How to calculate the budget when buying a used car?
After a mortgage or rent, the next big thing in your monthly budget may be a car loan. Before purchasing a used car, you need to know that there are other expenses that come with buying a car. This is about understanding the total cost involved in owning the vehicle. It is what financial experts call Total Cost Ownership (TCO).
TCO is the estimated amount of money that assists a buyer in determining the total cost of a car. It is beyond the initial amount paid to purchase the vehicle. It is about the total cost of the car over the time it is used.
TCO shows a vast difference between the cost of purchasing a car and the car’s long-term cost. The idea behind TCO is to ensure you can operate the car properly after it is purchased without breaking the bank. Here are the factors that make up TCO.
- The cost of fuel – Fueling your used car will be an everyday expense if you want to use the vehicle frequently. To estimate the total fuel cost, the total mileage per year should be divided by the vehicle’s fuel economy rating.
You can visit https://fueleconomy.gov/ to have an idea. Then, multiply the mileage with the price of a gallon of gas in your locality to know the fuel cost. Going for a car with a better fuel economy will drastically reduce the cost, especially if you want to use the vehicle for many years.
- Maintenance – Used cars require more frequent maintenance than new cars. For a late-model vehicle, the average cost for repairs and maintenance is $100. It includes brake pad replacement, changing of oil, tires, etc. It would help if you considered purchasing an extended warranty when purchasing a used car. An extended warranty means you won’t pay a considerable amount on repairs and maintenance for some time.
- Registration and taxes – There is a cost for yearly motor vehicle registration renewal plus state taxes. This depends on your state of residence. You may also have to pay for where the car is parked at work. Put all the costs together and divide by 12.
- Depreciation – Many buyers don’t consider depreciation costs when purchasing a used car. It is not what you can add to your monthly costs, but it is a factor that you should know.
It is interesting to note that purchasing a used car helps you avoid the worst form of depreciation. Cars can lose between 20% and 30% of their value in the first year.
Deprecation can reduce to between 15% and 18% over the next five years. The best way to control this is to purchase a used car in which the depreciation is slower than the average. This helps to increase the car’s value when you want to sell it or trade it in. You can maintain the vehicle by reading the owner’s manual and keeping the car’s records. If the car has excellent service history, the value can increase by 10%.
- Payment of the car and insurance – These two expenses are about 65% of what you will pay out of your pocket. So, look around online for cheap car insurance. Making comparisons would save you some money. The final thing is to make payment for the car itself. So, make the calculation and come up with a subtotal. Only budget 25% of your monthly income on TCO.
- Sample calculation – If you earn $50,000 annually, divide it by 12. It gives you $4,166 monthly. 25% of that would be $1,041. This should be your monthly TCO.