Rental car companies have a formula and the basis for this formulae is how much it will cost them while they have the vehicle versus the return from renting the vehicle. The basis of their calculation can be used by you to really consider which vehicle you can afford and the results will probably amaze you.

Salary packaging companies do this all of the time when calculating the running cost of the vehicle and the tax benefit to the client, so why don’t we all do it?

Well, the answer is simply that people buying a car for themselves rarely take the running cost into consideration. They usually base their decision wholly on the buying price or monthly finance and this is a big mistake.

Let me show you why:

We can first break the cost of the vehicle up into segments:

1. You buy a car for say $30,000 and after 3 years it’s value (by industry standards, though not precise) is about 40%
2. The difference is then $18,000
3. You travel 10,000 km per year (you need to work that out) and this and the 3 years you keep the vehicle for, will form the basis for the rest of your calculation.
4. Fuel consumption is marked on the new vehicle and you should use the highest given level. If this were 6.9 lt /100 km then based on say an average of $1.40 per litre for fuel the total cost of fuel for the 3 years would be $2,898.
5. Your service interval could be 15,000 km and your average service could be $300 (you can find this out when you are shopping for the vehicle). So your service bill for 3 years will be $2,000
6. Your insurance is whatever you buy it for per year (say $1,200 per year) by 3 years is $3,600.
7. Your registration renewal is about $850 per year depending on what state you live in which in this case makes it $2,550 for 3 years.
8. You will most likely have one set of tyres changed at around $600 for a car of this price.
9. If you take a loan for the full price of the vehicle at around 5% the interest and charges will be about $4,500 for the term (easy to calculate when you get your finance quote by multiplying the repayments by the months and subtracting the amount of the loan)

So in total your imaginary $30,000 vehicle will have cost you: $32,348 over the 3 years. This is a total of $1.08 per km

Using the same calculations (which are all averages):

Car value:

$20,000 will cost you 83 cents per km

$40,000 will cost you $1.33 per km

$50,000 will cost you $1.58 per km

Of course, these amounts all change according to these main factors you have to find out (not difficult to find):

1. Fuel consumption
2. KM traveled per year
3. Service interval and fixed price service costs
4. The interest rate on finance
5. What your states registration costs are each year.

Your other option to working all this out yourself and also getting an added tax saving into the bargain is to get a salary packaging quote and it is all worked out for you. If you salary package it will reduce the cents per km dramatically allowing you to buy what once would have been a car you thought you could not afford.