The cheapest car is the one you already own
Gas prices are rising, and until we either start moving away from fossil fuels or find a way to synthesize them cheaply, they will continue to rise. So what should you do about it? Common advice would be to trade your car in for a more efficient model and save money on gas, but is this really good advice?
Over the last 5 years I've kept track of every penny spent on my car. This article is inspired by what I learned about the costs of car ownership in that time. Even though you may spend more on gas or maintenance, keeping your used car around longer will save you money in the long run.
The Cost Breakdown
The costs of owning a car fall into 3 main categories, fuel, maintenance, and non-operating costs. Fuel is the obvious one and the one most people will tell you is the primary cost of owning a car. Maintenance is the second category, things like oil changes, tires, brake jobs, and the like. Newer cars will usually cost less for maintenance and have warranties that cover major repairs, while older cars will inevitably need repairs more often. Non-operating costs are those costs that generally aren't affected by how often you drive. The biggest non-operating costs are insurance, depreciation and interest on the loan (if you finance).
As I mentioned already, filling your gas tank is the most obvious of the costs. Depending on the size of your gas tank, each fill up will cost a minimum of $30-$60 for typical cars. If you fill up every 10 days, that's around $1000-$2000 per year you're spending on gas. For the sake of argument though, let's assume you drive 12,000 miles per year and average 25 mpg. At $3.75/gallon, that would be $1800 spent on gas in a year. (My previous car averaged $1400/year, but gas was cheaper at the time.)
Maintenance is the next big cost, on the last car I owned (a 2000 Acura TL) this averaged about $120/month, or $1440 per year. That was doing most of my own maintenance too, so paying a dealer or mechanic will increase the cost.
Non-operating costs are the most often ignored costs. The primary non-operating costs are depreciation, insurance, loan interest, and possibly taxes if you live somewhere that taxes you based on assets. For my 2000 Acura, insurance was about $600/year and taxes/registration was ~$100/year. I paid the loan off quickly, so I only paid around $450 of interest on the loan ($135/year). Depreciation costs were the big surprise, over the time I owned the car, the value dropped by almost $800 per year. That might seem high, but it's actually relatively low. Depreciation costs start at about %20 per year for a brand new car, and drop to around %15 per year after that.
Overall the non-operating costs were over $1600 per year. Those are the costs that you can't avoid. Think depreciation isn't a real cost? Try selling your car for what you bought it for.
Car commercials often talk about how you'll save money on gas if you buy their car, and for the most part they are telling the truth, you will save money on gas by buying a more efficient car. But what they are not telling you is that you'll spend far more than the savings in other costs. Let's say you buy a new Toyota Prius that averages about 50mpg. A base model Prius starts around 24,000 and in 1 year will be worth $18,000-$21,000 according to Kelley Blue Book. You will burn half the gas as your old car that gets 25mpg. So you will save $900 in gas over that year, but spend an additional $3,000-$6,000 on depreciation. The second year of depreciation will be in the range of $2,000-$3,000 with another $900 saved on gas.
Now I'm not saying you should drive your car forever or never buy a new car, but just don't think you're doing your pocket book a favor by buying a more fuel efficient new car to save some money. Consider all the costs when replacing your car, not just what you're putting into the pump.