Grease Lightning Expenses

I traded in my old sedan for a sporty Mercedes-Benz when I became a pharmacist. While I thought I found a good deal, there are many additional costs that come with owning a car that have to be factored in. Before you go all Danny Zuko over an automobile after pharmacy school, we should discuss all of the costs associated with transportation.

First off we need to consider the cost of buying the car itself. Since car prices can vary from a few hundred dollars for a clunker to hundreds of thousands of dollars for a Bentley, to simplify the discussion let us focus on a modest sedan example at $20,000. If you have twenty grand lying around then paying cash for a car is always a great option, but like most

The Automobile Alter

The Automobile Alter

people you will probably be entering into a small loan to make the purchase. Auto loans typically come with a 36-72 month repayment term (3-6 years, compared to a mortgage that is often 15 or 30 years). So for a fixed 5% interest rate car loan for $20,000 to be paid off in five years, the payment would be approximately $378 each month. In the first month, about $84 would go to cover the interest on the loan and $294 would go to the principal.

Once you have purchased the car, in order to legally drive it on the road in the United States you will need to purchase car insurance. Auto insurance varies based on a variety of factors including your driving record. Compared to the car insurance rates you paid while in undergrad at 18 or 19 years old, the rates you will pay as a pharmacist in your mid-twenties will most likely be better.   Since so many factors influence auto insurance premiums, for our example we will stick to a simple $100 monthly premium (which would cover a large percentage of drivers in a $20,000 sedan).

Gas prices have become a larger part of the financial discussion in the past decade. Rather than get into the nuances of oil prices in the Middle East, we are going to use simple math to stay focused. If we estimate driving 20,000 miles in our car each year and assume we get an overall fuel efficiency from our mid-sized sedan of 20mpg (miles per gallon), then we will purchase approximately 1,000 gallons of gas each year. So at a cost of roughly $4 per gallon, you can budget to spend $4,000 each year or $333 monthly on fuel costs. After insuring our car and putting gas in it, we have more than doubled our monthly expense for transportation.

There are still a few other miscellaneous expenses related to transportation that still need to be factored in before we finalize our auto budget. Licensing and registration are usually a small annual expense compared to most transportation costs, but still an expected expense. Routine maintenance, such as replacing the tires, brakes, windshield wipers, and changing the oil all add to the overall cost of transportation. These repairs can vary quite a bit from car to car. Just know that the more unique your car is (sports car, big truck, import, luxury car) the more expensive repairs tend to be. While the routine maintenance can be planned, the unexpected repairs (like the ones after an accident) are hard to budget. Having a savings account set aside for emergencies is the best practice to prepare for these disasters. Since tires and brakes typically last longer than 20,000 miles, some years will be less expensive than others. On a monthly basis, budgeting an additional $100 per month for other auto expenses will help you cover these items. Keeping any surplus in a savings account can help you prepare for those more expensive repairs.

Figure 6: Monthly budget for a $20,000 mid-size sedan.

  Monthly Annually
Car Payment $378.00 $4,536.00
Car Insurance $100.00 $1,200.00
Gas Expense $333.33 $4,000.00
Miscellaneous $100.00 $1,200.00
Total Cost $911.33 $10,936.00

 

Once you break down the basic expenses related to transportation, it is easy to see how a vehicle can drain money from your bank account. A modest $20,000 car loan can lead to over $10,000 in expenditures annually until the car is paid off.   This example is less than the estimated 16.4% of income ($1,366.67 per month) we discussed in chapter one. I’m not advocating completely against a new car at graduation, however I do hope you will run through this example each time you decide to buy a vehicle. With just a few variables (car price, loan amount, interest rate, fuel efficiency, etc.) you can calculate whether or not your budget can handle that new Porsche or if you need to wait.

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Joey
Joey Mattingly, PharmD, MBA is an assistant professor at the University of Maryland School of Pharmacy located in Baltimore, Maryland. Joey has managed retail and long-term care pharmacy operations in Kentucky, Illinois and Indiana. Leading Over The Counter is a blog of Joey's views and opinions on the topics of pharmacy leadership and management and do not represent the University of Maryland, Baltimore. Joey can be followed on Twitter @joeymattingly.

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