A radical retirement plan needs to be underpinned with strategies on all forms of expenditure. This articles looks at cars.
Ignoring our home, a car is often the second most expensive thing we will buy. I deliberately used the word “thing” rather than “asset” because unlike a home, a car (unless it is a classic) will always go down in value.
A car is NOT an asset and it is important to recognise this because the first rule is that you should never borrow money to buy something that goes down in value. However, many people do. According to an article in the FT in October 2013 75% of new cars are bought with direct finance.
This is interesting because in the book The Millionaire Next Door (which you can get from the library rather than buying) you will find that self-made millionaires never buy new cars and never buy on credit.
Think about it this way. Should you spend ALL your money on a car? If the answer is no then why would you spend more than all your money because that is what you do when you buy a car with a loan?
But, assume you do have the cash to buy a car outright and the local dealer is offering finance at say 2%. You could think borrow the money cheap and invest my cash and get a higher return. Sounds good?
Well, you’d be wrong because you need to look at the total cost per year and the cost per mile rather that the cost per month. When you do this it can change your choice of car and your driving style!
The most important factor is to reduce the amount you use the car. A two car families can become single car and you could be looking at 10,000 miles a year or even 5,000 miles a year, especially, if you look at the car as a luxury and restrict your use. This means a modern car could last you 30 years.
This is important to appreciate because when you buy a car you are buying the future mileage. And, like any good business you don’t want to carry too much stock. You are paying for something you will never use!
Let’s look at example.
Car buyer A buys one of the lowest cost-per-mile small cars for £15,000. He drives it for 13 years, traveling 200,000 trouble-free miles.
Compared to paying £15,000 off part of a 5% mortgage or making an investment that pays a 5% annual return the real cost is £31,705.
Car buyer B buys the same car but six years old with 90,000 miles the clock for £6,750. They can only get another 110,000 miles out of the car which takes 7.3 years. They then buy another used car to cover the remaining 90k miles for £5,625.
Buyer B uses up £6,750 over the 13 years, which is worth £12,912 if it were used to pay off part of the mortgage or in a 5% investment plus the additional £5,625 for the extra 90,000 miles for the final 6 years. This has a cost of £7,588.
So at the end of 13 years, car buyer A costs £31,705 while buyer B cost was £20,500. This is a saving of 35% or £11,205 every 13 years. And, this is driving essentially the same car.
You just need to ask yourself what’s important to you. Looking like you are well off and driving a new car or being well off and having financial freedom?
The truth is that well over 90% of the car market is people are buying cars that they cannot really afford.