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The true cost of vehicle ownership is full of complexity and hidden expenses

According to the Bureau of Labor Statistics, the average American spent 16.4 percent of their budget on transportation expenses in 2021. Experts, however, recommend limiting your transportation budget to 10–15 percent of your income.

As transportation costs have climbed faster than inflation during the last few years, understanding your vehicle’s true costs are more important than ever. Unfortunately, many people only look at the sticker price of a new vehicle, or even worse, the monthly payment, and never stop to consider the other hidden costs.

Without getting into other transportation-related expenses like public transit and airfare, there are many more expenses related to owning a vehicle than just the vehicle’s up-front cost. One way to look at vehicle expenses is to calculate the total annual cost of ownership. If you have an older car or you’re currently in the market for a new vehicle, but are unsure about the financial implications, you’ll want to consider the full breadth of costs you pay year in and year out:

• Depreciation costs: The old saying that a car loses 10 percent of its value as soon as you drive it off the lot? Well, it’s true. But depreciation continues to erode the value of your vehicle by about 15 percent every year thereafter. That depreciation costs you money, because if you tried to sell your vehicle, you’d get less than what you originally paid. By considering the depreciation cost of your current car, you can more easily compare it to the cost of purchasing new and look past the high initial transaction cost.
• Maintenance and repairs: The annual maintenance and repair budget for vehicles can vary widely, although $900–1,200 per year is probably enough for most drivers. If your car has logged over 100,000 miles, expect to budget on the high end of that range.
• Fuel costs: Gas prices have been on a wild ride the last few years, making it difficult to anticipate and set a budget. Nationwide, currently sit at around $3.50 per gallon (as of writing), although prices can vary wildly from state to state. Fuel-efficient vehicles, or alternative-fuel vehicles like EVs can help hedge against inflation risk, although they come with some trade-offs on upfront cost.
• Insurance premiums: Insurance companies tend to charge more for expensive or newer vehicles, so drivers can often save by buying used. You may want to shop around for a more affordable policy and consider if you need to maintain full comprehensive and collision coverage or if you are willing and able to cover the full cost of replacing your car. (Remember to always carry liability insurance and adhere to any legal requirements in your state.)
• Interest costs: If you have a vehicle loan, you are paying interest to a lender on a depreciating asset. But there is a lesser known interest cost, which represents the opportunity cost of owning a vehicle over an appreciating asset like stocks, bonds, or real estate. This cost is not well-defined and may vary from person to person. I personally like to use the 13-week Treasury Bill because it is very similar to the rate of interest in a high yield savings account. The yield on Treasury Bills currently sits at around 4.5 percent.
• Registration costs: Most states require that you register your vehicle annually, but the fees vary widely between jurisdictions. You also may find that more fuel efficient vehicles actually have higher registration costs because highway fees are often collected through gas taxes. States need to make up that loss some way, so be sure to check your state DMV to avoid an unpleasant surprise!

Once you total up all these costs individually, you can compare your car’s total annual cost of ownership to the annual cost of ownership of a new vehicle. If the total annual cost of purchasing a new(er) vehicle is less than your current total annual cost of ownership, it might make financial sense to upgrade.

You can also determine whether your transportation costs fall within the 10–15 percent of income guideline set by financial experts. Just take the vehicle’s total annual cost of ownership and divide it by your current income. If the result falls toward the low end of that range, you can rest assured that you are making a prudent decision. (Note: This calculation does not include other transportation costs like public transit and airfare. You may want to add those estimated costs to determine whether your total transportation costs fall within the recommended range.)

Below is an sample calculation for the total cost of ownership of a 2006 Ford Explorer and three alternative new(er) options. In this case, both the Ford C-Max Energi and the Kia Soul EV have lower total costs of ownership than the Ford Explorer, while the Toyota Avalon is more expensive.

A copy of this Google Sheet can be found here. If you want to modify it, you’ll need to create a copy of it first (go to File → Make a Copy). For convenience, the spreadsheet includes an updated feed of average sales tax rates and fuel costs by state.

But what happens if none of your desired options are cheaper than your existing vehicle? An alternative approach would be to wait until your car needs major repairs. At that point, you could evaluate whether the one-time upfront costs of purchasing a new vehicle are lower than the cost of repairs. For example, consider the following scenario:

• Your current car, a 2006 Ford Explorer, needs $3,500 worth of repairs. You know the car is only worth $4,000 or so, but you aren’t sure you want to spend $16,000 on a new(er) car.
• You could compare the $3,500 repairs to the $16,000 price tag on a 2017 Kia EV and come away thinking you should just fix the Explorer and get on with your life. But that would probably be a mistake.
• The cost of auto repair should be compared roughly to the one-time costs associated with purchasing a new vehicle. These may include sales taxes, one time licensing, titling and registration fees, or it may include a negative cost (a benefit!) like a rebate or tax credit.
• You then add the one time costs to the total annual cost of ownership — the repairs to your Explorer and the sales taxes, titling fees, and the like to the Kia. It turns out that when you added the repair costs, the old car is actually $1,000 more expensive from a total cost of ownership perspective, even in the first year!
• Another way of understanding this is by calculating the limit on the amount you should be willing to spend to repair your car. By subtracting the total cost of ownership of your Ford Explorer from the total cost of ownership of the Kia along with the one-time costs associated with the purchase, you see that you should be willing to spend up to roughly $2,400 to fix your Explorer instead of purchasing the Kia.

The Vehicle Purchasing Decision Tool lets you compare these one-time costs as well. Keep in mind that you don’t know what all of your future costs of ownership will be for either vehicle. You might be unpleasantly surprised that your new Kia needs costly repairs six months from now, so be prepared for the unexpected.