How to save when buying a car: estimate your total costs of ownership

TL;DR – Buy a non-luxury vehicle that’s 5 – 10 years old with less then 100,000 miles on it, reliable (Toyota or Honda are good brands), has 4 doors (sports cars cost more to insure and maintain, and are less flexible), and gets at least 20-25 miles to the gallon. Check prices for both new and used (aka ‘pre-owned’) through Costco’s pre-negotiated rate Auto program.

One of the biggest expenses many people have is a car payment. I’ve never had a car payment, because the only car I’ve ever purchased is the 2002 Toyota Corolla I bought in 2006 for $5,000 with 80,000 miles on it. I’ve driven it about 120,000 miles since then, and it’s still going strong.

Cars can be a big money pit, so strongly consider 1) buying used and 2) estimating total cost of ownership with a web calculator like this one, or doing a ‘cost per mile’ calculation with my Google Sheet:

1. Estimate how many miles the car will have when you get rid of it. 200,000 is a good estimate if you buy a reliable vehicle like a Honda or Toyota and drive it into the ground like I recommend.

Next, subtract the number of miles the car already has on it. Divide that into the purchase price. For me, that was $5,000 / (200,000 – 80,000)  = 4.2 cents per mile. Multiple by 1.5 to (roughly) account for the fact that you’re paying the money upfront, which ‘costs’ you more than being able to pay over the life of the car: 4.2 * 1.5 = 6.3 cents per mile.

If all the cars you are considering get about the same gas mileage (> 20 – 25 miles per gallon) and would have similar maintenance & insurance costs, you could stop here and just use this number to compare between vehicles. But feel free to do the works below.

2. Next, tack on gas costs per mile. My Corolla averages around 25 miles per gallon in the city, so let’s say $3.50/gallon for regular / 25 miles per gallon = 14 cents per mile for gas. Estimate your mileage here.

3. Estimate auto insurance costs by getting a quote for the car you’re considering and dividing by how many miles you expect to drive (say, 6,000 per year if you have a short or infrequent commute, and maybe 12,000 if you have a typically-long American commute. Maybe more if you have kids.)

I pay about $600/year because I don’t have collision and I max out my deductibles, but on the flip side I have high limits. I’ve driven about 9,000 miles per year, so that’s another 6.7 cents per mile.

4. Lastly, take a guess at annual maintenance costs and divide that by how many miles you think you’ll drive yearly. This one’s tough, but for me, I’d guess ~$240 per year for oil, oil changes, wiper blades, new tires & brakes every ~5 years, plus stuff occasionally breaking.  That’s a pretty bare bones budget and factors in me doing as much as I can myself like oil changes and fixes I can find YouTube instructions on. That’s another $240 / 9,000 miles = 2.7 cents per mile, giving my Corolla a grand total of 6.3 + 14 + 6.7 + 2.7 = 29.7 cents per mile. 

Translating this into a yearly cost of ownership is useful to compare between vehicles with different ‘life spans‘:  $0.297 per mile * 9,000 miles/year = $2,673 per year.

Again, these numbers are really mostly useful to compare between cars, but the yearly figure can be a useful budgeting number too.

Use this cost per mile calculation when buying your next car. It’s a good way to get an ‘all in’ estimate of what it will truly take to drive your car over its lifetime.

Where to buy

Costco has a fantastic Auto program where they negotiate low rates ahead of time with a network of dealers. You simply contact the dealer in your area after browsing prices online and you get the no-hassle rate Costco has already gotten for you. Of course, you can see if you can bargain a better rate yourself at another dealership, but Costco’s program takes the stress and hassle out of it.

A word on reliability

Along with cost, optimize for reliability: ease and cheapness of repair, and lack of hassle, which probably means avoiding anything German or luxury. Parts are plentiful and cheap for most popular American and Japanese cars, less so for European brands or rarer makes and models.

Use Consumer Reports’ car-buying guide to avoid lemons and improve your chances of getting a good vehicle. (If you don’t have a subscription, see if you can access it through your local library online like I can through the Seattle Library.)

Author: Ward Williams

Ward is an independent financial advisor at Better Tomorrow Financial. He started working as an independent investment advisor in 2009.

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