If you live outside of a major city or transport hub owning a car is one of the more necessary evils. Cars are incredibly useful but also one of the more, how shall we say, drains on our personal finances. I used to be firmly in the camp of bigger is better, fancier is better and the more bells and whistles the vehicle has then the better it is. Who was I trying to prove something too? Society I guess, societies firm belief that we should all be keeping up with the Joneses.
The problem with a brand new car
For the vast majority of people out there, there will be 2 main recurring monthly expenditures. Mortgage/rent and a car lease/finance payment. For years, I held car finance and lease deals to ensure I had a brand spanking shiny new car. Nothing really high end (see featured image), but nice enough to ensure I was always in something no older than 3 years. I’d take the car and drive it around, panicking about every potential scratch, about every bump of the alloys and tracking every single mile I drove to ensure I didn’t get stung by the excessive mileage charges that all those kinds of deals come with. But who cares about all that, my car was shiny!
This was my genuine attitude since I got my first full-time job and regular salary and for the best part of the 7 years since. Whilst I never paid an absolute fortune for a deal, my payments were still between £160 and £200 every month. Adding that up over the years that’s almost £13,000. Throw the excess mileage charge and damage fees into the mix and it soon adds up. Now if we perpetuate that forward and keep my attitude the same over the next 20 years I’m going to hit just under £50,000. That is also assuming I don’t suffer from lifestyle creep and my monthly car payments don’t start going up and up. £200 a month is firmly at the low end of the spectrum for any kind of finance or lease deal. Now, anybody who knows even a little bit about investing and compound interest can see how else that £50,000 could be used and what that could have turned into over the same 20 year period.
Running some quick calculations in a FIRE enthusiasts favourite thing (spreadsheets, wahooo!!) and you can see what that £200 a month could become. Assuming you invest £2,400 a year (£200 a month) and return 7% a year at the end of a 20 year period your £200 a month has miraculously turned into £105,000. I like maths, maths is good!
Joining the dark side
I had a bit of a debate about the phrase ‘dark side’ for this section, as in all honesty I am firmly believing I have seen the light. If that little bit of maths right there hasn’t opened your eyes a little bit to the sheer possibilities then let’s delve a bit deeper into my reasoning for making my 180.
Do I really want to keep doing this? I asked myself this question when my last car came to be returned. A £400+ mileage bill plus a £500+ damage bill was a real kick in the teeth. Now, after driving it around with a real degree of care, stressing about every potential bump and monitoring my mileage I’ve still been stung with the best part of £1,000. Bummer!!
So what’s the alternative? If you asked Mr Money Moustache he would tell you to scrap the car and cycle everywhere. Whilst that does get a huge thumbs up from me in principle, for a lot of people that isn’t realistic. It’s a commonly known fact that the second a new car is driven out of the garage it instantly loses 50% of its value. As time goes on the rate of depreciation gets lower and lower and, whilst never quite levelling off, it does slow down. The trick, buy a car that has already depreciated. Simples!
The 5-year rule
I like to think of the 5-year rule, if it’s newer than 5 years it’s still in the prime stages of depreciation. My most recent purchase was an 8-year-old Ford Fiesta with 40,000 miles that cost me £5,000. In an ideal scenario, the £5,000 would be paid in cash and then bye-bye monthly payments. Now, that’s still not overly realistic for the vast majority of people me included.
The short-term loan
A personal loan, ahhhh scary!!!! How can you take a personal loan after just preaching that monthly payments are bad? I can hear you all screaming, I can almost feel the pitchforks being raised in my direction. But let me just explain! In the example above that assumed a £200 a month payment until the end of time, at the end of every 2-4 year finance term you trade in and get the newest, the latest and the greatest! With the short-term loan option, I like to look at things a little differently. My £5,000 loan was taken over 4 years working out at around £111 per month, already this is a lot cheaper than anything you could get brand new. After taking the loan there is a two pronged attack to the second part of this strategy!!
Taking the loan out is a means to an end, it is a way for the necessity of car ownership to be made semi-affordable. There isn’t a chance I plan on keeping that loan going for the whole 4 years. Paying it down in the first 12 months, now there is something I can get on board with.
Much like my investment strategy, I view my car ownership as a long-term strategy. Most cars nowadays will run, with a bit of tender loving care, until at least 100,000 miles. They may be beaten, battered and bruised by the time they get there but they will still be running. Now when I bought the car, it had 40,000 miles which will give me a theoretical 6 years of ownership. If I stick to the plan of paying the car off in the first year that gives me 5 whole years of car payment freedom. If, after 6 years, the car is starting to cost me in repairs I may well start the whole process again OR I may just keep hold of the car until it is on its deathbed. By that time, I may well have the cash spare in my emergency fund to buy another 5+-year-old car straight away, or I may choose to complete the same process again with the personal loan/early repayment strategy. Who knows!
Am I making sense?
Some people will read this and question my sanity, how can you cope without having a brand new car? How can you drive around in something so old, so beaten! To them people, I just smile and wave and accept that I’m not going to reach absolutely everybody with this post.
But hopefully, even just a handful of people will read this and look outside at the brand new Mercedes Benz sat on the drive and question how much that actually is costing them! I’ve quickly realised since starting on my financial independence that cutting expenditure is equally if not more important than earning lots of money. Car ownership was one of my first ‘quick-wins’ to increase my savings rate. Plus, who really needs a top of the range car? Who do you really need to impress?
Until next time!