Last month we started a series about the three important lifestyle decisions that most of us are likely to face, all of which have big financial implications. These are: the house you choose to live in, the car you choose to drive and the school you send your children to. This month, we tackle cars.
If you lived in the UK or the USA, a car probably wouldn’t be on this list of most important lifestyle decisions. Here in South Africa, cars are, relatively speaking, significantly more expensive than in many other countries. Several years ago, Wesbank released an International Mobility Study in which the cost of buying, using and maintaining an entry-level vehicle was compared across seven countries – Australia, Brazil, China, Germany, South Africa, the UK and the United States. Here were some of the results:
- It costs 55% more to get and keep an entry-level vehicle on the road in South Africa than it does in the USA.
- It will also take 95% of the average annual salary of a public school teacher to buy the vehicle, compared to only 23% in the USA. This means that if that teacher could spend his entire monthly salary towards saving to buy the car, it would take South Africans nearly a year to save the amount, while it would take an American teacher just under three months.
This in itself wouldn’t be so much of an issue if we had great public transport options, but the reality is that if you’re going to get around in this country, you need wheels. So seeing as cars make up such a big part of a budget, here is the advice we share with our clients about purchasing them.
Everyone is different. On one side of the scale we see those that live for that new car smell and the discovery of each and every button, dial and feature. They want the latest and the greatest. On the other side of the spectrum are those who see a car as purely a way to get from A to B, and are happy to drive one until the bumper falls off. There is no right or wrong here, or sweeping statement that we as your financial planners can make, except to say that whatever you choose, it should fit into the bigger financial picture.
This means that the purchase of a car should not be considered in isolation, as oftentimes it is, because “it’s just something I have to have in order to get around.” As mentioned, it is one of the three big lifestyle decisions, therefore it can impact on the other two. And unlike a house, it is an asset that will begin decreasing the day you drive it out of the showroom. It’s critical that when you make this big decision, whether it’s to buy a run-around or your dream Maserati, you’ve thought it through.
Here are a few things to consider when thinking about buying a car:
- Don’t only look at the sales price of the car. You should also consider its cost to run and insure, compared to what you are currently driving as well as other cars you may be considering.
- Think carefully before signing up for a Motor Plan to extend beyond your warranty. This is a sales marketing technique deluxe as usually, there is nothing wrong with a five-year-old car, and you most likely have several years after your warranty is up before you need to start replacing many parts.
- Financing should be your last resort. We generally believe that financing is a bad strategy, and ends up costing you dearly. Ideally, it’s best to pay cash, and if that is not an option, look at using your bond facility instead of taking out a loan. If you are looking at financing, be aware of balloon payments, admin fees and compulsory insurance: these are costs that are often hidden.
- Avoid impulse decisions and steer away from trying to keep up with the Jones’s when buying a car
So whether you’re ready to realise your lifelong dream of owning a Ferrari, are thinking of switching to a big family car, or are happy to carry on driving a 15-year-old Mercedes, take due consideration when buying a car as it’s a decision that has massive financial implications.