Cost of Car Ownership:
Estimating True Cost, Depreciation, and Total Expenses

While most people budget for the initial price of a vehicle, few consider the long-term cost of vehicle ownership. While the value of your car will reduce over time, the costs associated with its operation and upkeep will continue to accrue; this makes the true cost of car ownership far more than that initial MSRP or sticker price. To get a better idea of whether a car fits in your budget and estimate what types of expenditures you'll need to make over its lifespan, you'll need to determine the total cost of car ownership.

What is the Total Cost of Ownership?

The total cost of ownership for a vehicle, or any other asset you invest in, is the initial purchase price combined with all costs associated with related operations. For a vehicle, this means the price you pay to a seller to get the vehicle plus the costs to operate it. The factors that influence those vehicle costs include:

Depreciation: Once you drive your car off the lot, it begins to lose value due to a process called depreciation. On average, new cars depreciate around 60% of their original value in the first five years after they are purchased.
Fuel: Whether your car takes gas, diesel, or uses some form of alternative fuel, the material you use to power your car will add to its costs.
Insurance: In most areas, you are legally required to have liability insurance. Most insurance plans are paid through monthly premiums. The cost of these premiums is determined by the type of vehicle you drive, the quality of your local roads, how far you drive each year, and various other factors. There are several different kinds of car insurance, including:
- Liability Insurance
- Comprehensive Insurance
- Collision Insurance
- Uninsured Motorist Insurance
- Underinsured Motorist Insurance
- Gap Insurance
- Medical Payments Coverage
- Personal Injury Protection Insurance
Interest on Loans: If you don't have enough money to pay for a car outright, you can make monthly payments through a loan. Loans are generally done through banks or a lending company and offer a way to make monthly payments towards the price of your vehicle. To ensure a loan fits your budget, you'll want to use a loan calculator, which can help you estimate your monthly cost before buying a car.
Licensing and Registration: Passing a driving test and getting your license, along with the costs to have your vehicle registered to drive legally, all carry their own fees. A driver's license will have a different cost depending on what state you drive in and can range anywhere from $10 (the cost in Missouri) to $72 (the cost in Connecticut.) Car registration fees also vary, ranging from $14 in a state like Mississippi to $274 in places like North Dakota.
Maintenance: While regular car maintenance may seem costly, it can also help your vehicle maintain a higher resale value over time. There are many maintenance-related tasks you'll want to complete to keep your car in good working order, including:
- Tire Rotation
- Maintaining Tire Pressure
- Changing Lights (Parking lights, Turn Signals, Brakelights, Headlights, etc.)
- Keeping Fluids Topped Off
- Getting Oil Changes
- Changing Filters (Air Filter, Oil Filter, Etc)
- Maintaining Safe Levels of Tread Depth on Tires

Most of these tasks should be completed on a set schedule, with most taking place monthly, every three months, twice a year, yearly, and every other year. Other tasks will depend on your mileage, like oil changes. On average, you should get an oil change every 3,000 to 5,000 miles, though a service technician will give you an exact estimate when you go in for a change.

How Can I Determine the True Cost of Car Ownership?

To get your cost of ownership, you'll need to pick a period of time and calculate all the associated factors. That means taking the initial price, finding your annual depreciation, and combining both with any other annual costs your vehicle incurs. Look at how much you spend on fuel, maintenance, repairs, insurance, and any expenses specifically related to your car. For example, if the average annual depreciation is $1500 over five years and your average annual vehicle expenses are $3000, your average annual cost of care ownership is $4500.

How Do You Calculate Car Depreciation?

Car depreciation can be affected by many different factors that change over time; that being said, there is a general formula you can follow. Take your car's current fair market value and subtract the purchase price (while deducting any related fees or sales tax.) You can also use several online tools to automatically calculate vehicle depreciation. These are provided by sites like Kelley Blue Book or the National Automobile Dealers Association.

Can I Use My Car as a Tax Write-Off?

Expenses related to your car can be deducted if the vehicle is used exclusively for business. The situation gets a bit more complicated if you use the vehicle for multiple reasons (both for business and personal purposes). The most significant tax write-off related to vehicles is mileage. If you intend to write off mileage for a multi-purpose vehicle, you'd need to record and estimate how many miles you drive for business reasons and how many you drive for personal reasons.

How Much Does a Vehicle Depreciate in a Year?

On average, a new car will depreciate around 60% of its value within the first five years. Your specific depreciation rate will depend on various factors like age, vehicle condition, make, model, mileage, accident history, ownership history, and even vehicle color. The best way to get this information aggregated is through a vehicle history report. You can get many details relating to any available car, including: