Savings to be had for canny drivers

DEPRECIATION sounds like an impressive accounting term, however it is the biggest cost of owning a car.

It is the amount that your car falls in value over time.

Unlike petrol, insurance, repairs and registration, we don't notice the impact of depreciation - it just eats away at the value of the car week after week.

Just look at the classic Australian family car - the Holden Commodore Executive.

Based on RACQ calculations, a new car depreciates in value by $105 a week - about half of its total running costs (registration, fuel, tyres, repairs, interest on the loan plus insurance).

Have a think about what that $105 means.

It means that every week the average person earning $15 an hour after tax has to work about seven hours just to pay for the extent to which a new Commodore has fallen in value.

It doesn't matter whether your new car is leased, bought through a loan or purchased in cash, the depreciation is unavoidable and significant.

If, rather than purchase a new Commodore a consumer purchased a three to four-year-old one that was half the price then the rate of depreciation would be roughly halved.

Even if you doubled the RACQ estimate of service and repair costs for the older Commodore, you will still be ahead by about $50 a week purchasing the second-hand model.

Think about this on a cash basis. What if you had two cars in your garage - a new Holden Commodore and another three or four-year-old car.

To use the new car for the week you had to put $105 into the ignition to get it started, and to use the older car you only had to put in $55 to get it started.

My strong suspicion is that most people would happily choose the slightly older car and start the week with an extra $50 (or three hours of work) in their pocket.

Here is the real clincher. If a person buys a new Commodore every five years and - given the rate of depreciation of $105.12 calculated by the RACQ - if they buy their first car at age 20 and their last at age 70, they could have invested the depreciation of $105.12 a week at the rate of 6 per cent a year after fees, taxes and inflation and would have had $2.28 million in today's dollars by the age of 75.

If they either bought a second-hand car, or a cheaper smaller car, that depreciation at the rate of $52 a week, they would have been $1.14 million better off by the age of 75. That is an extraordinary figure, and is before any other financial benefits of cheaper registration or fuel costs if you had chosen a smaller car.

Further, this is only for one vehicle, with many families running two cars.

Suddenly you can see why many millionaires prefer second-hand or relatively low-cost vehicles. Perhaps part of the reason they are millionaires is because they drive second-hand or lower-cost vehicles.

How you spend has a great deal of impact on your ability to be successful financially.

The cars you buy over time will prove to be the biggest purchase that depreciates in value and being thoughtful about your decisions could be worth a cool million dollars or two!