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Own a Car? - This is the Lifetime Cost of Automobile Ownership

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The cost of daily commutes and weekend getaways are rising relative to inflation (Transport Affordability Index, AAA February 2020). This means that the cost of transport is rising at a faster rate than the value of the dollars in your bank. In response we must be conscious of our transport consumption and the amount we spend to go from A to B.

This paper attempts to extrapolate the long-term projected costs of owning an automobile while comparing it against the use of low-cost options such as public transport or riding a bicycle. The costs associated with ownership have been calculated on the below six assumptions.

Assumptions

  1. Automobile ownership begins at the age of 20 and final automobile purchase is at the age of 68.
  2. A automobile is purchased every 8 years.
  3. The cost of the bought automobile increases over the individual’s lifetime.
  4. Service and running costs are fixed per year.
  5. All of projections are adjusted for estimated inflation of 1.5% p.a.
  6. A 50-year period will be used to estimate lifetime costs and the opportunity costs associated.

Cost Estimations

  1. Ownership Costs According to the AAA February 2020 report, and deducting the estimated costs for public transport, the average person will spend $9,144 p.a on automobile costs. This includes insurance, fuel, tolls, car loan payments, registration, licence, and maintenance.

  2. Purchase Costs The cost of purchasing an automobile every 5 years must be projected. A conservative price for the new car cost has been adopted, e.g. a small SUV, retailing for 30,000. This car price has been used as a fixed benchmark for lifetime automobile purchases in the model. It can be noted that the costs associated with new vehicle purchases is likely to be underestimated. The model fails to account for the increase in automobile price as a person grows older and seeks greater luxury. The underestimation has been accounted for a straight-line depreciation method. This means that at the end of the 8 years the vehicle has zero resale value.

On the above assumptions, the lifetime costs of vehicle purchases are 30,000 * 8 = 240,000. This gives a yearly cost of $4,800 p.a. for a 50-year period.

  1. Combined Yearly Costs Combining ownership costs and purchase costs gives a current yearly cost of $13,944.

  2. Inflation rate adjustment Taking a 1.5% inflation rate on the current yearly cost you have a 50-year cost of $1,027,432. In order to calculate this cost projection, you use a future value annuity formula.

Opportunity Cost – Situation Analysis

  1. Public Transport and Bicycle If you remove the vehicle out of your life and replace it with public transport and a bicycle you would be able to fully minimize your transport costs. Riding a bike is free and servicing is approximately $100 per year where you buy a bike every 8 years at $1000 retail. This gives a yearly cost of $225 per year. Public transport costs may be approximately $30 per week if you are commuting every working day. This gives a yearly cost of $1,560.

Both costs combined gives yearly transport costs of $1,785. For simplicity purposes and potential car-pool and more expensive public transport costs this value is rounded to $2,000. This gives a yearly potential savings of $11,944. If this value is invested every year at 7% return p.a. you would have $4,855,581 in 50 years.

  1. Halving your vehicle/transport costs If you could halve your transport/vehicle costs your annual current costs would equal $6,972. If you invested the other $6972 in an investment fund earning returns of 7% p.a. every year you would have $2,834,320 within 50 years.

Let’s say you spend half your savings on other aspects of your life e.g. travel. If you invested the $3,486 in the same investment fund every year, you would have $1,417,160 after 50 years.

  1. Purchasing Cheaper Vehicles Throughout Lifetime In this scenario you would purchase a car with an average value of $20,000 every 8 years instead of $30,000. This would reduce your current year costs by 11.5% down to $12,340. This gives a lifetime cost of $909,277 and savings of $1,604. This gives a saving of 118,115. If the yearly savings of $1,604 were placed in an investment fund receiving 7% p.a return you would have accrued $652,072 in 50 years.
  1. Visual Illustration

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Sources

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