Since the boom of the automotive industry of the 1950s the car has become an integral part of South African society. People will always want to own cars, but that’s the issue, a car is a depreciating asset. Your car loses value the moment you drive it off the lot and continues to lose value as time goes on.
Car manufacturers have spent more than R194 Billion on advertising in 2018 alone. They convince us that once we get behind the wheel of their new car, our families will love us more, our neighbors will envy us and our freedom to go anywhere is secured.
Unfortunately, they are more likely to take away your freedom and security.
New cars are a financial triple threat. We borrow money at interest to pay for an asset we need to pay to maintain and drastically depreciates in value.
What is Car Depreciation?
Car depreciation is the difference between a car’s value when you buy it and when you come to sell it.
You might be surprised, but the value of your car decreases to 91% of the initial market value the minute you purchase it. Why? Well, it’s all in the perception of a next prospective buyer. At the moment you buy it, the car’s state moves from “new car” to “used car”, and even though it’s been used for just for one minute, its value drops significantly.
Then, the car value continues to drop year after year.
- After a year, your car’s value decreases to 81% of the initial value.
- After two years, your car’s value decreases to 69% of the initial value.
- After three years, your car’s value decreases to 58% of the initial value.
- After four years, your car’s value decreases to 49% of the initial value.
- After five years, your car’s value decreases to 40% of the initial value
Calling a car a bad investment is like calling Malusi Gigaba a bad nuclear scientist. I mean cars are not an investment at all. I cannot think of any other thing I would spend this much money on that loses its value so quickly.
So what now, how do I get a car?
Let’s put in a few ground rules on what to do when you are about to purchase a car.
- Buy a car that is at least 5 years old, that way you are skipping the majority of it’s depreciation curve.
- Save up to buy a car in cash. Paying interest on something that loses it’s value is like going to McDonalds to order salad.
- Save an equal amount to your car payment. If you cannot save the amount equal to your car payment, then you simply cannot afford it. In other words, if you cannot save R2000 a month then you cannot take on a R2000 a month car payment.
How much money is at stake here?
Say I buy a new Toyota Corolla for R315 000 and I put down R15 000 as a deposit, financing the rest at 11.50% over 60 months. My monthly repayment would be R6 693.
Now what if I buy that same car, but an older model. If I buy a Toyota Corolla 2014 model for R135 000 and put down a deposit of R15 000 the monthly repayment will be R2 734.
That is a total saving of R3 959. If you take that money and put it into a few ETFs (great read on this) or property, even with a conservative growth of 7% per year, you would have over R2 million in 20 years.