In the last few weeks, I’ve read a few posts about how much you should spend on a car. Specifically- the question goes like this- how much should I spend on a car given that my net-worth is x.
Personally- I think this is an illogical question, more about that later
Optimise your Car, Optimise your Life
Lets go back to the basics on how to optimising your life.
The first area to look at optimising is your housing expenses- they are by far your biggest expense. Getting your housing expenses sorted early on will set you up for years to come.
Once you have your housing sorted, then you should look at optimising your transport expenses. That generally involves your car. Transport is most likely you second-biggest expense- with the average car-owning Kiwi spending around $7000-$8000 per year.
And finally, when you have optimises housing and transport- you can focus on food. Your food bill is your third biggest expense.
How Much Car Can you Afford?
How many cars you can afford is really a personal question. There’s no hard and fast rule to follow. Some suggest that you should never spend more than 50% of your annual income on a car. Others say to only spend 5% of your net worth- no more. But what if your net worth is negative?
From a strictly financial perspective- a $30,000 car doesn’t get you from A to B more effectively that a $10,000 car. And public transport or biking will always be cheaper than a car- if you factor in the true cost of owning a car.
And if you do choose to buy a car- let’s face it you probably will (NZ has one of the highest car ownership per capita) then you will want to have a decent emergency fund for any unforeseen repairs. You also want to avoid car loans- they generally have high-interest rates.
What’s a Cheap Car?
True beater cars can be picked up for a few thousand dollars- you often seen them advertised on the side of the road or on TradeMe. Personally, I think you should aim slightly higher to reduce the risk of your car completely breaking down one day.
For around $4000-$10,000 you can get a decent runabout that will last you years. If you haven’t been shopping recently, a quick trade search reveals that there are over 8000 cars newer than 2008 with less than 100k’s on the clock. You can normally find a good Toyota Yaris for around 4-6K with 60k on the clock.
Let’s Face Some Facts: Cheap cars are not Cool
Let’s face it- cheap cars are not the coolest! Nor can you “impress” people with them. And you won’t get a sense of pride driving them- if you’re a car guy like me. They don’t smell like new cars, and there is generally something that doesn’t work. They probably don’t have the best paint, and possibly the odd dent here and there.
At least historically that was the case…
Today there are many cheap Japanese cars that are perfectly adequate for getting from point A to point B. And they’re not bad value.
The point is that it’s not the car you’ve dreamt about, but if you’re serious about trying to build wealth over time it’s probably necessary.
How a Cheap Car Makes You Rich
The way in which a cheap car will add to your wealth over the long term is much more to do with ongoing expenses than it is to do with the upfront cost. The main things to consider are:
A brand new car may lose half of its value in the first 5 year. If you bought a $30,000 car, you may lose $15,000 in 5 years. A $5,000 car basically can’t depreciate in any significant way. I bought a $2500 BMW- and when it was nearly a complete write off the scrap metal dealer still gave me $700 for it.
The money that you put up for an expensive car could be used to invest with instead. If you had $30,000 and bought a $5,000 car and invested the remaining 25,000, earning a 5-10% interest over 5 years you could expect to see a return you between $5,000 to $15,000.
Generally- the more expensive your car is the more it cost to repair when something breaks. Repairs of popular cheap cars are cheap because they are so popular- meaning parts are widely available and inexpensive. Beyond that- if you have a cheap car- you’re more likely not to get everything fixed.
An older car may need to be fixed more often than a newer car, but the difference isn’t necessarily as big as most people assume.
If you have a $30,000 car where are you going to get the maintenance done? Probably at the dealership from which you bought it from. How do they pay for their showrooms and free coffees?
And how about a cheap car? The local mechanic down the road- or even do it yourself with parts from Supercheap Auto or Repco
Sure there are ways in which you can save on car insurance– but it will simply cost you more to insure a new car than an older one. It will cost the insurance company more to replace your new $30,000 dollar car than you $5,000 car- so the premium will be more expensive for the newer car.
When most people go to buy a new(ish) car, they often have to click it up on finance. Car loans have fees and interest that you will need to pay. But with an automatic savings plan set up- many people can buy a $5,000 car using cash- avoiding all the fees and interest from finance.
A car with decent fuel consumption will save you money over the long term. Generally- the smaller the car the better fuel consumption they have- because they don’t have to lug all the extra dead weight around.
Tips for Buying Cheap Cars
Look out for cars that need expensive maintenance- around 80 to 100k many cars need their timing belts replaced. For most cars this is quite an easy repair and won’t cost much- but for some, this can be expensive. I once owned a Mistubishi GTO from the ’90s which needed a timing belt replaced- turns out you need to remove the water pump and a few other things to get to it. Quite an expensive job if you bought it to the mechanic.
Always ask if the timing belt has been replaced or needs to be done. Normally- mechanics will put a sticker under the bonnet to indicate when it has been done. German cars and some newer Japanese cars have timing chains- which don’t need to be replaced.
Buy a Normal Colour
Chances are that you want to get rid of your cheap car in a few years- so buy one in a sensible colour. Sure it might be nice to drive a Barina in apple green mint- but that colour might not age well and go out of style. Which make it harder to resell. Stick to lighter plain colours. Blacks and metallics show scratches and dirt more.
Stick to Popular Models
Stick to the popular models, like the Toyota corollas, Honda Jazzes, or Suzuki Swifts. These tend to have a good reputation, so older models seem to sell them selfs. They may be slightly more expensive early on but they tend to hold their value for longer.
The first proper car I bought was a Toyota Camry. It was a direct import purchase. I paid $6,500 for it with 70,000km on the clock and had to pay on-road costs ($390 if I remember correctly). I sold it 5 years later, with 190,000km on the clock for $6,000. No major repairs or issues and everything still worked. I believe it sold because it was a Toyota- granted- I did buy a second-hand set of near new tyres and rims for a warrant during the time I owned it- which did make it look much nicer.
But it goes beyond re-sale value. Popular models are cheaper simply because there are more of them. There are more parts available for them, mechanics generally have some experience with them- so repairs a quicker and cheaper for you.
Look for a car that is newer than 2001- the main reason for this is that you will only need to get a warrant check done once a year- rather than every six months.
My Personal Car Situation
I drive what I think is an expensive car- the upfront cost was just over $11,750. I imported my car directly from Japan- which made it much cheaper than any similar vehicle on the NZ second-hand market. I’ve now had it for 5 years and done 70,000km.
But it’s not the upfront cost that is expensive- it’s the maintenance! And there are two reasons why the maintenance is expensive. One- it’s a German car, so parts are generally much more expensive than Japanese cars, and two- it’s not the easiest vehicle to do the maintenance on. Since I tend to do much of my own maintenance. The Germans seem to make everything just a little too complicated.
There’s definitely room for optimisation when it comes to my car. But since there’s no money owing on it- and it’s in reasonable condition, rather than trying to sell it and buy a cheaper car, I’ve decided just to be less dependent on it altogether. I live about 6 km from work- so rather than drive- I’m aiming to bike more.
My Toyota wagon cost me an average of $4876 per year to run (2012-2013) and my German car cost me an average $6326 (2015-2018). That’s an extra $1450 per year- which helped me a lot when saving for a house deposit.
Now- the thing to remember is that you don’t need to plan on driving a $5000 car for the rest of your life. A dollar saved now is worth much more to you than a dollar saved in 10 years. I spent more than a decade with cheap cars- sure, I’d love to buy something fancy and new- I just know the opportunity costs are high and I’d rather not work more so I can pay for my fancy car- which I only get to use when I drive to work to pay for it.