First-time car buyer? Here’s what you should be budgeting for

PERSONAL FINANCE

Experts weigh in on what vehicle ownership entails, including maintenance and unexpected expenses.

Purchasing a car for the first time can be both exciting and overwhelming at the same time. Thinking about the type of car, colour, and features you want are all fun decisions. But it’s important to leverage the financial expertise of CPAs and other professionals to shed light on both the expected and unexpected costs of car ownership to help you make an informed decision.

How to get started

When you start to shop for a car, there are a few initial decisions to make, including new or used and electric or gas powered. Another choice is whether to buy or lease.

“If you talk about the difference, at the end of the day, purchasing is about ownership,” says CPA Ryan Hillstead, a partner with Grant Thornton LLP in Regina.

Regardless of whether you lease or own your next vehicle, or if it’s new or used, gas or electric, you’ll need to set aside a monthly budget for ongoing costs.

Fuel costs and insurance

One of the most obvious operating costs for a gas-powered vehicle is fuel. “Gasoline is quite an expensive and volatile commodity,” says Hillstead.

“Prices are obviously changing compared to a year ago,” says Kristine D’Arbelles, director, public affairs with the Canadian Automobile Association (CAA) in Ottawa. “Using compact cars as an example, driving 20,000-km a year, right now gas prices can add up to $2,000 a year on average.”

There are online tools available, such as CAA’s Driving Costs Calculator, that can help you determine your likely monthly costs, based on the make and model of the car and mileage, including gas, depreciation, maintenance, licence and registration, and insurance.

Insurance is mandatory and can vary widely depending on the make and model of automobile and jurisdiction. Expect to pay at the very minimum $1,200 a year. If leasing a car, there may be additional coverage requirements, says Hillstead. “For example, my normal insurance policy doesn’t cover off certain things such as windshields. That might require a bit of extra insurance,” he says.

Add to that licence and registration fees which average around $120 a year.

Maintenance

“Maintenance can be all over the place,” says D’Arbelles. “The yearly average is about $1,000 for a compact car for scheduled maintenance such as oil changes, filter replacements, tire changes and wipers.”

Maintenance costs will be higher with a pre-owned vehicle, says David Robins, principal automotive analyst and head of Canadian Vehicle Valuations at Canadian Black Book in Mississauga. “With a used car, you are usually going to be higher up in the maintenance cycle, as some items, like brake pads and rotors, will be wearing out sooner and need replacement.”

If you are leasing a car, some of the maintenance costs may be covered under the lease agreement and you can ask for clarity about that at the time of purchase. While that may be the case, mileage penalties for going over the allotted allowance can be heavy, cautions CPA Lloyd Monteith of Monteith Enterprises Limited in London, Ont.

Hillstead notes that, often monthly lease payments will be less than other financing plans. “It’s a bit cheaper from a cash flow standpoint. But you don’t get the equity at the end.”

One thing to keep in mind with hybrid and electric vehicles (EVs) is that, while the sticker price may be higher, fuel and scheduled maintenance costs could be lower, given that they don’t require gas or oil and filter changes. “Instead of spending $2,000 a year on fuel, you’re probably spending less than a couple of hundred [dollars] for the electric bill, depending on where you are charging your car,” says D’Arbelles.

Hillstead says he paid about a five-per-cent premium for his hybrid vehicle. “Like any accountant, I did my calculations to find the break-even point. It ended up being about four years.”

Depending on the province, there may also be government incentives that can mitigate the costs. Federal point of sale incentives for EVs, for example, range from $2,500 to $5,000.

Buyers of electric vehicles should consider an EV charging station for the home, says Robins. Depending on what level of charging station you opt for, these run around $1,500 on average, plus installation.

Miscellaneous costs

“The biggest cost in car ownership is actually depreciation,” says Robins. He notes that the majority of depreciation takes place over the first five years of ownership.

“The next five years, the depreciation factor is far lower. That means the longer you can keep a car running on the road in good condition, the less you will end up spending.”

Depending on your usage and location, parking fees can be anywhere from zero if you live in a rural community, to a few hundred dollars a month in urban environments where parking is at a premium.

Also, be sure to factor in seasonal tire changes as well as interest on money borrowed, if you financed your vehicle purchase.

Build in a buffer

Regardless of what type of vehicle and payment option you go with, remember to do as much research as you can and ask lots of questions. And, most importantly, plan for the unexpected and leave a bit of a cushion in your monthly budget. It’s the best way to ensure you drive happy.

Budget projections

Looking for more budgeting tips? Read CPA Canada’s helpful book, A Canadian’s Guide to Money-Smart Living.