Cars…to buy or not to buy?
I always wanted to buy a Mercedes, that is until I started dating a chartered accountant and he changed my mind! He made me think about everything in terms of the numbers, which led me to question all my large purchases.
A car is usually the first big purchase for a lot of people, but unlike a house, education and other big goals, cars are NOT an investment from any angle.
When it comes to car, to buy or not to buy is the question these days.
Logic – The numbers say no
To begin with, you need to first figure out the cost of the car. The purchase price is just the start; you need to add registration, maintenance, fuel, parking, cleaning etc. These can increase the cost quite a bit.
One figure that most people forget is depreciation – the number that your accountant tells you to claim in your tax return but you don’t actually payout in cash. Well, you do, just not at that time.
Depreciation for your car can be 20-40% in the first year, that is, it is worth 30% less, on average, than what you paid for the minute you drive it from the showroom.
Then there’s the cost of borrowing. Most people ‘finance’ their car with a loan that carries a relatively high interest rate compared to a home loan. While you can avail tax breaks in some countries, borrowing to buy a depreciating item rarely makes sense.
All of these don’t even factor in the environmental cost, a lot of people roll their eyes and think surely my one car won’t make a difference. Of course, the effects on the climate may seem far in the future, but given the immediate impact of pollution on your health, we should take it more seriously.
While I lived in Sydney, I took public transport during the week,. so we could only drive on weekends. And the numbers showed I was better off taking cabs.
Of course, the situation is different in India; the public transport system is terrible, but so are the roads, traffic and cost of cabs. What’s the point of a fancy car with nowhere to drive or being able to reach your destination faster?
So, I asked my friends at BigDecisions.com to repeat the calculation for Mumbai, where I now live, – the result was the same even with daily commutes and surge pricing. Check out the video for the actual result.
Peace of mind – Convenience says yes
You will probably say that cars offer convenience that cabs just don’t. Cabs are never available when you really need them. True. Even if cabs turn out to be cheaper, would you really take a cab to go a romantic long drive?
So I admit I did buy myself a second-hand car, both in Sydney and in Mumbai. The effects on my social life were mixed; it improved in Sydney but made no difference in Mumbai. I felt better for having a car that I could drive in case I needed to, in the middle of the night. It’s like having an insurance policy; you buy it for peace of mind rather than with the intention of getting your premiums back.
Feel good factor – A status symbol, maybe
Let’s admit it. The real reason most of us buy cars is for the feel good factor. A Mercedes says you’ve arrived. Well, that’s what it meant for me. But I concluded that not having to work for a living was an even better status symbol. So I put my energies and savings towards that goal, which meant buying a new car with a high interest loan, was out of question. I achieved the goal – I now write from my own home and am free to do whatever I want.
In conclusion, I would recommend buying appreciating assets like a house or an investment portfolio over spending too much on depreciating ‘liabilities’.