Thinking Of A New Car, Think Again

Apart from Enron, One-Tel or HIA shares there is nearly nothing as bad as investing your money into a new car.

The moment you drive the car off the lot you will lose a chunk of your money; anywhere between 15% and 25%.

Do not buy into the hype of a new car. Yes, the new car smell is great. The feeling of that first drive is second to none. The excitement from your friends and family when you get the car is addictive. But the financial hangover is severe.

Buying a car is a very emotional experience. A lot of people see their car as an extension of themselves. And if you watch any car adverts, they use emotional words to sell you the car. How will this car make you feel?

If you need a late model car, why not purchase a one-year-old car. Let someone else take the big one off loss on the car. Then you purchase the slightly used car with a huge saving. Believe me; the excitement is nearly as good.

While buying a new car is not good financial sense. Buying a new car with a car loan is totally crazy. Nearly all car dealerships offer finance and banks throw their hats into the ring with great offers.

How smart is it to purchase something that will drop in value, with cash? Not too smart.

Now how smart is it to purchase something that will drop in value, with debt? Really not smart.

The dangers of car loans should be taught in schools. Just to give people a heads up on what to avoid when looking for a car. If you have never really thought about a car loan here are the facts:

On a $35,000 car with 100% of the money borrowed over a period of 5 years. At an interest rate of 10% you will make car repayments of $743 a month. Plus over a 5 year period you will pay a total amount of $9618 in interest.

The average car will lose around 40% of its value in 5 years. So you have essentially paid $35,000 for the car and $9618 for the interest, a total of $44,618. For a car which you own free and clear but could only sell for $21,000 five years later, this is a loss of $23,618.

Had you paid cash for the new car, your car would still be worth $21,000 five years later but because you paid no interest, you would have only lost $14,000.

Had you waited a further year before buying and purchased your desired car second hand. You would have paid $28,000 cash (because the orginal owner has taken the 20% drop in price right away). And you could still sell it for $21,000. So you would have only lost $7000.

As you can see, by having some patience and waiting, you really can save quite a lot of money. There is a big difference between a $23,618 loss and a $7,000 loss.

Next time you are in the market for a car, sit down with some paper, pen and a calculator. Do the sums. Then try and take the emotion out of the purchase. If you do this, you can really make some big savings. And remember, if you need a car loan to purchase a car you probably can`t afford it anyway.

Train vs Car

The other day I was talking to a friend who has just got a job in Adelaide. He has started working in a call centre in the middle of the CBD.

Knowing that I was good at budgeting he asked me to work out the difference in cost between driving his car and catching the train. Now I will share them with you in case you are in this situation.

Car

My friend lives 30 kilometres from his work. He then parks his car for $17 dollars a day.

Now his car uses 8 litres of fuel for every 100 kilometres driven. Each day he drives 60 kilometres, so each week he drives 300 kilometres. This means he uses 24 litres of fuel each week. If fuel was selling for $1.30, on average he uses $31.20 on fuel alone.

Plus parking his car 5 days a week at $17 a day he would be spending $85 a week in parking.

Petrol $31.20

Parking $85

Total per week to get to and from work $116.20

Or if he works 48 weeks a year this would cost $5,577.60

This does not take into account any wear and tear on his car. For example using extra oil, less time between servicing and possible accidents including insurance claims.

Train

On the train he pays $4.20 per trip in and out. So it would cost him $8.40 a day.

Total per week to get in and out to work is $42

Or if he works 48 weeks a year this would cost $2,016

This is a saving of $3,561

So in this case the train wins hands down.

Sure it’s not as comfortable. Not as nice to sit in a train when you could be in a nice car cruising at your own pace. However the savings can’t be denied.

Plus on a train you don’t have to worry about the price of petrol. Your ticket price is set. If fuel for example went up to an average of $1.50 per litre, all of a sudden you would be spending an additional $231 to get to and from work by car.

Let’s say each year for five years you could save $3,500 by taking the train.

You put that money into a savings account at 5% interest over the five years at monthly intervals.

At the end of 5 years you would have $19,857.78.

Not bad hey?

So my advice to my friend or to you the reader. If you have a choice, take the train to add to your bank balance.