paid £10,000 for a small car 8-years ago it will be worth little more than £1,000 today which means it cost about £1,125 per year in depreciation. If you only kept it 4 years you would have got about £4,000 in part exchange making the average annual depreciation cost about £1,500.

There’s nothing you can do to control this cost. Depreciation is determined by the used car market. This market is made up with millions of buyers and millions of sellers – it’s a true market – no one buyer or seller can control it.

When you buy a car the brand and market trends will determine its future value. It’s difficult to make predictions. Who would have thought Skoda, Kia, and Hyundai would become so highly regarded?

You can make a difference by keeping your car in good condition but it only amounts to hundreds – maybe a grand – between the extremes of  immaculate and scruffy.

If you buy a larger more expensive car it will cost you significantly more, most likely £1,000 more per year. Long gone are the days when a 4×4 held their value.

Interest is the amount you pay to borrow money or the missed opportunity of investing the money if you pay cash. You can get an 8% return on your money. Finance companies charge about 16% APR which is about 8% flat per year. If you borrow £8,000 of £10,000 over 5-years the total cost of the interest will be about £640 per year one way or the other.

If you buy a larger more expensive car the cost goes up – about double.

Maintainance is what it costs to keep a car on the road. So that’s car insurance, road fund licence/vehicle excise duty, petrol, servicing, inevitable wear and tear.

Car insurance is a nightmare and a whole subject in itself. You could be paying anything from £300 to £3,000 for a small car depending on your proposal and the extent to which you shop around directly before using a car comparison company. This is the only motoring cost where you can make a real saving. It really is worth shopping directly for the cheapest car insurance.

Vehicle Excise Duty prices varies from nil to over £1,000. It’s normally about £120 for a small car. This is a fixed cost determined by your car’s emissions and the government’s budget.

Fuel – let’s say petrol is £6 per gallon and a small car returns 40 mpg. Over 12,000 miles that’s £1,800 per year. You could buy diesel or a car with advanced fuel saving technology but the saving you make in fuel is robbed back by the premium you pay for theses cars. It takes over 50,000 miles to start getting a return.

Servicing a small car costs about £150 per year but too many people skip this.

Inevitable wear and tear. About £150 for cheap tyres. About £100 for brakes. Bulbs and battery replacements are immaterial and you may get away with the exhaust. We should allow £75 for a breakdown service.

You may disagree with my figures but you get the idea.  For a small car – depreciation about £1,300 per year, interest £640, car insurance – let’s say £400, VEC £120, fuel £1,800, servicing £150, replacement parts £250, £75 roadside assistance. I make that a whacking £4,735.

The average earnings for 2011 were £26,200 which I guess is £22,000 take home pay.  So motoring costs for a small car can be about 21% of your take home pay – over one fifth. If you buy a larger car your costs could easily be £6,000 per annum which is over 25% of the average take home pay.

So following on from yesterday you can see why cars might not be thought as cool as they once were with people now preferring affordable if not free technology.

It’s worth considering if you really need a car. Have you considered the cost of hiring a car when needed, which you may previously have thought comparatively expensive? And if you need a car, which type are the best cars to fit your purpose and purse?

Regards
Ralph

Is a BMW Better Value Nowadays?

Since October 2008 the entry price of a BMW 3-Series has only increased by about £1000, 5%, less than 2.5% per year. Most other makes have increased car prices by some 16% over the past two years since 2009. That’s 8% per annum, twice the rate of inflation. I notice there’s also been little change in the Audi A3 prices.

It gets better because since 2008 BMW 3-Series fuel consumption, emissions and performance have improved enormously. A 320d now does a combined 60 mpg, 125 emissions, 146 top speed, 0 to 62mph in 7.5 seconds. If you drop 0.5 seconds the ED option returns 68.9 mpg with 109 CO2s. Compare these figures with the old 46 mpg, 146 CO2s, 130 mph and 0-60 in 9.3 secs.

It’s pretty fair to say it looks like the 3-Series is better value today.

There is the criticism you can spend a fortune adding options to premier brands. However its just as easy look at a popular alternative at £20,000 and be walked up the model range by a salesperson making special offers and be looking at up to £27,000.

Car buyers need to take a close look at different options. Many cars have so many different trim options multiplied by a huge range of different engine options. I’m cynical about so many different options believing its simply an opportunity to charge different prices.

The 3-Series doesn’t have too many options, the main difference between them being performance. It also appears they now deliver blistering performance for less money than in 2008.

I’m guessing BMW needed to improve value as they seem to have increased the volume of cars they sell and now have to maintain it. For the extra 10% you pay for a 3-Series there could be some pay-back with fuel cost sayings and lower vehicle excise duty.

It all adds to the value.

Regards
Ralph