The cost of car ownership
Correspondent | Monday April 7, 2014 11:29
Question: Is the car purchase a wise decision?
a) Will Peter afford the daily running costs?
b) What other costs should he plan for?
c) What else could go wrong?
d) Is the car an asset?
We must all be careful when we buy something that we can’t usually afford. It could put us into a precarious position where it may end up costing us more.
If you haven’t budgeted carefully for something, you really need to think about whether you can afford it - even if you have the cash available today. If you’re not able to afford extras, and your sudden windfall is a once off incident, how will you pay for the costs that cars incur?
What “extras” are we talking about?
l Fuel
l Service
l Insurance
l Mechanical breakdowns
Fuel costs
When we aren’t used to driving, we might have an unrealistic view of what the fuel actually costs per kilometre for the type of car we are buying.
Fuel in Botswana costs about P9.60 per litre.
Say the average family car uses 7 litres to travel 100km, so travelling 100km costs 7x9.60 = P67.20 for 100kms. Make sure you calculate this upfront, before purchasing a car. If this cost is going to be more than what you are used to spending on taxis, will you be able to afford the extra expense in your monthly budget?
Peter lives 15km from his work, and works 6 days per week (25 days per month), so travelling to work and back (30km) means he will travel 750km in a month to work. If he also travels 250kms for pleasure, that’s a total of 1,000kms each month.
If 100kms costs P67.20 Peter’s fuel will cost him P672 per month or P8,064 per year
Servicing your car
Firstly, make sure that there are plenty of other vehicles like it on the road – that way you know that there are easily accessible and affordable spare parts for the type of vehicle you have chosen. Don’t buy a ‘rare’ car – or else if something goes wrong it might be off the road for months - waiting for a spare part (or perhaps a mechanic might even fit the wrong part).
Secondly, make sure that you know a reliable mechanic who has the right tools to work on your car. A guy who fixes cars in his backyard may be cheap, but he’s also likely to get things wrong and put your car ‘off the road’ – costing you more. Also, most cars today have on board computers that can only be fixed by mechanics with the right computer equipment.
What are the costs of servicing a vehicle?
Regular servicing is vital to keep your car running. Over time, parts wear out, oil degrades and your car becomes more likely to break down. Regular servicing by a good mechanic every 10,000kms is vital to keep you on the road – and that means servicing costs at least once per year. Including parts, you should budget for P1,000 to P2,000 for this.
Top tip:
Lastly, after every service make sure your mechanic puts any old parts he has replaced in the boot of your car. That way you know that you are only being charged for parts he has actually replaced – not old parts that are still on your vehicle. Most of us don’t know enough about engines to protect ourselves through knowledge – pretend you know more than you do and keep your mechanic honest!
Insurance
If you can’t afford to replace your car easily, you need to buy comprehensive car insurance. This will pay out money if your car is involved in an accident, or if it is stolen. This might cost you about 6 percent of the value of the vehicle each year. For a P40,000 vehicle the cost would be P2,400 per year or P200 per month.
Shop around for insurance – different brokers and different insurers may give you better rates. But remember – pay your premiums on time, or the insurance won’t pay out if the worst happens.
Mechanical breakdowns
You should keep an emergency fund in your budget to pay for those dark days when your car has some mechanical problems. Ask yourself, if the gearbox goes wrong (for example) how am I going to afford a new gearbox for P4,000? Remember - without a gearbox, a car is just a rusting lump of metal!
Your emergency fund should be in a safe location, and you should add to it each month, to protect you in the longer term.
Is a car an asset?
An asset is something that adds value or income to you.
We know that the value of your car depreciates every year – by about 10%. This means that a P40,000 car this year might only be sold for P36,000 next year.
Eventually, when a car gets too old, nobody wants to buy it. So remember to take care of your car - every chip and dent will reduce its value.
If Peter buys a car for P40,000, it will cost him:
l P8,064 per year in fuel
l P1,500 per year in servicing
l P2,400 per year in insurance
l P4,000 per year in value depreciation
The total cost of owning his car is therefore P15,964 per year (without any breakdowns) – so should Peter really count his car as an asset?
Be street wise
Make sure you are buying a car that is in good condition, that the mileage is correct, that the parts are genuine.
Realise the additional costs and budget for them in advance. If you are importing from abroad, know how much VAT, import duty and registration will cost you.
Make sure the brakes work and the tyres have plenty of tread - you don’t want to be the cause of an accident.
Keep an emergency fund for damages, breakdowns and insurance for your car.
Remember: your Financial Wellness is up to you. Follow these simple life rules, live within your means, and be comfortable and happy with your money.
Author: Lechedzani Pitso – Financial Wellness Trainer with S.C.I. Training (Pty) Ltd. © S.C.I. Training runs financial wellness programmes in Botswana. For help and information contact them on 3180243 or 72309718 or leche@wellness.co.bw