Jesse Cramer, author of The Best Interest, joins the show to share his in-depth research into the astounding math behind car ownership.
Listen now and learn:
- How to evaluate the impact of time owned vs. miles driven
- When purchasing a used car is smarter than buying a new car
- How leasing compares to owning from a cost perspective
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Show Notes
Jesse Cramer is the author of The Best Interest, a blog dedicated to helping people improve their personal finances.
In October 2020, he published the most useful article I’ve ever seen on the cost of car ownership. Lucky for us, he updated the data earlier this year.
Jesse’s article pulls data from from automobile aggregation sites and government agencies to create context for the true cost of car ownership and presents the most comprehensive answer I’ve seen to “How much does a car cost?” using a cost per mile metric for easy comparison.
Here are my notes from our conversation.
The Primary Costs of Car Ownership (2:00)
When determining the cost of driving a car, you must consider both time-based and distance-based costs.
Time-based costs include things like your annual registration fee with the state. But most costs are distance-based. As Jesse notes, your tires don’t care about how long they’ve been on your car, they just care about how many miles they’ve driven.
Because most costs are distance-based, Jesse’s analysis seeks to convert all time-based costs to distance-based costs.
The average driver puts about 13,500 miles on their car each year, which allows us to convert time to mileage. Jesse notes, however, that the math in his article and our conversation should really be used as a framework for making car ownership decisions because of the wide variance in people’s lives.
Not all people drive 13,500 miles a year. Nor does everyone drive their car for the same amount of time. There are also wide variances in lifestyles and use cases—for example, a person that regularly needs a big truck like a Ford F150 versus someone that doesn’t drive much and owns a Toyota Prius—that changes the way someone might consider the cost/benefit tradeoffs.
With that in mind, Jesse explains the six biggest costs of car ownership:
- Depreciation
- Financing
- Maintenance and Repair
- Fuel
- Registration/Inspection
- Insurance
Taking these costs into account, Jesse’s 2023 estimate for the cost of owning a car is 47 cents per mile over the average 15-year lifetime of a car. It’s important to note that it’s typically more expensive earlier in a car’s life, perhaps 60 or 70 cents per mile. And because a car gets cheaper to drive every year, it might only be 40 to 50 cents per mile later in life.
Buy a New Car vs. Buying a Used Car (9:00)
In my opinion, one of the most interesting conclusions from Jesse’s analysis is that the cost of buying a new car versus the cost of buying a used car is very similar.
Once upon a time, there was a lot more information asymmetry that allowed people to find great deals on the used car market (of course, you were also more likely to find bad deals and lemons). But these days, cars that go through factory refurbishing and receive a dealership’s stamp of approval for quality are priced at essentially the same cost per mile as a new car. If you’re buying from a dealer, there are minimal cost-per-mile savings in buying used versus buying new.
If you’re buying a used car on the secondary market, there’s more price efficiency in the past due to more robust and accessible information on valuation (Kelley Blue Book), reliability metrics (Consumer Reports), and even specific vehicle history (CarFax).
Jesse and I agree that the lack of cost savings from buying used isn’t worth the peace of mind that comes with buying new. But it’s a very personal decision. Both Jesse and I drive our cars for close to ten years, so saving (at best) 3-5% in lifetime cost by purchasing a used car is a poor tradeoff. For others, there are many scenarios I can imagine where making that decision is prudent.
The Difference in Cost of Owning a Gas vs. Electric Vehicle (15:40)
The comparison of gas vehicles versus electric vehicles is changing rapidly. When Jesse first did his analysis in 2020, you could make a really strong argument that even though electric vehicles had a higher upfront cost, they were cheaper to drive over their lifespan than gas vehicles.
When updating his analysis in 2023, Jesse notes that prices for electric cars are coming down, so they are becoming even more favorable. The primary costs are lower in the long run than fuel. Electricity is significantly cheaper than gasoline or diesel.
So when choosing between a gas or electric vehicle, the question to ask yourself is if you want to pay more upfront to save more in the long run.
Evaluating a Car’s Utility (17:00)
Much of evaluating the different tradeoffs in car ownership comes down to measuring your personal utility.
For example, my family has taken multiple car trips of over 12 hours in the past few years, which makes getting a larger car with a third row that folds down more useful. We also find ourselves driving a third kid to school or soccer practice somewhat regularly, which makes having the third row a bit more useful. Of course, a two-row car is cheaper, but the utility of a more spacious car should factor in at some point, especially if it means we are saving thousands of dollars on airfare.
Jesse’s mantra when evaluating such tradeoffs is to follow the math. He created a really interesting metric called Value Over Replacement Car (VORC), which he describes using his brother as an example, who is a contractor that remodels kitchens and bathrooms.
Jesse’s brother truly needs a truck for his work. However, the average truck owner in America rarely uses a truck for its true utility need. Perhaps they use it for a few weekends a year to tow a camper or jet ski or boat. But are the few weekends of utility worth owning a truck?
VORC looks at buying a car that is the best value for day-to-day commuting needs and then renting a truck for the weekends it’s needed. This type of analysis could probably be applied to any type of purchase whether it’s my family’s two-row vs. three-row car or something as small as a pair of shoes.
Utility is tough to measure, but I really like the way Jesse has created a metric for it that can be used as a framework for making a car purchase decision.
Buying a Car vs. Leasing a Car (26:00)
This is probably the area in which costs have changed the most since Jesse originally published his article. In 2020, Jesse estimated that it cost 10-12% more to lease than buy a car. This makes intuitive sense because leasing means driving a car for its first three to five years, which are its most expensive years of ownership. When you lease cars over and over, your cost per mile comes out to be much higher than owning the same car for, say, six to ten years.
But in 2023, Jesse estimates there is a 35-40% premium on leased cars over buying a car (new or used) as dealers have repriced leases to reflect the spike in used car prices that started during the pandemic.
Although leasing is clearly more expensive, the utility of leasing is different for everyone. If you highly value driving a new car every three years, leasing might make more sense than trying to buy and sell a car every few years. It’s also more common for families that worry about wear-and-tear of a vehicle and the changing utility of vehicles as their kids’ grow up.
When to Repair a Car vs. Buy a Car (30:00)
For people who hold onto their cars for at least ten years, eventually, they are faced with the choice between spending money to maintain their existing vehicle versus purchasing another one.
For example, should you spend $600 on new tires for a car that Kelley Blue Book says is worth $4,000?
Jesse suggests that the decision should be made with survivability in mind. The National Highway Traffic Safety Administration has a large dataset of survivability for various cars, so you may determine that your car can last another five years, which perhaps equates to another 60,000 miles of travel. Mathematically, it’s easy to amortize a $600 expense for 60,000 miles….but that only gets you part of the way toward a good decision.
Other costs may pop up over these next 60,000 miles of the car’s life. Jesse explains that having a good, trustworthy mechanic can be particularly valuable in these scenarios because they can point out what other things might need repair or replacement over that time span.
Resources:
- Jesse Cramer’s blog The Best Interest
- The True Cost Of Car Ownership by Jesse Cramer
- Kelley Blue Book
- Consumer Reports
- CarFax
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