The true cost of a car

There are lots of important decisions to make
when buying a car: Do you need a truck for the farm or a small car for the city? How
important is gas mileage to you? What color do you want? Once you decide what car you want, figuring
out what you can actually afford can seem a bit complicated. Your monthly car payments
might be affordable, but you also have to keep in mind other costs youll have, like
insurance payments registration fees and unpredictable expenses like a sudden hike
in gas prices or the need for a big repair. So, before you begin to shop around for a
car, you might want to take a look at some of these costs so youre not caught off
guard. First lets figure out your budget.

On average,
people spend about fourteen to sixteen percent of their annual income, before taxes, on their
transportation budget. Thats a figure that includes all the expenses of owning a carnot
just your car payments, but your gas, insurance, maintenance and repairs, and everything else
as well. So for our example, lets use this as a
guideline, and look at what this might be for an annual income of fourty two thousand
dollars. To figure out your budget, well take sixteen
percent of fourty two thousand.

That gives you six thousand seven hundred twenty dollars
a year to spend on your car, or five hundred sixty dollars a month. So lets look at the costs involved in getting
a new, basic subcompact sedan that has a sticker price of about sixteen thousand four hundred
fifty dollars. Now for any car, there are plenty of extra
things you can get, like satellite radio or a sunroof, which can drive up the price, but
were going to forego the bells and whistles and stick to a basic model. And when you buy a new car, keep in mind that
there are often extra fees in addition to what you pay for the car itself.

You might
have fees for things like documentation, and destination charges for getting the vehicle
from the manufacturer to the lot. Your registration fees may also be included,
which can save you a trip to the DMV. Some of the fees youll encounter, like
registration, are non-negotiable because they are required by your state, but some things,
like documentation fees or the base price of the car, may be flexible and open to some
negotiating depending on where you buy your car. So lets say that after negotiating the
price of the car and the fees, and adding on your local taxes, youre paying sixteen
thousand seven hundred fifty dollars total.

And in this case, youre going to finance
the car entirely. That means youre not going to make any down payment or trade in
another car. If you get a six-year loan at a three point five percent interest rate,
looking at an online calculator, your monthly payments will be around two hundred sixty
dollars. But financing comes at a cost.

In this case,
you end up paying about one thousand eight hundred fourty five dollars in interest on
top of that sixteen thousand seven hundred fifty dollars of principal over the course
of your loan. So if you have the cash, you may consider buying the car outright. Or if
you have a few thousand to spend on a down payment, you could lower your monthly payments
and save in interest over time. But for this example, lets say you dont,
and youve got a two hundred sixty dollar car payment.

Then theres gas. Lets say this car gets thrity two miles
to the gallon. And on average, you drive about one thousand two hundred fifty miles per month.
Twelve fifty miles divided by thirty two miles per gallon gives us about thirty nine gallons
of gas each month. If gas is around four dollars per gallonthirty nine times fourwere
looking at about one hundred fifty six dollars a month on gas.

Theres also your car insurance. Insurance
prices are based on a number of factors including where you live your driving record the
type of car youre driving even your job. If youre figuring this out for yourself
you might want to look at an insurance estimator as rates can vary dramatically. Lets say
you use an insurance calculator, put in your info, and see that youll get a rate of
about one hundred dollars a month.

So, adding our monthly car payment of two
sixty and an estimated gas expense of one fifty six plus the one hundred for insurance,
we already have a total of about five hundred sixteen dollars per month. Now lets look at some more periodic expenses
you might have, like regular maintenance: generally speaking, every seventy five hundred
miles or so, its recommended that you rotate your tires and change your oil. If youre
driving one thousand two hundred fifty miles per month, thats about fifteen thousand
miles per year. Divide that by seventy five hundred miles, and it looks like you might
need to do this about twice a year and lets say it costs you about eighty dollars
or so each time for a total of one hundred sixty dollars per year, although some new
cars come with a service agreement that covers some of these basic maintenance costs for
the first few years.

Now going to a shop for regular maintenance
can be a hassle and you may wonderis it worth it? Well, skipping tire maintenance
and oil changes can cost you in the long run. A set of tires might last you longer if cared
for properly. And a new set might cost you around six hundred dollars. Not changing the oil will eventually wear
out your engine which could cost thousands to replace.

So that one hundred sixty dollars
a year may be worth it over time. For the first few years, with a new car, you
probably wont need to do much more maintenance than thisif you do, it might be covered
by your warranty. Youll also have to re-register your car
and probably get it inspected from time to time. Depending on your state, this could
be once a year or every few years and can cost fourty five dollars to three hundred
dollars or more.

Lets say your registration and inspection will cost about two hundred
dollars every two years, or another hundred dollars per year. So adding one hundred sixty for maintenance
and another one hundred for registration and inspection, we get two hundred sixty dollars
per year Divided by twelve months weve got, well,
about twenty two dollars per month. [Show math: 260/12=21.6667] And if we take our previous monthly expenses
which were five hundred sixteen dollars, adding twenty two weve got five thirty eight. Then looking at our original budget of five
hundred sixty dollars if we subtract five thirty eight for our monthly expenses, that
leaves us with twenty two dollars.

So, having calculated some of these costs
of car ownership, we can see that this car could be inside your budget. Now you may be thinking about that extra twenty
two dollars a monththats two hundred sixty four dollars a year. Why not accessorize? But having a little extra in your budget to
cover unexpected costs is a good idea. It may come in handy if theres a sudden hike
in the price of gas, or the cost of your insurance goes up.

And once your warranty runs out, youll
have to pay for any repairs you might have, like replacing a headlight or an oxygen sensor
or maybe even something bigger. So its a good idea to keep these extra
costs in mind when figuring out what you can spend. If your car payments alone put a strain
on your budget, you might find yourself the owner of a car you cant afford to drive.
And if a new car is too much for your budget, you might consider buying a used car, which
we look at in another video..