I’m hoping to get some financial advance from my readers. Here is the situation:
I am financing a 2000 A6 sedan. I really like the car. But I’ve just been saddled with a $2,000 repair. I’ve already authorized it, so
that’s unavoidable. This brings the total maintenance cost thus far to around $5,000 over two years.
With my financing arrangement, the total amount of money I will pay for the car is around $28,000. I have approximately $17,000 left to pay
off the loan. When I bought the car, it had 55,000 miles on it and was in excellent condition. The KBB
value was around $30,000, so I got a pretty good deal on the car at that time.
Now, two years later, I have put 55,000 more miles on it for a total of 110,000 miles. Its current KBB value, if it still had just
55,000 miles on it, would, interestingly, be $17,000, the amount I have left on my loan. My payments would have just kept the principal
in line with depreciation. I would essentially have been paying $464 per month to lease the car: I have pumped $9,000 into it, but
would not have seen my equity increase at all. However, since it has twice that milage, it is now worth just $13,000. This has left me in the
rather odd situation of having to come up with $4,000 cash for the privilege of selling my car.
To do a little math, the maintenance costs (and that includes everything, including oil changes, scheduled maintenance, and tires) work out
to about $0.10 per mile. With a car that gets approximately 25 m.p.g., this means that I’m adding $2.50 per gallon of gas to the operating
expense of the car. Since the car only
takes 91 octane and higher, and since I live in Southern California, what I have essentially done is, thus far, double the price of
gasoline, compared with the hypothetical car that requires no work whatsoever. Following this logic, my maintenance costs on the car are equal to the costs to operate the car without maintenance with gas at $5.00 per gallon, or
about what they pay in Europe.
So the question is, Is it worth it? The $5000 in repairs includes the pricey 100,000 mile scheduled maintenance (which might be a scam, I don’t know), and with the amount of driving I am
currently performing, that won’t have to be performed again for another two and a half years. But as it’s unlikely for the maintenance cost
of an older car to be lower than when it was newer, I can pretty much expect at least this same expenditure. More, actually, because
while 55,000 over the span of time I’ve owned the car works out to around 530 miles per week, I’m currently putting closer to 700 per week
on the car. That, conveniently but dishearteningly, works out to around $200 per month: about the amount I pay for gas, as mentioned above, and almost half what I pay to service my loan.
Thing is, despite owing $4,000 more on the car than its current value, depreciation has probably stabilized somewhat. To wit, in three more
years, it won’t have lost another $25,500, the linearly projected rate at which it has depreciated thus far. That would give it a value of -$12,500,
which is absurd. Even if the car’s not running, it will be worth more than that. And the only way a good car like the 2000 A6 would not be
running three years from now is a catastrophic accident — and that I’m insured for. So in three years the car will be worth, what?
That’s one of the questions. Projecting my future mileage over three years gives me a total of 220,000 miles. A 1997 A6 (that’s the year
2000 minus three years: follow?) with 220,000 miles books at $7,280. Now figuring in inflation and the fact that the 2000 A6 is a better
car to begin with, could we project a value in three years of $9,000? $10,000? Let’s pick $9,000.
Another wrinkle is that even though my payments will have the same absolute dollar price over the next five years, in an inflationary market
the dollar is constantly losing value, so the relative cost of my car payments is going down (this is part of the effect that gives
your grandmother $300 per month house payments while her neighbors pay $2,000.) I’m unsure if I’ve compensated for this effect fully by
increasing the projected resale value of my car in three years to $9,000. Can you tell I’ve never taken an accounting course?
Thus, my current situation is $4,000 negative equity in my car. Projecting future trends as best I can, I will pay $7,500 (that
number is subject to radical change) for service and $17,000 (that number is fixed) in car payments over the next three years while the car
loses another $4,000 in value. But then the car will be paid off, and I’ll own something worth $9,000. So, drum roll please, the car will
cost me $24,500 over the next three years, but then I’ll have a positive equity of $9,000, which seems like a net expenditure of $15,500
over the next three years, or an annual operating budget of $5,000.
But there are many questions in my mind. Perhaps most significantly, I’ve rather haphazardly included inflation in my calculations wherever
the whim struck me. How do my calculations need to be refined to figure that in? Also very significantly, how valid is my projection of
future repair costs? Every part in a car would seem to have a certain lifespan, so as the car gets older my intuition suggests that the
repair costs will go up and up (for instance, if a part lasts 150,000 or 200,000 miles, I haven’t had to replace it yet, but I will in the
future, whereas if it goes out every 30,000 miles, I’ve already had to replace it and I will
continue to have to replace it on a regular basis.) A lot of this is just experience. I don’t have a lot of experience repairing
cars. I’ve owned cars for eight years now, but I used to buy junkers for $1,200 and just drive them until they died. So, what’s the model
of the curve of a car’s repair costs, f(x), as it ages? Intuition suggests that f(x) > x, but does f(x) = x2? ex? OK,
just forget that: how much more will the cost of my car go up to maintain? Anyone?
In a sense I’ve already answered my own question. From year 0 (when I started owning cars) until year 6 (when I got the Audi), I’ve owned
[counts in head — Buick that doesn’t count because of the insurance payout after it got wrecked, Chrysler, Honda, Toyota, Buick — maybe
the Toyota shouldn’t completely count as it’s still running] 4 cars. As they were each about $1,200, and lasted one and a half years
apiece, and since I would buy a new car any time I was faced with a repair bill of $700 or higher — OK, that’s actually not enough
information yet, but let’s say I paid $800 total for maintenance for each of the cars — that’s $2,000 over a year and a half, or about
$1,300 per year annual operating cost. All of that’s loss, by the way, because in all but one of the cases I donated the car to a charity
after I was done with it, and since I didn’t (and don’t) itemize my deductions all I got was a warm fuzzy feeling. But that’s terribly
facile: there are other, major factors that increase the worth of the Audi. Safety, for one. Reliability, because each of the
junkers would leave me stranded at the side of the road far too frequently, and that’s just a lot less attractive with a small child.
Third, comfort. I’d lose the “cool” factor in my own estimation: Audis are my favorite cars. And I’d like to say the prestige doesn’t matter to me,
but it’s worth a certain amount to not have valets snub you, not get as many stares and honks, and not have Thousand Oaks’ completely
corrupt police force pull you over because you’re driving an older model car and obviously don’t belong there (Yeah, they do that. They’ll
make up a problem, like saying your tail-light is broken when it isn’t, then tell you charming things like the fact that they almost pulled
their gun on you. And they’ll ask you repeatedly if you have guns or drugs in the car, because they’re “sure” they saw you “stash”
something. Foreign readers take this to heart. American police in affluent areas really are this corrupt, it’s not just media
hype.)
Help me fix my numbers, please, but even if I got my numbers right, I don’t think the question is just whether it’s worth a $3,700 per year
(or about $300 per month) surcharge for the benefits I enumerated above. That I’d have to answer without your help. The questions are more
“Is there a car with a lower-than-$1,200-per-year annual operating cost?” I don’t know. And “Is it worth my gathering up $4,000 cash, plus
ponying up at least $1,300 to fix a body problem that’s Audi’s own admitted fault that they refuse to compensate you for, just so I can sell
my car?” That is, “Is is it worth $5,300 now for projected savings later?” You should know that, while I’m not comfortable telling everyone what our
annual household income is now that Jenn’s staying at home, it’s lower than it was two years ago. But Jenn will go back to work before
the three years is up. And my pay will go up, and if it doesn’t outpace inflation, there will be more serious problems. And finally, Yes, I guess I
am asking you to help me make the value judgments of whether the safety cum reliability cum prestige is worth the extra
expenditure.
I’d love your help. Link to comments page in the dateline.
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