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Courier MBA Day 18: What Does Your Car Really Cost?

Say you have a choice:

Drive a 20-year-old Buick that's getting 19 miles per gallon, or finance a ‘gently used' Prius.

Which one is going to cost you less to operate for your deliveries?

The answer may surprise you.

Your Credit Card on Wheels

Driving your car is like having a credit card on wheels.

If you listen to me much, you hear me call the car a credit card on wheels.

That's because every mile you drive is creating a debt. Every mile is adding costs that you WILL have to pay. You will pay it when you have to replace parts that have worn out. You'll have to pay it when you get less for it when you do sell or trade it in.

We don't think of those costs because the money doesn't come out of our pocket right now. That's why a lot of people only think of gas and maybe oil changes – they only think of the stuff that you pay as you go. If you have a really good car, those things will likely be your only out of pocket costs…. for awhile.

The importance of knowing your real costs:

You hear me asking this question a lot: How are you really doing? Yesterday I talked about knowing your profit and loss so you could know how you're really doing. Truly understanding your actual costs of operating your vehicle will help you get a more accurate picture of what you really are making.

Truly understanding your costs also helps you to fully prepare for those costs. In future sessions we'll talk about things you can do to make sure you're never surprised by the expenses that come with putting so many miles on your car.

Does it really cost 57.5¢ per mile like the IRS says?

Usually not. But it might.

There's a general attitude in the driver community that we've got a pretty sweet deal. The IRS lets us write off 57.5 cents per mile that we drive when it doesn't cost nearly as much. They feel like we could make a lot of tax free money because of that.

It's not about the IRS trying to be nice or generous. It's about trying to simplify an expense item that has so many variables. It's a lot simpler for us to report an amount per mile than it is to report every expense. It's also a lot easier for them to validate expenses using a per-mile standard than it is to go through every gas receipt and oil change and to dicker over if the depreciation amount is accurate.

That said, the actual cost IS closer to 57.5 cents per mile for a lot of people than they realize. They make the assumption that a significant number of people are part of that population that buy a new car every two to four years.

The thing is, when you drill down into all the costs involved with operating your car, you may be surprised what that comes out to. We'll talk about those costs.

Figuring out what your car really costs.

In the questions below we'll drill down into what your car costs per mile to operate. I'm tempted to call it the true cost, but the truth is you really don't know until after you've quit using the car and moved on to something else. It's that moment that you've sold the car or traded it in that all the debts are settled on that credit card on wheels.

Like I said, a lot of the costs of owning your car are costs you'll pay later. That means some of this is going to be an estimate.

Here are some of the costs to take into account:

Fixed costs.

These are costs that are generally the same no matter how many miles you drive.

It's because of these costs that those of us who put a lot of miles on our vehicles for our delivery work have a lower cost per mile.

If you had $5,000 in fixed costs and drove 10,000 miles, that fixed cost is 50 cents per mile. If you had those same $5,000 in costs and drove 50,000 miles, now it's 10 cents a mile.

Your fixed costs are going to include:

Insurance. What does it cost to insure your car? If you have a policy with more than one car, most policies will break the cost down by car. If you want to do the quick math, you could divide your premium by the number of cars you have.

Taxes and registration costs. How much do you have to pay each year at the DMV when you renew?

Cost of ownership. If you have a loan, this involves the interest portion of your car payment. This is NOT the total payment amount – the principle is not considered a cost of ownership. You also don't include the purchase price if you paid cash – that's all related to the value of your car, and we'll get into that later.

If you LEASE your car, the total lease payment is considered part of the cost of ownership.

Costs that generally go up when you drive more.

These are the costs of keeping your car operating. Your gas and your wear and tear. This is the part that does go up with every mile you drive.

Gas. This is the one we think of the most cuz that's the one thing taking money out of our pockets day by day. Obviously you can add up all the gas you've bought and divide by the miles you drove – that's a good practice if you don't do it yet.

You can also get a good calculation of the cost per mile for gas. What is the average cost of a gallon of gas where you are? (I know, cost of gas has been anything but stable this year, right?) How many miles does your car get per gallon? Divide the cost per gallon by the miles you drive.

Maintenance and repairs. Here's where we start getting into estimates. We can count on the very routine stuff: oil changes especially. But what about all the other parts that wear out over time? Timing belts on a lot of cars have to be changed every 100,000 miles or so. Tires last about 40-60,000 miles. There's hoses and brakes and a whole ton of stuff where every mile you drive gets you that much closer to replacing or repairing those things.

Some of those things are big ticket items.

You can go through all the different things like this and try to figure out a cost per mile. To simplify things I'll tell you you're going to be close to 7.5 cents per mile. You may be a LOT lower than that for a year or two and then all of a sudden some of those big ticket items hit the fan and for that year, it's a lot higher than that. All the numbers I've run have had me figuring out that most cars are somewhere around that 7.5 cents per mile range.

Loss of value. This is the big one that most people don't think about at all.

I mentioned earlier that you don't include the principle of your loan or your purchase price as a cost of ownership. That's because you have something of value in return for that money. In other words, if you buy a car today for $5,000 you could probably turn around and sell it for $5,000. In that situation, that car didn't have any cost because you got back what you put into it.

But if you bought it for $8,000 and sell it a year later for $5,000, now you're out $3,000. That's when the vehicle costs you money.

The kind of miles that we drive for deliveries can have a dramatic impact on the value of your car. Sale values and trade in values are often tied to how many miles the car has on it.

Here's a step by step way to get an idea how much value you lose per mile:

1. Get an estimate of your car's value. There are other places that do it but I'm going to walk through doing so with Kelley Blue Book. If you're at the home page you can click Car Values, then My Car's Value, then choose the option to Get Kelley Blue Book Values (the link I gave goes to that option). If it asks for your email address, that's optional – I would skip that (unless you LIKE getting promotional emails) Enter the year, make, model and miles on your car. Make a note of what miles you put down – you'll need that later.

Usually there are a lot of different styles on a car. If you don't know off hand which is yours, I would just say pick the very first one. Make a note of which one you picked, you're going to be doing this again.

You'll be asked what equipment is on your vehicle. Don't worry about the options, just go ahead and click on “Price with standard equipment.”

Select the color closest to your car's and the car's condition.Make a note of what you selected, you'll use this later.

You will get a screen that shows your car values. Click on Private Party value. You'll see a range. Write down the value that you see in white, which is right in the middle of the range.

The value I would write down on this is $4,781.

On the example above, the number I'm writing down is $4,781 for my Chevy Equinox. That's a reasonable amount that I could expect to sell my car for.

Now, ask yourself this question: How many miles are you putting on your car each week for deliveries? Multiply that times 52. That gives you an estimated annual amount. Say I'm driving 450 miles a week on average, my delivery business is adding 23,400 miles a year to my car's mileage.

Go back to Kelley Blue Book, because you're going to do all those steps again. You'll do everything exactly like you did before, but this time you're doing one thing different. When you enter miles, add the number of miles to the mileage.

For example, I put 112,000 miles down the first time. I'm now putting 135,400 miles.

Enter everything else exactly the same as you did the first time. What you are trying to do is get a feel for how much difference the miles make in the value of the car.

I'll admit, I'm tempted to go from “Very Good” condition to “Good” the second time around because it's hard to imagine putting that many miles on my car and for it to stay in the same condition.

This was the value that came up after I ran it a second time.

Basically it's telling me that my car would be worth $361 strictly because of those extra miles.

Divide the loss in value by the miles you added. So I divided $361 by 23,500 miles.

Every mile I drive is costing me 1.5¢.

My car is 11 years old. If you have a fairly new car or fairly valuable car, you're going to see a very big difference. I ran the numbers once on a new Prius where the cost per mile was closer to 14 cents a mile.

A note about leasing: If you lease your car, this exercise doesn't really matter. That's because you never actually own the car. However, if you drive more miles than the allowance, you'll likely have to pay a per-mile penalty. You'll want to figure that cost in instead of the loss of value.

Now add it all up:

Estimate how many TOTAL miles you will drive your car. Add up all your fixed costs and divide that by those miles. That's your per mile amount for fixed costs.

If you lease your car and think you'll have penalties, esimtate what those will be and divide by total miles for the year.

Add your 5 to 10 cents per mile for repairs and maintenance.

Add your fuel cost per mile that you figured out earlier.

Add your depreciation cost per mile that you just figured out.

That will give you a reasonable estimate of what it costs per mile.

  • Say my insurance is $70 per month, and my registration and taxes are $120. I own the car outright so there's no interest. That's $840 a year in insurance, plus the $120 registration, so $960 fixed costs. I estimate 30,000 miles for the year, so that comes out to 3.2 cents per mile.
  • My car is starting to get up there in years/miles so my maintenance costs may be a bit higher. I'm going to just go with 10 cents a mile.
  • I get about 20 miles to the gallon at $2.25 per gallon average. That's 11.1 cents per mile.
  • My depreciation or loss of value was 1.5 cents per mile.
  • 3.2 + 10 + 11.1 + 1.5 comes to a total of 25.9 cents per mile.

As I said in the beginning, the long term or future costs are more of an estimate. But it's going to be a pretty well educated estimate. In the end, you can't know the exact cost of running your car until you've sold it and everything is said and done.

I wrote an article on what I figured out after selling my Buick. At that point, I could compare what I paid for it to what I sold it for, and I could add up every penny I ever spent on the thing. It came out to 26.1 cents per minute. You can read that article here.

I've run numbers on a lot of cars – generally I've found that cars only a couple years old are running closer to 40 cents or more per mile. Cars 5 to ten years old are closer to 30-35 cents per mile, older cars in good mechanical condition might get as low as 25¢ per mile. It's rare to get lower than that much. If you have a Geo Metro getting 45 mpg and in tip top condition, you might get down to 20 cents per mile.

I asked about the Prius vs 20 year old gas guzzling Buick. The numbers I ran that I mentioned earlier showed the Prius was losing more per mile in value than what I was paying in gas for my 20 year old Buick. Thought you might find that interesting.

Now we'll let you figure it out in the questions below. This has a lot more questions than you're used to, but that's because today we're doing a step by step through all the things we just talked about.

There's a lot of math in this, you'll want to pull out your calculator. If you're having trouble with any of these, just type “Help” into the answer and I'll see if I can help you walk through it all.

Could this help someone else? Please share it.