Okay Courier Nation, let me ask this: What does your car really cost you to operate?
The IRS says it’s 58 cents a mile this year. Some of you are thinking they’re on crack. Some are thinking thank you thank you thank you – we get to claim all this money when it’s nowhere near that expensive.
Have you done the calculations? Have you really looked into what it REALLY costs you for your car?
Don't make the mistake of driving so many miles you can write off all your income.
I see these discussions when the subject of taxes comes up. People who say that they don’t have any tax expenses because you drive enough miles that if you claim them, you have no taxable income.
Warning… I’m about to go off here. You’re killing yourself if you’re that person, you’re doing slave labor. You’re doing volunteer work for a corporation. If this is you, You’re not making any money. Not nearly as much as you think. I’m going to tell you right now, you’re better off stopping right now, go flip burgers, go work retail, you’ll make a hell of a lot more money. Seriously folks, if you are driving so many miles that you can completely write of your earnings, you aren’t anywhere NEAR minimum wage. I can promise that.
You think you’re making money, you’re bringing cash in, but you’re not making a profit.
You have to understand that.
Guys, you have to be driving about 2 miles for every dollar to be able to write everything off. TWO MILES. You might remember episode 8, where we talked about figuring out your profits. In that we recommended 35 cents a mile as a good go to figure for cost per mile. When we dive into this more here, you’ll see that’s probably not that far off.
So here’s the deal…. If you’re driving 2 miles for every dollar, you’re making 30 cents. That’s what’s left over after your expenses.
Thirty cents on the dollar.
So let’s say that miraculously you pull off $20 in revenue per hour. That means driving 40 miles – not sure that’s even possible unless you do nothing but freeways with no wait time at the restaurant or customer. But you still somehow pull that off.
You know what you’re making? $6 per hour. SIX FREAKING DOLLARS per hour.
If you're going to be a volunteer, do it for a nonprofit
Dude, you’re a freaking volunteer. Stop driving so many miles. If there’s no way to stop driving that many miles, then stop driving. You’re just giving your time away. Grubhub, Doordash, Postmates, these are not non-profits but you’re still volunteering for them.
Just… stop it! But I’m getting paid a lot. Folks, all you’re doing is getting a loan. It’s not pay, it’s a loan. It’s a loan you have to pay when you buy new tires, when you replace the timing belt which you probably have to do once a year, when get pennies on the dollar for your car when you sell it or trade it in. And here’s the thing, if you haven’t thought this through, if you really think you’re making more than $6 per hour, I can guarantee you’re not preparing for those big costs that are going to hit you.
You DO know they are going to hit, don’t you? My tires 40,000 mile tires wore out after 40,000 miles. Who knew??? That timing belt that I should replace very 100,000 miles – well I didn’t because it costs so much, and it snapped and now my engine is ruined. Who knew??? Why do you think they tell you to replace the freaking thing????
Why this is important.
Most of you are smarter than that. I hope you are. And to you who are, I apologize for putting you through that rant. Folks…. This is serious stuff here. It’s the difference between really making decent earnings and running a bankrupt business.
I get passionate about this because, it’s insidious how these gig economy companies exploit drivers and all the while drivers think they have it so good. Drivers are making slave wages, they’re volunteering without even realizing it. They see the tax deduction and think that’s great, no taxes, but don’t realize just how much their cars are costing.
I can see how it happens. I mean, it’s hard to wrap our heads around what our cars REALLY cost. We don’t see the money going out right away. It’s all stuff that costs us later. Did you ever see the old commercial where the mechanic said you can pay me now or you can pay me later…. So much of the costs ARE A pay me later thing, and you have to be fully aware.
It’s hard to wrap our heads around the 58 cents the IRS says. If you have a fairly new car, it’s going to be a LOT closer to the 58 cents a mile than you realize if you’re diving normal miles. Even at the kind of miles we drive, it’s going to be closer to 35 cents or more per mile. Rarely will it be less, and in the most rare instances you might get down to 25 cents a mile.
But here’s the deal, Courier Nation: You’re running businesses.
Like it or not, you are. Understanding that and thinking that way is our best way to make sure we’re not among those exploited by the independent contractor system. It’s the best way to use their system and turn it to our advantage. And that means being aware of our actual costs.
But how do you know which it is?
Let’s walk through some things to get you a better idea what your actual costs are.
So how do you calculate the cost? I’m going to run through a few steps here for you so you can do a basic calculation. Now understand, we’re trying to get at the cost that actually impacts you, not a tax calculation. This is more about understanding how it truly impacts YOUR bottom line.
First, you want to figure out how many total miles you drive.
I mean total, not just business miles. You need to be tracking this anyway for taxes because you’ll be reporting how many miles were personal and how many for business. Add up how many miles you think you’ll drive in a year.
Now let’s look at some fixed costs.
Insurance, registration, taxes. Do you have a loan? What is the interest part of that loan for the year? Do not take the total payment, just the interest part of it. If you’re not sure, take the amount you owe right now times the interest rate. If it’s $20,000 and a 2% interest rate, your interest will be around $400. It will actually be probably a little less than that, but it’s a good quick calculation. Add all those costs up. Divide them by your annual miles.
You only do the interest if there’s a loan. The principle payment is not considered an expense. And you do not do interest on a lease. You actually do the total payment on a lease, but I’m going to say, if you’re on a lease…. Stop now. Seriously. I’ll get into this a bit more, but there may be exceptions but a regular lease is not a good option for something like driving delivery. The miles get REALLY expensive.
Okay, so you added those up, divided by miles, and that’s the cents per mile for the fixed portion of your expense. My car- that came out to .06 for 6 cents a mile. My cost is lower because the car is paid off, insurance is lower and taxes are lower. Newer and more valuable cars, especially if you have a loan, can be closer to 20-30 cents per mile.
Now, let’s figure out depreciation.
Maybe first let’s UNDERSTAND depreciation.
This is one of those make your eyes glaze over money terms, isn’t it? If you own your car outright or you have regular financing, a LOAN (not a lease), you count this. If you are on a lease, you do not do this step.
There’s a reason we count this, and it’s the same reason you don’t count the principle on your car loan. It has to do with the fact that an asset is considered the same as money. It all has value. You pay $20,000 for something, it’s not an expense because you exchanged that money for something else that has value. Over time, that may gain in value – they call that a gain, or it can lose in value and they call it a depreciation. A house is more likely to gain value. The car is more likely to lose value.
And here’s the thing with depreciation and cars: Miles are a major value killer. The kind of miles we do can really drive down the value of your car.
There are a lot of ways to figure your depreciation.
Tax law allows you to break it down over five years on a car. But what I want to do is get a more real world idea of how the value of your car is changing. This gives you a much better feel for what the real cost is.
A Real World Calculation of Depreciation
Go to somewhere like Kelly Blue Book – kbb.com. You can click on Car Value, then My Car’s Value and tell it you want to get trade in value. It will ask for details about your car, enter them as asked. Put in all the information, year, make, model, options on the car, and the current miles. Put in all the information and write down what the Private Party Value is (if you use other sites some might have a Retail value option).
Now, go and do the same thing. Enter everything exactly the same, with two differences:
- For the model year, make it one year older. So if this is a 2018 Toyota Prius, this time around you’re doing it for 2017
- Find the number of miles you expect to drive in a year. ADD that to the miles that are currently on your car.
Take the private party value and compare it to the first time you did this. How much lower is it? Take the difference and divide by the miles. I’m figuring 30,000 miles for my car – my Buick will lose $300 value – that’s a penny per mile. It’s hard to lose value when there is no value, right? But on a newer car if it loses 3,000 miles over 30,000 miles, that’s 10 cents a minute.
Leasing is different
IF you are leasing you don’t take depreciation. That’s because on a lease, you never actually own the car. Depreciation has to do with value of something that is yours. You’re not trading money for something of value. That’s why your total payment is an expense. And so depreciation doesn’t enter into the equation at all.
But there’s something else you do have to factor in on a lease. Your lease probably has a mileage limit and a penalty for going over the miles. See, the difference between a lease and a loan is you aren’t paying to own something like you do with a loan. With a lease, your payment is calculated to cover the drop in value of the car while you have it. That’s why the payment is so much lower. But remember, the thing that kills value on a lease? Miles. And that’s why they have a penalty – if the value drops more than they planned, they need to make up for it. It makes sense when you think about it. The problem is that a typical lease only allows about 12,000 miles or less per year, and the penalty for miles over that is often around 25 cents a mile.
So if you have a lease, you have to figure that cost in. Take the miles you will drive, figure how far that is over the limit, and take that times the penalty. At 30,000 miles, that’s 18,000 overage at a quarter each. That’s a helluva lot of quarters folks. That’s 4500 dollars. Divide by your 30,000 annual miles and that’s 15 cents a mile.
See why I say don’t do the lease? You may have received
better terms, but pay careful attention here. There’s a reason Dave Ramsey
calls it a fleece.
So NOW we can get to the gas.
The one thing we usually think about when we talk expense. What does gas cost on average in your market? How many miles to the gallon do you get? I hope you’re tracking that, you want to get an actual number, not just what the manufacturer says you will get, because we want to know what your car actually costs you. Divide the price per gallon by the miles per gallon. It’s $2.60 where I live, my car gets 20 miles to the gallon, that’s 13 cents a mile.
One last thing you need to figure in.
Maintenance, wear and tear. There are so many things that have to be replaced, so many maintenance items you do so many miles. These usually have to happen every so many miles, meaning every mile you drive gets you one mile closer to doing these. Your tires, your breaks, changing oil and fluids, belts, hoses. You have big ticket items like timing belts and water pumps. And here’s the thing with these: Every mile is an expense here because you WILL have to pay for it. It is later, but with all the miles we do, it’s sooner than it would be under normal miles.
I find that 10 cents a mile is a good number. You can get really lost in the weeds and try to add up everything you would have to do, how many miles it has to be done, what it would cost to do, and calculate a per mile average. I’ve done this a few times and it always seems to come in around 10 cents a mile give or take a couple pennies. Just so we don’t get lost in the weeds here, let’s go with 10 cents.
Now we’re going to add all those costs up.
Your fixed costs per mile. My Buick was 6 cents.
Your depreciation per mile. My Buick was a penny
Your gas per mile. My Buick was 13 cents
Your maintenance – we’ll go with the 10 cents.
All that adds up to 30 cents a mile for me.
Just for comparison sake, I ran the numbers on a 2 year old Prius.
I did this originally when I started wondering if it made sense to buy a newer more economical vehicle. The problem is the interest, taxes and depreciation are so much higher on a more valuable vehicle, and those way more than offset the gas mileage. It came in at 39 cents a mile
What kind of cars cost more or less?
Your most economical option is if you have an old enough super economical car in really good shape. It’s paid for, insurance is cheap, and it doesn’t need a lot of repairs. The value is already mostly gone so there’s no depreciation. In that situation you’re going to be closer to my Buick in fixed costs – 6 cents, in depreciation, a penny, and maintenance, 10 cents. The difference would be fuel -if you can get double the effriciency you’re around 25 cents a mile. That’s as cheap as it’s going to get, Courier Nation.
Folks, run yourself through all these numbers. Be realistic on your costs. If you know your real costs, you are more aware of the need to keep your miles down. You have a better idea what you are REALLY making. You know when this isn’t really making money for you. And if you’re doing this, this also helps you prepare for those future costs.