The Numbers – Car Buying Considerations Part II

Last week I bought this amazing old but new-to-me car. I wrote about the purchase in Mind vs Heart when buying a car. Today, I want to share with you all the numbers that rationalise my car-buying activities! Let’s nerd out a little bit!

Cars are Freakin’ Expensive to Buy

First of all, cars are expensive to buy! Especially here in The Netherlands, where we not only slap 21% VAT on top of the gross car price, we also add a tax we call BPM (belasting van personenauto’s en motorfietsen – tax on cars and motorcycles). This BPM thing is a little bit more complicated than the 21% VAT, but can add up to quite some money!

Tax Examples

The BPM you pay on a new car depends on its CO2 emissions. Cars that don’t emit CO2 (electric vehicles) are exempt. Conventional vehicles are hit with a base rate of 360 euros, plus a variable amount per gram of CO2 per km.

This CO2 tax is divided in five tiers:

  1. Tier 1 (1-71 gram CO2/km) is 2 euros per gram
  2. Tier 2 (72-95 gram) 60 euros per gram
  3. Tier 3 (96-139 gram) 131 euros per gram
  4. Tier 4 (140-156 gram) 215 euros per gram
  5. Tier 5 (157 and above) 429 euros per gram

On top of that, cars equipped with a diesel engine pay an additional 88 euros per gram on top of the rates above.

For cars with great fuel economy, this tax is not that high. For cars with worse fuel economy, this tax can quickly become a lot.

For example, a brand new Ford Fiesta with its small petrol engine will be taxed with 3,250 euros in BPM based on its 105 gram/km CO2 emissions. However, a big BMW X5 with a massive M50d diesel engine will be taxed an incredible 32,700 euros of BPM! This is based on 173 g/km CO2.

Depreciation

Of course, I was never planning to buy a brand new car. Not only are new cars super expensive, but they also lose a lot of value in their first few years. This phenomenon is called depreciation, or the declining value of an asset.

Buying used cars is usually more economical. The first owner already “paid for” the depreciation and you can purchase the car for a lot less than when it was brand new. It’s not uncommon for cars to lose 70% of their value in the first 5 years.

Since modern cars are pretty reliable, I have no problem with buying an older car. If it’s maintained well, the lifespan of the car can be well beyond 10 years.

My Giulietta was built in 2013, making her 6 years old. I’m the third owner and paid slightly less than 23% of the original price of the car. Talking about depreciation!

Cars are Freakin’ Expensive to Operate

After the initial purchase price, cars are expensive to operate as well. You’ve got your fuel expenses, maintenance, insurance, and road taxes.

Depending on the type of car you drive, all of these could be very expensive. So yeah, owning a car is not cheap.

For my Giulietta, I budget 100 euros per month for maintenance, pay 85 for insurance, and about 110 per month for road taxes.

Fuel costs are very much depending on how much you drive, but I don’t mind driving a lot as long as it’s for business since I get a fixed reimbursement per km driven.

Company Car or Privately Owned?

My previous car was a company car. In The Netherlands, it’s common that employees that are on the road get a company car. Basically, it’s a piece of equipment. Salespeople, account managers, consultants, all of these occupations are driving a lot here so most of them get a company car.

Then, some companies give company cars as a secondary benefit. If you don’t need one for your job, this usually means upper management.

If you use your company car for personal trips as well, you have to pay the government an additional tax we call “bijtelling”, which basically is a form of income tax on the car you received.

Bijtelling works as a percentage of the original price of the car, you add that to your taxable income. My old company car had a 21% tax rate, on a value of 26,700 euros that meant I had to add 5,600 euros to my yearly taxable income which means I paid 2,800 euros per year in additional taxes for the benefit of driving a car paid for by my employer. I was allowed to drive an unlimited number of personal kilometers per year, so that’s nice if you drive a lot.

The Math. Show us the Math!

The reason for buying a car of my own instead of having a company car for me was purely financial. The bijtelling tax alone wouldn’t be enough to justify getting rid of the company car, but my employer is so nice, they also pay out your monthly car budget if you decide to drive your own car to work.

That means that my gross salary increased with my car budget. Also, my company car tax (the 2,800 per year) went away, and on top of it all I get to get all my business kilometres reimbursed at 19 cents per km.

The first two increase my fixed monthly net income, the third is variable. This means that the more I drive for business, the better. All my personal trips now I have to pay myself.

Costs

In my scenario, I went with the following numbers (rounded for convenience):

  • Insurance: 1,000 euros per year
  • Road taxes: 1,340 euros per year
  • Maintenance budget: 1,200 euros per year
  • Depreciation (not cash flowing out, but still a cost): 2,400 euros per year for the first two years
  • Fuel economy: 1 litre of diesel per 16 kilometres (could probably drive 18-20 but I like to be conservative)
  • Fuel price: 1.50 euro per litre (currently it’s 1.30, but again, being conservative wins)

My fixed expenses (including depreciation) will be 5,960 per year. In total, I expect to drive 30,000 km per year, making my fuel expenses 2,800 per year (remember, I calculated very conservatively).

If I include the capital costs (I could have invested the purchase amount) the total yearly cost comes out to 9,400 euros.

Income

Then on the income side of the equation I will earn an addition 4,500 euros net as a result from the gross lease budget payout. I save the 2,800 I paid as taxes for my company car.

Also, I expect to drive 20,000 km per year for business, yielding an additional 3,800 euros in net kilometre reimbursements.

This means there is a net benefit of over 1,700 euro per year for driving a personal car. Remember, all the numbers here are conservative. For example, calculating with a slightly more realistic fuel economy of 1 litre per 18 km and 1.35 euros per litre of diesel, the total savings become over 2,300 per year.

Conclusion

On top of the savings, driving this car really feels like an upgrade compared to my previous car. So I’ve got that going as well. Could I have been driving a cheaper car? Oh yeah, easily. But this one is more fun and I still get to save some money. I’m a happy Alfa Romeo owner for sure!

Now of course, whether you can reproduce this yourself depends mainly on your country’s tax regime regarding company cars, and your company’s policy of whether they pay out the lease budget.

My savings are based on the first year of ownership, after which everything becomes a bit cheaper (less depreciation and insurance costs).

Also, the more I drive it for business the higher my savings will be. If I start driving insane amount for personal trips, my costs will go up.

Have you ever considered handing in your company car?

3 thoughts on “The Numbers – Car Buying Considerations Part II”

  1. Haha great to see I’m not the only one doing the math on company versus private car. In my case keeping the lease car made most financial sense: this is due to the fact that my company does not reimburse the mileage I would have to drive for work, together with the fact that I still have a couple of years of 30% ruling to go, effectively lowering my “real” bijtelling.
    …congrats on your blog, as well as on your nice Alfetta!

  2. Hehehe… finally another Dutchie who calculates instead of just conveniently taking the company car. I have done exactly this for the last twelve years and have no regrets at all. I bought a 2 year old modest car, costing € 10,000 at the time and drove it for 11 years. I kept it well maintained all that time, hardly ever experienced any issues and then scrapped the car. It probably created another 30K of income over that period.

    Now, I am taking it even further. I live quite close to my employer (10 minute bike ride) and decide to not purchase a new to me car instead relying on Snappcar and Greenwheels, Uber and NS for transportation. Thus far this works out great to us as a family.

    We do groceries a little closer to home, we bike a lot more and use public transport as much as we can. It saves us a ton of money each month, and its environmentally better I suppose.

    Anyway, congratulations with this smart decision!

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