I have a love hate relationship with cars. I love owning them and driving them but I hate how they destroy wealth. Some of my worst financial mistakes have been buying cars. When I started on my journey to financial freedom I realised that I had spent a lot and lost a lot of money on cars. The problem was I really enjoyed owning them. So I needed to find a way to own them without losing a fortune. I wish I knew how to buy a car and save money.
I am the first one to tell you to avoid cars in the first place. I just love bicycles and the idea of car free cities. There are many places in the world where this is possible, typically in Europe and Asia.
But I live in South Africa and here it is not that practical. We have a vast country with wide open spaces that need to be explored. Our roads are very unsafe for bicycles and pedestrians and our public transport is poor. So even if you don’t like cars your freedom is restricted without owning one.
The Facts About Car Ownership
Cars are referred to as assets in accounting terms . But in investment terms they are not assets because they lose value over time and don’t generate income unless you are a driver or in logistics. Even then they are costly assets.
For you and I cars are a liability and major expense. The more you spend buying one the more you lose. That is because the car starts depreciating from the day you drive it. New cars will easily lose up to half of their value within 4 years.
There is no financial advantage of buying a new car ever. Not even the warranty and maintenance plan are savings because these are built into the price too. Most of the time you convince yourself that you deserve or need a new car. When in reality all that you have done is extended your self into more debt.
The only way to truly know if you can afford a car is to buy it cash. If you can’t buy it cash you can’t afford it. If you buy cash you will never buy a car that you can’t afford. If you aren’t careful you will lose money rather than buy a car and save money.
The cost of the car is not just the purchase price. There are additional costs that you need to factor in like
- Finance costs and interest
- Fuel and tyres
- Maintenance costs
The younger you are and the more you drive the higher all of these costs will be
How Much Car Do You Really Need?
The reason you buy a car is because you need personal transport. The problem is that for most people buying a car becomes an emotional decision to boost their status. If you only ever thought about it as a form of transport then your decision making process would be a lot different.
Strange as it may seem but not everybody needs a car. So it is worthwhile to ask the question do I really need to buy a car. Is there not another way that I can solve this transport problem. Can I move closer to work, can I use a bicycle or a scooter, can I use public transport? Can I work from home to reduce transport or share in the family?
If you do still need a car then how much car do you need. Do you really need to buy that 4×4 if you will never use it? Do you really need all of those features and speed?
The more car you buy the less money you have to invest. Harsh reality is that if you can afford to buy a car you can afford to invest. The car will give you short term freedom and options but will erode your ability to build wealth. Investing the savings on the other hand will build wealth and give you long-term freedom
8 Tips To Buy a Car and Save Money
1. Buy used not new
Remember the facts about car ownership, well you need to apply them. The biggest saving that you can make is to buy a used car instead of a new car. The high of a new car wears off after just a few months then you are in a used car anyway. When you buy used you avoid losing that huge devaluation amount from new to used.
If you have your mind set on a certain car you can still buy it. Just buy the same model but a used one rather than new. You can find used models in excellent condition that look and even smell like new still.
By buying used you will be paying less for insurance too and your finance charges will be lower. Sure you may or may not have a higher maintenance cost but it will be significantly lower than the other higher costs of buying new.
2. How to buy a used car
There are many options when buying used. Don’t be fooled by the stereotype of the dodgy second-hand dealership on the other side of town. Buying used could be anything from buying a demo model to buying a 10 year old model.
No matter how or what you buy you should always look for the following
- The lowest mileage possible – make sure it is legitimate and car age relevant
- Full service history with original or reputable dealer
- Balance of warranty if you are buying under 3-5 years old
- Well looked after car – signs of neglect should be a red flag
If you will be traveling a lot then consider a demo or a one to four year old car from an approved dealer. Cars this age should come with the balance of a factory warranty or maintenance plan. This will give you peace of mind and allow you to still sort out any problems under warranty if need be.
If you don’t travel a lot then you could consider an older car because you will not put that much mileage onto it. If you know about cars you could buy something up to 10 years old or even more. Cars this old will give you the best value for money but you need to be able to maintain them and know what you are buying.
3. What type of car
The type of car will depend on your needs. You need to be honest with yourself here. Ideally buy as small as you can but with acceptable safety features and ratings. Once again the more car you have the bigger the add on costs. Consider your needs for the next 10 years and get a car that you can keep.
In my experience the smaller cars from Japanese or Korean manufacturers provide everything you need and are the most reliable. Think of brands like Honda, Kia, Toyota, and Suzuki. These manufacturers make cars that last for decades.
4. Keep the car for at least 10 years
Cars from the 60s and 70s would barely last 100 000 km before major work was required. That was with 5-10k service intervals. Nowdays cars can go well over 300 000km without any major work done. Fact is the quality and reliability of cars has improved significantly.
When I was in my 30s I sold a car because it had reached 100 000km and I thought it was going to be a problem. Now 20 years later I have bought the very same model with 300 000km because it is good value and what I need.
A 10 year old car with +250 000km is more common than you think and is being driven by the millionaire next door. A well looked after car has a reliable life of at least 15 years.
Don’t be fooled by the repair cost. The cost of repair is significantly less and only a fraction of the cost of financing and insuring a new car.
5. One old car beats two new cars anyday
Replacing your car every 4 or 5 years is an absolute waste of valuable investment money. Rather keep your old car for another 5 years and invest the savings you make from the payments and the insurance.
Lets assume that every 5 years you buy a new 300k car. That means that 20 years and 4 new cars later you have spent R1.47M on cars
Now lets see what happens if instead you buy a used car at 150K and keep it for 10 years and then buy used again. That means that after 20 years and 2 used cars later you would have a R1.5M by investing the savings
That’s how you save money on cars.
6. Take minimal finance and pay minimum interest
Ideally you want to save up and pay cash for your car. If you are saving for a 100K or 150K car it is a lot more manageable than a 300k car. If you can’t save up the total amount then save for and pay as big a deposit as possible
This will reduce your monthly payments and give you negotiating power on the price and the interest rate
With the payment reduced you can afford to contribute more every month so you can pay it off faster and save even more interest.
7. Shop around for finance
Don’t ever be desperate for finance. If you are, see that as a red flag because it means you won’t get a good deal and you are probably spending too much. You don’t have to use the dealer finance and you don’t have to use your banks finance. You have to find the finance that gives you the best deal. You the buyer have the power. Get quotes and negotiate
You want a deal with the shortest time frame you can afford, paying the biggest deposit and with the lowest interest rate available. Don’t ever consider balloon payments they do more damage than help.
8. Careful who you take car buying advice from
You will find car buying advice all over. Dealers offer you amazing specials with delayed payments, balloon payments and once off deals. Lifestyle magazines recommend how much you should spend on a car. Do your own homework properly and consider all the costs short and long term. Understand the detail of your car buying transaction. If you can’t understand it you should not be buying it.
Be careful of articles and statements from “Financial Experts” like this thread explains
So You Can Buy a Car and Save Money
Besides your house your car will be the second most expensive item that you buy. That means it is the second biggest opportunity for you to save money. Most people overextend themselves too often with cars and become debt slaves.
You can still buy the car of your dreams and save money if you buy wisely and implement these saving tips. Let us know in the comments below what your experience has been with buying cars.