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If you want to get serious about building wealth and saving money … then you will need to focus on the big stuff. Sure cutting back on things like cable television and eating out less are great, but those savings can only go so far.
The real benefits come from large expenses like housing and transportation. It is impossible to have a 50% savings rate when half your income goes to paying your mortgage and car payments.
As my wife and I are trying to ramp up our savings rate, we are identifying the expenses that are taking up most of our income. For example, we recently discovered that over 37% of our income went to housing expenses last year!
Unfortunately, we bought a home that was too big for our needs and now are paying for it.
Next on our list of high expenses to review was transportation … or in our case … the cost of owning cars.
What Cars Do We Own?
Our family owns 2 vehicles. One is a van (almost 6 years old) that we bought new with a low interest rate. It is used to transport the kids around to different events and for family trips.
The second is a new car I purchased a little over a year ago. Previously, I had driven my old car for 16 years. After months and years of rising maintenance costs to keep it running … I finally had enough. The car was way to expensive to keep running so we donated it to a charity.
I drive over 50 miles a day to work (round trip), so we decided to buy a new car that gets great gas mileage, with a low interest rate. Our goal is to drive this car as long as it lasts … hopefully more than 15 years.
Looking back, there are a bunch of things we could have done differently … like buying used cars instead of new. We could have also lived closer to my work so that I didn’t need a car or at least gotten by with a less reliable vehicle.
The good news is we plan to continue driving our vehicles for many more years. But even though we will eventually pay off both cars, the costs of owning them won’t stop there.
How Much Do Our Cars Cost per Year?
We are currently working to pay off two different vehicle loans, both with low interest rates.
Our family van (car loan #1) has an interest rate just over 1% and we have less than a year before it is paid off. The second vehicle (car loan #2) has a 0% interest rate, so we are not in a rush to pay that off … although it would feel nice with no car payments.
While it is easy to figure out how much money we spent paying off our loans last year, what about the other expenses? Owning a car has more than just monthly payments as you can see below.
Here is a list of vehicle related expenses we paid last year (2017) –
- Car Loan #1 – $5,125.00
- Car Loan #2 – $2,705.67
- Gas – $2,527.31
- Insurance – $1,635.49
- Maintenance – $368.49
- Registration – $242.16
2017 Total Car Expense = $12,604.12
Not surprising, but our monthly car loan payments made up the bulk of our transportation expenses.
Next on the list was gas, followed closely by car insurance. The only good thing about both of these expenses is that we can charge them to one of our travel rewards cards. This will give us the opportunity to put those expenses towards future FREE Travel.
Both of the vehicles we own now are still relatively new and don’t require a ton of maintenance yet. Things like oil changes and tire rotations make up the bulk of the maintenance expense.
Finally, we had to pay over $200 for registration and plate fee’s in our state for the two vehicles.
Overall, we paid $12,604.12 to drive our 2 cars. That averages out to $1,050.34 per month.
2017 Monthly Average = $1,050.34
That monthly total comes out to 21% of our average take home income. We try and budget for $5,000 of spending (take home pay after taxes) each month. Any money remaining is always invested.
So I am sure you can tell, transportation makes up a huge chunk of our monthly spending.
Owning a Car is Expensive
Almost a quarter of our take home income is used to pay for transportation.
When we look at our car expenses as a whole … that is a ton of money going out every month for transportation. Then if you add in our home owner costs (37%) to our transportation costs … that is a combined 58% of our income. WOW!
The good news is that our first car loan will be paid off within the next year, which will put our transportation costs at about 12%. That is still a big number but much better than were we currently are at.
As a result of reviewing both our home ownership and transportation expenses, my wife and I are looking for ways to fix this. We have considered selling our house and moving closer to my work. I have also considered leaving my job eventually to start a home business. Either of these options would help to drastically reduce our spending and give us more money for our savings.
There are pros and cons for us moving with all 3 of our kids in the local school district. So we are not in a immediate hurry to move but would like to figure out a smarter way to optimize our spending in these areas.
No matter what we end up deciding to do … my advice to my children and anyone else just starting out is to try and “hack your transportation” as much as possible.
If I had to start all over again, I would plan for my job and home to be within biking distance of each other. This would immediately eliminate the need for my wife and I to have 2 cars and would give me the opportunity to get more exercise.
I would try and hack our transportation costs as much as possible in combination with our home ownership costs. Buying a much smaller home would help.
I would also have given more consideration to finding a job where I could work from home. Then it wouldn’t matter where our house was located.
There is still time for us to change our situation though, but I hope my kids understand this concept one day.
Do you hack your transportation costs by living close to work? What other hacks have you done to lower your housing and transportation costs?