Do the math before buying or leasing a car

Freedom. For urban dwellers, that’s the hope that car manufacturers promise. Get out of the concrete jungle and into nature, go on road trips, drive to see your friends and family (hopefully soon), load up the car with your dog, camping gear, a bicycle, groceries, anything. The best part is you can leave your place at a whim and go wherever you want.

But, is the price of freedom worth the cost of owning or leasing a car, versus renting one, or car sharing regularly? Let’s do the math.

Aim to hit the budget benchmark for transportation

The budget category for car ownership or leases often gets blown out of the water, and at the expense of retirement and emergency savings. That’s because most people, when buying, can get approved to spend more, so they do.

The budget best practice is to keep your car costs, whether buying, leasing, renting or car sharing to 10 per cent or below of your take- home pay every month. If your net pay cheques total $5,000, you’d then aim to keep ALL your transportation costs under $500 per month.

Ownership and lease costs go beyond the monthly payment

This benchmark covers all the costs of ownership, btw, and not just the finance or lease payment. Auto insurance, gas (or electric charging), parking spot rentals, street permits, toll fees and an allocation for maintenance are all standard costs. Once you’ve gotten a quote for your auto insurance and parking, you can start to work the math backwards to get to a maximum payment for the vehicle. Continuing the above example, if your total budget for transportation is $500, your costs could look like the following:

Insurance = $100

Parking = $50

Gas = $50

Maintenance = $50

Car payment = $250

With this fast math approach, you can start to shop around for a vehicle that fits your budget for the car payment portion of the costs. Some leased vehicles will include regular maintenance as a part of the monthly payment, so factor that in.

Here’s a pro tip for you. If you don’t mind sharing your safe driving behaviour with your insurance provider, through a safe driving app, you can save money, and receive rewards. With the Onlia Sense app, for example, savings can add up to close to $40 per month. BelAir, Onlia, Intact and TD all now give back up to approximately 25 per cent of the premium if you’re a safe driver using their respective apps. So, the better you drive, the more you can save, and use that money for something else. And, of course, bundling insurance with your home policy is another excellent way to increase savings with insurance.

Buying used, and possibly outright can also save you money

Perhaps you are one of those Canadians who used the pandemic as an opportunity to save like you’ve never saved before. If you’re sitting on a pile of cash, and it’s not earmarked for your extremely important emergency fund (minimum of three to six months of essential expenses), you might be able to buy a quality used car outright.

Buying used can be a great way to save big bucks, because the greatest portion of the depreciation has already happened, but watch to ensure the car is in good condition, and won’t be due for major repairs soon. Also note that older cars and electric vehicles can trigger a higher insurance rate, which should be factored into your calculations.

Aggregator sites like Autotrader can help you sort through what’s available, and if you don’t mind doing a bit more filtering, plenty of used cars are listed on Kijiji Autos and Facebook Marketplace, too.

The tradeoff with rentals and car shares

Rentals and car shares require more leg work to get them booked in advance, picked up and dropped off at set locations and so on. But, they obviously do not require you to take on the full financial burden of owning the vehicle for the long term. Get in front of your computer and calculate the cost of renting (compare multiple vehicles and vendors), including gas plus insurance, and multiply that by the number of times you plan to rent every month. Like with the ownership scenario, ideally this is less than 10 per cent of your take home.

For example, if a mid-size car for two days twice per month, including $50 in fuel plus another $50 in insurance each trip comes to $500, you’ll want to weigh this against the pros and cons (including the hassle of finding parking, if you don’t have a spot) of owning the vehicle outright.

Take a similar approach with the costs of participating in a car share — add in membership and usage fees, fuel, insurance, etc.

Once you’ve compared your options from a financial perspective — buying, leasing, renting or car sharing — you can fully evaluate what’s going to be right for your lifestyle and your budget. What we know about joyful budgeting is that if something is super important to you, like the freedom to get out of the city, you’ll want to find a way to prioritize that expense into your budget.

This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star.