Driving ourselves to financial ruin

Australians love cars.

We are a vast nation, public transport is notoriously bad, and besides, it’s too hot to walk or bike to work.

I’d much prefer to sit in an air conditioned sofa, signing along to my favourites tunes like no one is listening. Bliss.

Don’t get me wrong, I love cars and constantly feel the desire to upgrade.

But have you ever stopped to think about the real cost of a car?

Let’s break it down a little.

The average Australian earns around $80,0000 per annum. It’s slightly less than this but let’s make this easier for me.

It’s not uncommon to see people on this salary driving around in brand news cars, entirely financed of course.

Let’s say they purchase a brand new car for $30,000, and take out a five year loan at 8% interest.

Let’s take a look at the running costs over 5 years:

Purchase Price	$30,000
Establishment Fee	$475
Interest	$6,500
Rego	$4,000
Insurance	$5,000
Services	$2,500
Maintenance	$1,000
Fuel	$12,500
Total	$61,975

If you earn $80,000 a year, you’re going to be paying tax of $19,147.

That means your actual take home, in the pocket salary, is $60,583 p.a.

Yep - you’re working for one whole year of your life, just to buy this car!

And that’s before you pay for food, pay for your accommodation, and pay for all the other life admin expenses - toiletries, work clothes, mobile phone, any number of other things you need to survive.

Imagine going to work every day day just to pay your car.

Really, it shouldn’t be that hard to imagine, because most people are already doing it!

The sad truth is, it gets worse from here.

Most people I see aren’t driving around in $30K cars, they are spending a whole lot more.

I see people in BMWs, SUVs, Land Cruisers every where I look. And I’m not just talking about people who can afford these cars, I’m talking about people in their twenties and early thirties, buying crazy expensive cars. Many of these people aren’t even earning $80k a year.

Most likely, you also don’t have just one car, your spouse has one too. And they are also trading their life energy for a lift to work.

Unfortunately, cars are a status symbol, so people are constantly upgrading their cars, and it’s not uncommon to see cars upgraded every 3-5 years.

But please realise this, your car comes at both a financial cost and a life energy cost.

Not only is it important to consider the cost, but the amount of your life that you exhausted to buy the car.

All those meetings you didn’t enjoy, dealing with difficult customers, arriving before work starts, working late, all so you could buy a car to get you to your job.

It defies logic.

And we haven’t even factored in the opportunity cost yet of the lost investment earnings!

My rules for cars are simple:

• Buy the cheapest and safest car your ego can afford.
  

• Pay cash for it. If you don’t have the cash yet, keep saving.
  

• Second hand cars are the most affordable. Because depreciation is highest at the start of the buying cycle (the first owner takes the biggest hit), you can minimise this cost by purchasing a car that’s already got a few miles on the clock.
  

• Some cars are cheaper to run than others. Buy these cars.
  

• Optimise your life by living closer to work. The further you live from work, the more you will be spending on fuel, with your car depreciating further with every kilometre you drive. If you optimise your life enough, you might be able to get to the point where you don’t even need a car at all.
  

• If you are all partnered up, try to live with just one car. Wouldn’t you prefer to have an extra $60,000 saved every five years instead?

An alternative way to buy a car:

Let’s say you are looking to upgrade, but you’ve already got a perfectly good working car in the garage.

You know it will give you another 5 years of relatively stress-free driving.

Rather than buying that $30K car on finance, where the repayments would be around $600 a month, you could instead keep your existing car, and invest the $600 per month instead.

$600 a month, returning 8% a year, will be worth approximately $43,000 after 5 years.

Now here’s where you come to a fork in the road.

You could:

1. Withdraw your investment after 5 years, pay some tax and buy a brand new car outright.
   

2. After 5 years, stop contributing further to the investment, and use the $600 per month to buy yourself a new car. Let run, that investment should be worth $295,000 in 30 years.
   

3. Let’s say you withdraw a small amount, say $20,000 at year 5, and then every 10 years afterwards, but continue to reinvest your $600 per fortnight into investments yielding 8% per year. Your investment is projected to grow to a substantial $591,000 after 30 years.

There’s a good chance you’re not just buying a new car regularly, you’re probably doing the same for your spouse too.

Given this, it’s not impossible to increase your household wealth by over $1million throughout out your life, just by keeping your car expenses under control and investing the difference.

Are we driving ourselves to financial ruin? Of course we are.