Wheels Of A Future Fortune

By Alan Feigenbaum AAA

Financial success often takes old-fashioned initiative and drive, but what you drive - and smart economic decisions concerning your vehicle - are equally critical. So learn how to make a "wheel" positive impact on your net worth by knowing how to choose cost-effective transportation.

Your Purpose-Driven Car
While choosing a car isn't quite a religious experience, you should still take a few moments to meditate on whether you need a vehicle at all. If you do, keep in mind that vanity regarding a car's appearance and features is a financial sin that can cost you thousands annually.

Drive Vs. Alternative Arrive
Based on the AAA's "Your Driving Costs" study (2010), the average cost to own a car each year is nearly $9,520 (often more for SUVs and minivans). However, the average cost can easily be double that, or even more, if you trade in your vehicle for a new luxury car every two or three years. This is based on 15,000 miles of driving per year. (For related reading about some of the expenses of owning a car, read Getting A Grip On The Cost Of Gas and Extreme Commuting: Is It For You?)

So how much do you really need that car compared to spending only a few thousand dollars annually for car-pooling or using public transportation? Keep in mind that this plan would leave plenty of money to take the occasional taxi or rent a car for the few occasions when it's absolutely necessary. (Cutting back to one car is one of the major ways new two-career parents are able to live on only one income. To learn more, see Consider The Outcomes When Cutting An Income.)

You might be wondering how can cars cost so much more when you frequently hear ads touting $299 monthly payments. However, those ads don't mention (in intelligible language), the high down payments, sales tax or inordinately long loan periods during which depreciation renders the car virtually worthless by the time you finally own it outright. Such advertisements also don't add fuel, maintenance, insurance and other factors to the cost ownership.

New Vs. Used
A tricked-up new car that depreciates substantially in its first two years is usually far costlier than a late-model used car with the same options for which you'll typically pay at least one-third less. You'll save even more depending on how loaded it is with options that quickly plummet in value. Finally, you're rolling the dice if you buy a new or extensively redesigned model line; no reliability data exists to reasonably estimate your likely lifetime cost of repairs.

Of course, a new car with an extended manufacturer's warranty - for which your costs are highly predictable - might well be worth the extra cost when you consider the potential (and unknown) risk of owning a used car. (Learn when it is smart to buy an extended warranty in Extended Warranties: Should You Take The Bait?)

Insurance
The "sexiest" cars are far more expensive to insure because they're prime theft targets and cost more to repair. For example, insuring a new Honda Accord costs about 20% less than the sexier but similarly priced, equipped and safety-rated Acura.

Similarly, significantly higher liability and repair costs contribute to elevated insurance rates for SUVs. Furthermore, you can usually insure a late-model used car for at least 10% less than the same car new. (To read more on this subject, see Shopping For Car Insurance.)

Use, Convenience and Safety
If you're on the management fast-track in a company where your car is highly visible, or are a consultant or entrepreneur who frequently has clients for passengers, your car could be an important part of your image. In this case, paying for appearance and features might be a good investment. You may also be able to justify an SUV if you're frequently carrying people and loads that wouldn't comfortably fit into a standard passenger car.

Although several of the newer "car-chassis crossover" SUVs are much improved, some SUVs remain significantly less fuel efficient and perhaps even more prone to rollover and other handling-related accidents than larger standard wagons and other passenger cars. (Learn how to save yourself money at the pump in Getting A Grip On The Cost Of Gas.)

Should You Lease, Loan or Fully Own
Appreciate the fact that other than when buying classic cars, you're definitely acquiring a depreciating asset. The extent to which you can minimize the depreciation while also limiting operating costs will determine your success:

Loser Leasing
Leasing appears to provide a shiny, fancy new car in exchange for reasonable monthly payments. However, leasing is actually like taking an expensive loan to buy the biggest-depreciating-value portion (often close to half) of a car's life, its first few years - and then doing it repeatedly with new cars so that you never benefit from the lower operating costs of an older vehicle.

Furthermore, leasing is the dealer's profit-restoring response to the manufacturers' invoice/incentives information the public now has readily available to help intelligently negotiate the purchase of a car. Leasing contracts have so many complexities that you're likely to think you've negotiated a good deal, and still overpay by hundreds or thousands of dollars over the lease's life. (Find the highs and lows of car ownership in Pros And Cons of Leasing Vs Buying A Vehicle.)

Swimming with the Loan Shark
No, you won't get your knee caps broken, but your budget might take a hit if you skip the down payment and take an extended loan that puts you "under water" when your car becomes worth less than the amount you still owe. Furthermore, even if you have adequate reserves, should you be forced to make an emergency sale, your loan might be soaking you if you finance through the dealer instead of dealing with the best bank or credit union offer.

Cash in and out on Ownership
If you're shrewd and patient enough about researching market value, searching for the best sellers and buyers, and determining the mechanical worthiness of a potential acquisition, then paying cash for repeated purchases and sales of fuel-efficient, late-model used cars is usually the best economic strategy. That's because the middle years of a car's life have the least expensive cost of ownership.

Furthermore, paying cash for only what you can afford enables you to save the monthly payments (minus maintenance costs) you'd otherwise be making, and combine them with the not-much-further depreciated sales proceeds of your current car. This will provide you with the cash to purchase a better used car in one or two years.

That said, most people don't have the time, persistence, knowledge and negotiating savvy for the cash strategy. The next best thing is buying late-model, high-quality, non-luxury, fuel-efficient cars and running them into the ground. Although maintenance costs are higher in a car's later years, there's nothing left to depreciate, so your annual cost of ownership will still be less for the years that you can delay chucking the "junker" and buying late-model or new.

If you must buy new, reliability and fuel efficiency should weigh heavily in your decision. If you choose to indulge in a "compromise" strategy of buying new and selling before the hassle of increasing maintenance, then maximizing marketability and minimizing depreciation is key. Choose options selectively because some lose almost all value quickly.

However, sun/moon roofs and upgraded seating are among those that hold significant value the longest. Ubiquitous air bags and other safety features don't, but get them anyway due to the obvious safety benefits, and to reduce insurance rates and increase your potential base of buyers.

Drive Down Your Car Costs
Speaking of safety and insurance costs, the good news is that safer, better-designed cars have helped cut previously continuous cost escalation. The bad news for bad drivers, though, is that their dramatically increased rates are helping fund those cuts for good drivers only.

Unfortunately, "bad" is relative: a point system used in many states might make your rates quickly double with just one serious or multiple minor moving violation(s), or one at-fault accident.

The Bottom Line
It's no accident that big savings come from mastering these car-ownership skills:

  • Negotiating a new car or lease - including avoiding low-value, last-minute dealer add-ons such as certain types of extended warranties
  • Finding and negotiating a good used-car value (and steering clear of trouble) from dealers or privately
  • Dealing with mechanics to negotiate the best deal possible
  • Choosing fuel efficiency and reliability, but understanding the hybrid hype (they're frequently more expensive to buy and repair)
  • Getting the car insurance coverage you actually need (To find out which policies are right for you, see Fifteen Insurance Policies You Don't Need and Five Insurance Policies Everyone Should Have.)

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