Are Driving Costs Driving You Crazy?
October 4, 2011Posted by katydavissong |
Marin Mommies is presents another great guest article by Marin mom and financial planner Katy Song, CFP®.
When you think of how you want to spend your hard earned money, rarely do you think “I want to overpay for car insurance and spend $70 to fill up my tank!” Car related expenses are a necessity for most families, but there are easy ways to reduce these costs and make sure you are not overspending.
The “rule of thumb” for transportation related expenses is that they should not account for more than 10% of your gross income. Depending on your salary, this could be a really big number! For example, if you make $150,000 per year the “rule of thumb” says that you can spend $1,250 per month on your cars. This could easily cover gas ($350), insurance ($115), commuting ($50) and a VERY nice car payment. While this rule might make sense in other parts of the U.S., I believe it overstates what a family in the Bay Area should spend given our significantly higher home related expenses.
So how much do most people in our area spend? Here are some facts on the biggest drivers of spending in this category and tips to save a few bucks.
Most people do not know if they are paying too much for car insurance. I have seen families paying up to $3,000 per year for the same coverage as a family paying $1,400 per year because they failed to update their policies for critical information.
The average annual premium for car insurance in California is between $1,200 and $1,300. There are a number of factors that “drive” your premium:
- Driving Profile: Number of miles driven annually, driving record
- Type of Car: Repairs on a Ferrari are more expense than on a Toyota Sienna
- Personal Profile: Age, where you live, occupation
- Coverage: Amount of coverage and deductible
- Credit Score: The better the score, the lower your premium
Tips to save: Update the number of miles you drive annually. If you no longer commute to work or are a stay-at-home parent, you need to significantly reduce this number from the default number of 12,000 per year. Increase your deductible. If you have a sufficient emergency fund, you can retain more risk. See if increasing your deductible to $1,000 has an impact on your premium (the savings varies greatly depending on your insurance provider). Clean up your credit and make sure your insurance provider has the right score. You can get a free credit report each year from annualcreditreport.com. Review your report and make sure your credit is 740 or higher. If not, fix any errors and get it cleaned up.
The average spending on gas in the San Francisco Bay Area according to mint.com is $150 per month, which is very low compared to what I see for families. Most families that I work with spend an average of $250–$400 per month on gas. You may not have any control over the price at the pump, but you can go further on each tank of gas.
Tips to save: Get regular tune-ups and check brakes/alignment. A car that runs well does not have to work as hard and gets better mileage. Park in the shade and fuel up in the morning. Since gas evaporates in heat, this is an easy way to conserve fuel. Eliminate excess weight. Get rid of the junk in your car. By lightening your load, you will improve fuel efficiency.
Sometimes financing a car makes financial sense but if you are struggling to make ends meet each month or find yourself on a single income, a car payment can be a huge burden. So when does it make sense?
Financing a car makes financial sense if you:
- want to improve your credit score,
- have sufficient monthly cash flow for the payment, and
- have your cash invested earning more than the interest rate on the car.
With incredibly low rates and great deals out there, it is tempting to overspend on a car. Don’t fool yourself. If you don’t meet the three criteria above, do not buy a car that is above your means. If it makes financial sense, here are some tips to get the best deal.
Tips to save: Buy a used car. Cars depreciate the minute your drive them off the lot. A car that is a year old will be a much better value than next year’s model. Buy at the end of a month, quarter, or year. Dealerships and salespersons feel the pressure to meet quotas and are more likely to negotiate on the price. Put down the largest amount possible and shorten the term of the loan. This will reduce your overall loan costs.
Personally, I love my car but do not like to drive. I am also within biking and walking distance of almost everything I need. So I have implemented a “two mile rule” that means I walk or ride my bike (with two kids in it) if the destination is within two miles. I love not fumbling for my keys after the grocery store and buckling/unbuckling car seats ten times a day. I filled up my tank once last month, called my insurance company and reduced the miles I drive to 3,000 per year, and calculated that I am saving about $1,200 a year now.
Katy Song, CFP®,is a fee-only Marin financial planner and owner of Katy Song Financial Planning in Mill Valley. She specializes in objective and customized financial plans for families with young children and couples starting their lives together. Katy lives with her husband and two children in Mill Valley. You can reach Katy at email@example.com or www.katysong.com.