Wow, don’t you just love that new car smell?
Smells like power and freedom!
Actually it’s more like petroleum evaporating off vinyl and plastic. Let’s see if you still like that smell when you find out what it’s really costing you.
Since the Auto boom, cars have become an integral part of Indian society. Car companies spent $14.0 billion in advertising alone in 2014, increasing up to $35 billion by 2018 and the figure is rising year on year.
Car companies have convinced us that once we’re behind the wheel, our families will love us more, our neighbors will envy us and our freedom to go anywhere is secure. Unfortunately, they’re more likely to take away your freedom and security.
In fact, new cars are a financial threat in the following ways:
- We borrow money at interest to buy an asset, that we have to pay to maintain on a timely basis.
- Depreciation: A new car will depreciate almost 60% in the first five years, 10% of that at the moment that you drive it off the showroom.
So, a car is never an investment at all, it’s a depreciating asset.
Leasing is not an option either, as leasing companies set their prices such that, you pay for the depreciation of their vehicle, and when it’s over they still have an asset to resell.
So here’s a set of few important suggestions that will help you own a car without any financial burden:
- Buy a car that’s at least 5 years old, right away you’re skipping the majority of its depreciation.
- Save up to buy a car in cash rather than paying interest on something that loses value.
- If you can’t comfortably afford to save an equal amount to your car payment, you can’t afford it. For example, if you’re not saving Rs 20,000 a month, you shouldn’t take on Rs 20,000 car EMI payment.
So how much money is actually at stake when you buy a new car?
Let’s make a simple calculation:
Let’s say you buy a new car for Rs 12,00,000 & put Rs 2,40,000 as down payment and get the rest financed over 60 months at 8%, my monthly payment will be Rs 19,465.
What if you bought the same car but a five-year-old model which costs you 60% less or Rs 4,80,000. You put the same Rs 2,40,000 as down payment and with the same loaner arrangement (at a higher rate for a used car, say 10%) you’re looking at a payment of just Rs 5099 a month that’s a monthly savings of Rs 14,366. You can plan a holiday every year with that saving.
Alternatively, you can take those monthly savings and put them into a growing asset like a home or a mutual fund and if you continue to do that every time you paid off the car even at a very conservative 9% per year return, In 21 years you’d have over Rs 1 Crore.
Really! Now is that enough to retire on, probably not but that’s just one thing you can start doing. To prepare for your future there are many more options.
So, as much as you like that new car smell, we would suggest that you should try this instead:
“The perks of early retirement or financial freedom”
Check out Personal Finance Rules that are never taught at School / College, Success is the Best Revenge: Ratan Tata’s Case Study
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