Rules for financial success: Rule 3
Correspondent | Monday August 21, 2017 16:08
Vehicle: Pay Cash For The Car You Drive.
“As we continue to live our lives under financial pressure, we must create new ways to deal with over-spending and start to focus on saving and investing for our future. It is imperative to live within our means, finding ways to make our money go further so that we can start to save and plan to be financially fit.”
What’s The Best Way To Plan To Buy A Car?
Owning a car has become almost as much a rite of passage for young Batswana as it became a status symbol for their elders. However, it can be a very bitter burden if one isn’t careful. The trap of vehicle financing is the one that can be most dangerous of all to our long term finances
Costs Versus Benefits
The immediate benefits of acquiring a beautiful new car can look great. The question still remains: Does the cost of the car really equate the benefit?
We all know that there’s a cash price for a car, but most motor dealerships will try to sell us a car based on a monthly payment.
That payment can be spread out over up to six years – plus interest, meaning that your ‘future self’ will be paying for the cost, and more.
Points To Consider;
l Purchasing (negotiating) Power
When you walk into a vehicle showroom, you are the customer and you should have the power to negotiate. However, the sad truth is that once you use a loan or finance agreement to buy your car, you’re giving the financer of your transaction the power that you had. This takes away any negotiating room!
If you’re buying a second-hand car privately, the person selling it is at a disadvantage – you know that they really want to sell it, but they don’t know whether you want to buy it. That means, if you’ve saved up the cash, you can sometimes get a massive discount, and a real bargain!
l Interest
When we’re looking at a car, we are overcome by the ‘smell of the leather’, and we often forget the cost of interest that will be charged on the loan. If anything, we focus on the Payment, not the percentage rate.
However, if you borrow P200,000 at 10% interest, you’ll pay back P3,705 a month – or P266,772 over the next six years!
l Payment Tricks
Salespeople can bring down the monthly payments by moving the bulk of the debt to the end of the finance period – called a balloon payment.
That way you could borrow P200,000 and paying back P100,000 of this by selling the car at the end of six years.
This looks good – your monthly payment drops to P2,685. However, it actually increases your total repayments to £293,386.
l Ownership Of The Vehicle
Even after completion of the transactions and the keys have been passed on to you...is the car truly and honestly yours? The truth of the matter is that until the debt is cleared, you’re on the hook. If you miss repayments, the car can be taken back from you and sold at auction.
We sometimes look at it like this: If your car payment is 40% of your salary, you spend the first 10 days of the month paying for the car. Each day, your vehicle demands that you get up and go to work to pay for it! The car is owning you – not the other way round!
l Making It Easier To Make The Right Decision
When faced with a purchase with P400,000 in hard earned cash in the bank, most Batswana wouldn’t opt to blow it all on an expensive car. This is because we rightly wouldn’t want to spend all our hard earned Thebes in one place.By saving up, therefore we make better buying decisions.
l A depreciating commodity
If you buy a new car, the second you sign the paperwork, the car is worth 12% less – because you’ll pay the VAT to BURS.
Then in the first mionute you drive it, it will be worth 10% less again, because its no longer new.
And then, over the next year, it will go down in value at about 10% each year
All this means that a 6 year-old car is worth less than half a new one. If you’ve also spent the last 6 years paying interest (in addition to fuel, tyres, insurance and tax) you can see how it’s a major drag on your quest to be financially successful.
Because the car itself starts losing value the moment you drive it off the lot, this simply means you are paying more than the car is actually worth year on year for the ownership of the vehicle, which unfortunately also cuts into your ability to save for the future.
Tips For This Rule:
l Build A Nest Egg
Save for the future as soon as you get paid - having a pool of funds helps you decide firstly what you can afford in the car market.
l Give real consideration to what you want compared to what you can afford
It’s important to know what you want, be it a brand new car or a second hand car, and what the costs are.
l Focus on your target
Keeping a focus on the amount you want to save up and the amount you are willing to spend on your car make it more attainable and allows you to be more realistic.
Final Review
All in all, the decision to buy a vehicle must be made with certainty that you have the financial standing to afford it. Planning and buying your car for cash means that you can choose the vehicle you want without crippling yourself in the process. Buying it on credit may be easy, but it makes your ‘future you’ much poorer.
“If your outgo exceeds your income, then your upkeep will be your downfall.”
Bill Earle.
©S.C.I.Group. Author: Daniel VanVuuren – Financial Adviser with the S.C.I. Group. S.C.I. Financial (Pty) Ltd. is a registered Investment Adviser, giving financial planning advice, financial education and debt counselling distress. For help and information contact 3180111 or advice@scifinancial.com