How to Calculate the True Annual Cost of Owning a Vehicle

When buyers calculate whether they can afford a vehicle, they typically look at one number: the monthly payment. This is the least informative number you could use for this calculation. The monthly payment tells you nothing about what you will actually spend to own and operate the vehicle over the next five years. A complete annual ownership cost calculation produces a very different picture.

The Six Components of Annual Ownership Cost

A complete annual ownership cost calculation includes six components. Loan payments or lease payments are the obvious starting point. Insurance premiums, calculated annually, are typically the second largest expense. Fuel costs based on your annual mileage and the vehicle's real-world fuel economy. Routine maintenance including oil changes, tires, filters, and scheduled services. Registration and licensing fees charged annually by the state. And depreciation, which is the reduction in the vehicle's resale value each year.

Depreciation Is the Largest Cost

For most vehicle owners, depreciation exceeds every other ownership cost including loan payments. A new vehicle that loses $4,000 in value in its first year costs you $333 per month in depreciation before you pay a dollar of insurance, fuel, or maintenance. This is why buying a two or three year old used vehicle, where the steepest depreciation has already occurred, is often the most cost-efficient decision even if the purchase price feels high compared to older vehicles.

Calculating Fuel Cost

To calculate annual fuel cost, divide your annual mileage by the vehicle's real-world fuel economy, then multiply by your local gas price. Apply a 10 to 15 percent reduction to EPA highway estimates for real-world driving. A vehicle rated at 30 mpg highway might deliver 26 mpg in real-world combined driving. At $3.50 per gallon and 12,000 annual miles, that vehicle costs $1,615 per year in fuel. A vehicle rated at 22 mpg real-world costs $2,182 per year. The difference is $567 per year, or $2,835 over a five-year ownership period.

Using Total Annual Cost for Vehicle Comparisons

When comparing two vehicles, calculate the total five-year ownership cost for each, not just the sticker price or monthly payment. A vehicle that costs $3,000 more to purchase but saves $1,200 per year in fuel and insurance over five years is actually $3,000 cheaper to own over that period. CarCostCX calculates these components for every vehicle in our inventory so you can compare true ownership cost before you contact a dealer.