Car manufacturers use the above statement in some form to appeal to your emotions while you make the purchase decision. This post, would however, talk about it from a financial independence angle. Read on to find out what is the right amount to spend on a new car.
First of all, let me say that I am also guilty of overspending on a car I recently purchased. However, I am still in a range that would not hamper my early retirement plan.
Following is a great graphic from FinancialSamurai.com that gives a snapshot of where you are in your “buy what you need, not what you want” journey as far as the decision to purchase a car is concerned. It provides a good enough rule of thumb to decide how much to spend on a car.
The above analysis is done according to the income and car spend in the US. For India, anything between 11-25% should be considered okay (as car prices in India are higher than in the US).
Following are some of the reasons I believe one should not spend more than 25% of their income on a car:
Reason 1 It is a depreciating asset at best, if not a liability
A new car loses about 20% of its value in the first year itself and around 60% in the first five years.
Reason 2 Okay, it is more of a liability. You have to maintain it as well
Not only you have to pay for maintenance (a BMW would demand a higher maintenance than a Hyundai or a Maruti), there is insurance cost, parking charges etc. With increasing reliability of services like Uber, it might make sense for you to not own a car at all.
Reason 3 Opportunity cost
You are letting go of a few SIPs that can compound to a lot in those 3-5 years you are paying for the EMI of that new car you just bought.
Reason 4 The thrill fades in a couple of months, and then…. You want that new Mercedes
Yes you would really enjoy the first few rides, where you discover jazzy features and boast about the ride quality. Truth is, that initial rush fades away very quickly, probably in a couple of months if not less. Post that, you long for a better car and the cycle goes on where you long for spending lakhs on a beast that will eat into your investment and early retirement plan.
Buying a car does not have to mean spending lakhs on something whose entire purpose is to take you from point A to point B while providing you basic level of comfort and security.
In case you have already spent too much on a car, you should aim to drive it for as long as you can (in Delhi, the max age of a car you can drive is 15 years) or till a time that maintenance costs are not taking a toll (cars built these days are usually sturdy enough to last more than 1,00,000 KMs without any major trouble).