Mathias Brandewinder on .NET, F#, VSTO and Excel development, and quantitative analysis / machine learning.
24. July 2010 17:35

When I moved to California a few years back, I soon realized that to get anything done in the Silicon Valley, you pretty much have to have a car. So, I purchased my first car. Fast forward today: I live in San Francisco now, and noticed that I am driving less and less. Bicycle is very convenient in my neighborhood, and I don’t have to commute to work on a daily basis. Which got me thinking – do I really need a car? Public transportation only is not an option, because coverage is too spotty, but what about using a car sharing service?

The 2 major services available in my area are ZipCar and CityCarShare; their pricing system is largely similar: they both:

• charge by the hour of usage,
• charge a higher cost over the week-end,
• offer a discount for full-day rental,
• have a pay-as-you-go option, and better rates with minimum commitment plans.

Both include gas, with one difference: ZipCar charges by the hour, whereas CityCarShare has a hybrid pricing, with a lower per-hour cost, and a per-mile cost.

By contrast, when you own a car, you

• pay a large upfront investment (buying the car),
• recoup some of the upfront cost if you resell eventually.
• pay regular fixed costs (insurance, registration taxes, garage),
• pay by the mile (gas),
• pay some additional costs, like maintenance, which are somewhat linked to mileage.

In addition to that, you bear the risk that your car gets damaged or totaled in an accident.

Another financial benefit of car-sharing services is that you get the type of car you need, when you need it – and where you need it. If you need a pick-up truck, to move some heavy equipment, this is included, whereas if you own a car, you would need to rent that truck. If you fly to another city, you would have to rent a car or use a cab, whereas ZipCar covers multiple cities, so you may have a car ready for you there, too.

So how could we compare the two alternatives, financially?

The big issue here is that the units are not directly comparable. The cost of car-sharing depends on how much time you would use the car in a month; unless you drive more than 180 miles a day, the distance travelled doesn’t matter. If you have to drive one hour to visit someone, and stay over for two hours, you will be charged for 3 hours, regardless of the distance you travelled.

Conversely, if you own a car, the two biggest cost elements are gas, which is directly related to the distance travelled (and not how much time the trip takes), and the now “invisible” initial cost of your car, and its permanent loss of value.

In order to compare the two alternatives, one approach is to determine their monthly cost. Let’s begin with the cost of owning a car.

Let’s first determine a monthly payment that is equivalent to purchasing a car today, and selling it later on. In financial terms, we want to determine an annuity (or rather, whatever a monthly annuity is called) that has the same net present value as buying the car today and selling it later. A quick search around the web indicates that a car depreciates at a rate of 15% a year, in a 10% to 20% range. We can convert that rate to the equivalent monthly rate:

MonthlyDepreciationRate = ( 1 + rate ) ^ ( 1 / 12 ) – 1

so if we own that car for MonthsOwned months, we expect to resell it for

ResellValue = InitialCost / ( ( 1 + MonthlyDepreciationRate ) ^ MonthsOwned )

The present value of that sequence – the amount today that is equivalent to the whole transaction - with a monthly interest rate of i, is the initial purchase, minus the discounted resell value:

Present Value = – InitialCost + ResellValue / ( ( 1 + i ) ^ MonthsOwned )

Using the classic formula for annuities, we can now convert this cash-flow sequence to a monthly payment, equivalent to the entire sequence of buying now and selling later:

MonthlyEquivalent = Present Value x i / ( 1 – ( 1 / (1 + i ) ^ MonthOwned ) )

In my case, I ran the numbers, and assuming I would still purchase a cheap, second-hand car for $7,500, and keep it for 6 years, with an interest rate of 7%, the equivalent monthly cost comes down to approximately$90.

The recurring costs are pretty straightforward. The biggest expense here is my parking spot, which costs me a steady $200 / month (that’s what you get for living in the heart of San Francisco), to which I need to add insurance, maintenance and registration fees: Rather than simply add the number of miles I drive every month, I also need to think about how much time I would need for each individual car ride, so that I can compare the car share options with owning a car. Because the rate for a complete day is different, I also need to consider full-day trips. On average, this is how a month looks like for me: I can now compute my average gas cost each month: I can now also compare how much I would spend, using ZipCar or CityCarShare. I rounded up their costs, to include taxes, and the fact that the prices their publish are for the cheapest cars available, which is not necessarily what you will get: All in all, the comparison comes down as follows: ZipCar:$346 / month

CityCarShare: $366 / month Own car:$389 / month

So what? First, both car-sharing services come out cheaper for me than owning a car. As a result, yesterday, I became a member of ZipCar, and had my first drive with it. I was pretty impressed by the convenience of the service. I haven’t ditched my good old car yet, and will first try it out for a month, to see how it really plays out, but I am pretty motivated to become car-less (car-free?) if I can.

Second, there are some intangibles in the decision, too. Besides the financial aspect, there is a definite good feeling about doing my part for the environment, and reducing the numbers of cars on the streets; it’s also nice that a significant portion of the fleet are hybrids. Then, I like that the pricing is so transparent: it puts a clear price tag on the act of driving, and elicits the hidden cost of owning a car. As a result, I anticipate that it’s also going to change my behavior, and make me think twice about driving (Why am I not biking to the gym?) The flip-side, obviously, is that I won’t have a car ready for me, whenever I need it. Finally, it also completely eliminates hassles such as maintenance or paperwork – it is somebody’s job to provide me with a fully functional car, the only thing I have to do now is drive.

What do you think? Would you consider abandoning your car and using such a car-sharing service? Or are you lucky enough to live in an area where public transportation is good enough that you don’t even need a car?

7/25/2010 8:01:42 PM #

Very interesting, not a option here for me, maybe the only place you could think about this is in London, here in the UK.
I thing the convenience of having your own car is set against the added cost, for me it would be this cost that I would have to weigh up. Certainly worth a serious think though, times do move on, and this one area that might change over the next 10 years, we will see - keep us posted on your findings! .

7/26/2010 3:43:58 PM #

Believe it or not, I have actually considered the moped option! Problem is, I can't replace the car with the moped (driving a moped on the highway to see a client doesn't seem quite right), and if I have to keep the car, I still have my garage costs, and limited gains. The regular costs are really the biggest component, gas is only marginal.
It's also clearly an urban option; I have 4 car stations within walking distance of my place, so it's not that much more complicated to grab a car than to walk to my garage - but I have to make plans now, which is a drawback. I think they have that service in London now, I wish they had it in Paris...
I am curious as to how the costs will play out: I have inflated the unit cost of sharing (you get 10% discount if you drive regularly), but I may also have under-evaluated how much I need to drive. The more you drive, the more interesting car ownership becomes.
I'll do a retrospective in a bit, when I have more data, both financial and "psychological"!

7/29/2010 12:13:25 AM #

>>>I'll do a retrospective in a bit, when I have more data, both financial and "psychological"!
Yes, that is also an imporant point, how it acually plays out in proactice, sometimes this things work well, sometime, they dont! look forward to the next instalment!
Cheers
Ross

8/5/2010 10:40:21 AM #

Actually, I'm keeping my car. I did pretty much what you've done and quite carefully weighed up the costs, although I measured against public transport. Unbelievably (I didn't believe I'd get the result I got) the car won by a hairs breadth and managed to get me to work for less than the £12 a week public transport would cost. So I bought it. Luckily (since it's a Peugeot 107, or to use it's other name "City Car") I am past the age where what I drive doesn't need to go quickly or look particularly great. The car needs to get me there, and that's it. The Peugeot does it nicely. And I don't need to wait for the bus in the rain ;)

8/6/2010 8:01:17 AM #

Even if you bought the car outright, you still need to pay for gas, upkeep and repairs. In our existing economy gas is extremely costly, and money is tight all around. Auto owners are looking to save in any fashion that they can. For many drivers, insurance is one way they’re looking to save. you do have the choice to try to get a break on your insurance payment with current company, or to research for inexpensive insurance companies.

8/8/2010 1:22:33 PM #

I'm not in an area where I think it would be a feasible option anyway, but if I were, I think the psychological aspect of the decision would be the ultimate kicker for me.  I would have the tendency to be thinking about the "clock" whenever I had a car out, if I were on a rental scheme.  As in your example of going to a friend's house that took an hour to get there, and you stay for two.  It would occupy my mind of how my time with my friends is now costing me money, and I'd prefer not to have to calculate out the value of things like that.  But if it was cost advantageous enough, I'm sure that I would be persuaded the other way.  Nevertheless, I hope it ends up working best for you.

8/13/2010 1:43:36 PM #

You've crafted a rational justification for the Y/N car question, but no matter how comprehensive the analysis gets, it comes down to the feelings of the owner.

At least when one buys their own car, they choose the brand, model, year, color, style and they become attached to these attributes. Oh my gosh, how can we miss it?  These owners express themselves with it; and they embody it's aura.  They are passionate about it. You might say some drivers become one with their car. I'm talking about the car enthusiasts.  Surely, you didn't forget about this segment of driver, did you?

Here are some examples of what I mean:
Hot rods, muscle cars, classic cars with lots of chrome www.gorockford.com/.../...-and-Chrome-Car-Show.pdf
German Cars
http://www.autowerksofamerica.com/
Fords
www.onlineathens.com/.../new_543246881.shtml

You must acknowledge there are some among us who have a relationship with their car which transcends the purely pragmatic value of a rationalized decision to use either private or rented transportation.

There's an exception.  I once rented a Corvette for a day. It was a pure blast. The dashboard indicators were projected onto the window, so that I could gaze at the speed and look at the road at the same time.  Most disappointing thing about it was turning it in at the end of the day.  Most times, renting a car just doesn't flip my switch at all. I haven't seen any Zipcars which inspire a great drive.

8/14/2010 7:26:40 AM #

Hi Doug,
Absolutely, there is an emotional component to it - money is clearly not the only driver. That being said, if it was only about emotion, everyone would be driving a Porsche (or whatever your vice is in car matters). And the emotional aspect cuts both ways, too. I confess, I will regret my small cabrio - but at the same time, first, I have the pleasure to "do the right thing", from an environmental standpoint, and then, every time I get a car, I get the pleasure of choosing from dozens of different cars, which has proven surprisingly fun. It is interesting how involved we get with something which is "just" a means of transportations. To this day, I still remember fondly all the bicycles I used as a kid
Mathias

8/20/2010 11:38:30 PM #

The probably with renting fast cars is that you have a tendency to drive like a maniac for that one of few days that you have that car. Two years ago I rented a Lamborghini Murciélago LP640 Roadster (which by the way was a SICK SICK car!) and got a ticket for doing 110 in a 55. Funny thing it that a friend of mine who owns a Lambo, has never gotten a ticket. Just figured I'd share my speeding ticket experience since I saw Doug mention a Corvette.

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9/29/2010 1:45:17 AM #

My suggestion is that you should keep your car. Because it can solve many of your transportation problems that shared services can not .

1/11/2011 12:33:59 AM #

I had  bad experience with Zip as you nenver know the state of the car from the person before you, and I think they had their dogs in it so it made me smell bad for my meeting.

Public transport wold have been better.

2/1/2011 9:21:12 PM #

I am also in favor that you should keep your car as it will provide you a convenience ,in awkward times,when you needed most and thanks for the excel file.

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7/6/2012 6:36:35 AM #

If you keep your car at least you have an asset no matter how much depreciation.

5/25/2013 7:11:23 PM #

I agree but its all about Gas cars forget petrol it just cost too much!!!

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