So, you own a car.
You’ve heard that sometimes these things don’t run in perfect condition forever. Go figure. So how much should you budget for auto maintenance?
The answer is: about 15% of your income.
Stuff Everyone Needs
As a rule of thumb you should count on changing your oil one to three times per year – you can do this this yourself to save money. This usually sets me back roughly $40. Every five years or so you should probably replace your tires, this sets me back roughly $500. Buy good tires. They’re worth the cost. Cheap tires just need to get replaced more often. In this case, I recommend Michelin’s. There are more incidentals, like coolant, fuel filters, and so on, but I think it’s often easiest to take a look at your spending on maintenance over the last 5 years and average it. All in all I figure about $50 per month ought to be about right, based on my average spending.
Stuff that depends
Additionally, you’ll need to set aside money for repairs as well as routine maintenance. This is a little trickier, as you don’t know in advance what the repairs will be or what they will cost. There are basically two components to saving for this: possible accidents, which you may have insurance for, and part failure, which generally is not covered by insurance.
You have two options here. Either carry comprehensive insurance, so that if your car is damaged you need only pay the deductible, or self-insure. The rule of thumb that I use is simply, could I cover this unexpected expense without causing a significant financial issue, ie having to take a payday loan, or end up paying interest on credit cards.
This means I don’t carry comprehensive insurance for my car. I have a cheap car, an emergency fund, and a high savings rate. If any of these weren’t true I’d strongly consider comprehensive insurance. If the car isn’t cheap, then replacing it at a moments notice is hard. If you don’t have an emergency fund, you don’t have money to replace it. If you don’t have a high savings rate you don’t have the capability of replenishing that emergency fund.
In order to make sure that I’m setting aside the right amount of money month-to-month in case of an accident I simply get a comprehensive insurance quote and set that money aside rather than purchasing the insurance. Yes, that does mean that month-to-month I don’t come out ahead of owning insurance, but in the long run the expected gross profit will accrue to me rather than the insurance company, for my car this works out to be about $40 per month.
If you have a warranty on your car you might not need to worry too much about much of this for the first few years. That being said, if you have an inexpensive used car you need to count on making the occasional repair. As a rule of thumb I figure that the expected repair cost annually is half of the depreciation. Another rule of thumb is that a car loses 25% of its value annually to depreciation. Therefore, if you have a $6000 car, then the depreciation is about $1200 for this year. Half of that would be $50 per month.
You can get a reasonable guess of the depreciation of your car by going to the Kelly blue book calculator to get the current value of your car. Then use the calculator again, only change the model year and the mileage so that the car is 1 year older. The difference should be a reasonable estimate of your car’s depreciation.
For example, my car from 2008 with 80,000 miles on it is worth $3000. I go ahead and check the blue book value for my model of car from 2007 with 90,000 miles on it. The calculator gives me: $2500. Therefore, I expect to lose $500 to depreciation over the course of the next 12 months. I therefore set aside $20 per month for repairs.
Adding it up
Altogether I budget $110 in maintenance a month for my car. I also budget the amount of depreciation I expect from my car, that way I’ll have already budgeted the replacement car on a month to month basis when it comes time to replace my old car.
For me the total monthly car budget adds up to $250 include gas, insurance, depreciation*, and maintenance. This is the third biggest line item on my budget, and it’s one that it pays to keep a careful eye on, it’s less than 10% of my take home pay.
So how much should you budget? If you make more money you could certainly spend more, but I suggest prioritizing financial independence over bonus cars. Certainly your car budget shouldn’t exceed 15% of your income.
*A rant on depreciation
Many people will ignore depreciation because it’s not a cash expense. This is bonkers. Depreciation is a real cost. You have a net worth, and every month it goes down by an amount equal to depreciation. In order for you to keep your net worth flat, you need to put the same number of dollars into a savings account to keep your net worth flat.
Alternatively, look at it this way. If you don’t budget depreciation, how does the cost of your car get put into your budget? If you pay cash for a car you probably aren’t just taking one months worth of excess cash to pay for a car. (If you can do that, great! But the situation is atypical.) That means that you’re going to blow up the budget for one month (the month you replace your car) in a weird way. This will result in significantly overestimating your savings rate! If you get nothing else out of this article. Budget the depreciation of your car.
An exception to this is that, if you have a car payment you can budget the depreciation plus the interest in the car payment or the car payment! If you budget for both depreciation and the car payment you end up double counting.