This week’s guest post is from Jack Atlas – the nom de plume of a fellow aspiring Financial Independence seeker. He has kept things frugal and focused during his early financial journey which has allowed him to build a tidy property portfolio. Seeing what he has achieved, I value his thoughts and take his insights seriously.
Purchasing a new vehicle can tend to be quite a hot topic, so just before we begin I would like to say that if there are any petrol heads out there who like spending big sums of money on their rides because it’s what they love, power to you. This article looks to highlight the impact of buying a new car will have your financial wellbeing. It is in no way prescriptive and whether you use this information or not is entirely up to you.
My viewpoint is contextually driven and it’s important to do your own research and fact check due to the large amounts of misinformation out there.
The average purchase price of a new car in South Africa was around R321k in June 2019 financed through Wesbank.
This means if you have R 321k in cash, you can buy the car outright with no loans. But what does this picture look like in a years’ time?
If we consider a new car, your “asset” will lose about 20% to 25% of its value in the first year of ownership. Assuming the low end, the R321k car will lose R60k in a mere 12 months. As the years go by and the car model becomes more outdated… this loss continues to grow until after about 5 years of ownership where the loss each year slows down. Then after about 10 years it often plateaus out and is more determined by the condition of the car.
The good news is that one only “locks” in this loss if one sells the car. What I mean by this is the R 60k above is only a paper loss until you actually sell your vehicle a year later at R 261k for example.
This means in terms of your financial wealth if you sell, you are actually now R 60k poorer, as we had R 321k in the bank to start off with, we bought the new car and then sold it a year later and now we only have R 261k in the bank. I.e. we have literally burnt through R 61k of your money in a year.
To build on this, most people don’t have R 321k lying around to buy a new vehicle. So what do we do – we take out a loan, after all we can “afford” it with vehicle financing, right? If we assume 11.38% as the vehicle financing rate one will get (prime lending rate has dropped so this may be lower than highlighted- this is just an assumption for illustrative purposes), we can expect to pay R 34k in interest alone in the first year.
So this would take our total loss for the first year of ownership to R94k.
There a few solutions in dealing with this loss:
- If buying a new vehicle, hold it as long as you can without selling, spreading the loss you will incur over the first 5 years over many more years than that. This is because after 5 years vehicles tend to stop losing their value as rapidly, so try and hang on to it as long as one can. Another 10 to 15 years if possible.
- Buying a reliable second-hand vehicle in good condition. Ideally older than 5 years as it would already have lost a lot of its value. i.e. from when you buy it, it shall only lose a little bit of value and you can enjoy the benefit for years to come.
- Avoid buying a vehicle at all, and use uber/public transport/living closer to work and other life hacks to get around. Currently, my friend has done this for over two years and the costs are less than 25k pa (mainly Uber) which is a lot less than the R 94k highlighted above, and the R 94k is even before fuel and insurance costs are considered. For two-car households, going down to one car can have minimum lifestyle impact and massive financial impact.
Financially you are destroying value if you swap out your vehicle every 3 to 5 years for a new one and this could in fact be the single biggest destroyer of wealth over your working life, should you do this consistently. There are workarounds listed above, and hopefully, you consider them in the next few years when you consider buying a new vehicle.
Stay strong and stay safe.