Before you shop

While you may want a car for a variety of reasons, you’ll need to decide if owning one makes sense for you. A car is a major purchase, and you have ongoing costs as long as you own it. You should also make sure you don’t race into a car-buying decision. If you need a new car because your current one is breaking down, you might even consider renting a car for a week or so while you consider your options. That’s because if you’re rushed, you might make an unwise decision on a new vehicle. And with an obviously worn-out car, you may be a target for an unscrupulous salesperson.

Cost of owning

The actual costs of ownership depend, to some extent, on where you live. Generally, owning a car is more expensive in a city — where you may need to pay for parking and face higher insurance premiums — and less expensive in a suburban or rural area. But you may be surprised that the average U.S. household spends almost 20% of its total income on car-related expenses.

So where does the money go? Obviously, your car needs fuel to operate. And while hybrid cars, which use both gasoline and electric power, are becoming popular, gas could be a major item in your budget, depending on how far and how often you plan to drive.

You should also consider maintenance — which generally includes the cost of new tires, oil changes, car washes and engine tune-ups — and repairs. It’s wise to budget about $30 (or 0.10% of the median new car price of $25,500) per month in regular maintenance for a new vehicle and about $50 per month for one more than three years old. Repair costs, while low on a new car, can easily run into the thousands on older cars.

Insurance costs

Next, you need insurance. In fact, in most states you can’t register your car without proof of insurance coverage. Insurance costs vary dramatically according to your area, age, driving record, number of drivers who will be driving the vehicle, the distances driven and other factors, ranging anywhere from $50 to $500 per month. The amount of your deductible and the type of insurance coverage (bodily injury, property damage, medical payments, comprehensive, emergency road service, car rental expense, etc.) you elect will also impact the cost of your insurance premiums. You can ask a local insurance agent how much you might have to pay to insure the car you’re considering. You can also get free insurance estimates on the Internet.

Losing value

One significant, yet often-overlooked, cost of auto ownership is depreciation, or loss of value. A new car typically loses about 35% to 40% of its value within the first three years — starting the day you drive it home. After that, most cars’ depreciation rates level out to about 7% to 10% per year. While you won’t actually pay out of pocket for depreciation, this loss of value is a cost of auto ownership because what you own is worth much less than what you paid for it. Regardless, you may still wish to research vehicle average residual values before you buy a car. Often, a little extra cost upfront (both your time and money spent) may save you money in the long run.