These days everyone has a car. Cars have become a key symbol of the rise in comfort and standard of living that characterises the 21st Century. Owning a car is one of those things – like buying a house – that people just do. Everyone thinks they should have a car.
And, of course, depending on where you live, particularly if you live in a remote area, a car may be a necessary means of transportation. However, for people who live in the city, and that’s most of us, owning a car is more of an issue of convenience or status rather than a necessity.
In urban areas, public transport tends to be affordable, convenient, and reliable, and thus a viable alternative to car ownership. If you live close enough to your work, walking and biking may be other viable and lower cost options.
However, if for some reason you do really need to use a car, you should first consider options like car sharing, leasing or renting. Remember that convenience always comes at a cost. And in the case of a car, it can be a money pit!
Why Do You Need a Car?
We have always lived in big cities and have personally never felt the need to own a car. We always chose our accommodations with the public transport system in mind, so that we would have an easy commute to work.
Similarly, we favour neighbourhoods with a large choice of amenities in walking distance. Overall, we plan for a lifestyle where we don’t need a car on a daily basis. During the week, we take the train or the bus to go to work. In fact, even if we had a car, we would not drive to work because parking in the city centre is too difficult and expensive.
We have all the major grocery stores within 20 minute walking distance from us (closer if we were to take a train or bus!). Instead of a car, we use a shopping trolley to transport our groceries home.
Even on weekends, we rarely miss having a car. Sydney transport is pretty great – Every Sunday they sell a “Family Funday” ticket that allows families with children unlimited use of any form of public transport (bus, train, ferry). The best part is that the ticket only costs $2.50 per adult.
The result is that many people with children who do have cars choose not to use them on Sundays because there is a cheaper alternative that removes the hassle of driving and parking. In fact, most people who have a car acknowledge that owning a car is a bad financial decision but are willing to make that choice in favour of convenience. But there are other ways to gain that convenience!
For instance, there are options such as car sharing, car leasing or car rental that you might consider. Each of these options is financially attractive for a different reason. Car sharing (e.g. GoGet, ZipCar) are best used for short inner-city trips, for instance an afternoon of heavy groceries shopping.
Car rentals would best suit weekend trips or holidays. Finally, car leasing is a longer-term option to temporary car ownership. Another option to consider is the use of taxis as a car replacement. Depending on the use you have for a car, you may find that those alternatives are actually cheaper than buying your own car. For instance, it’s cheaper to take a taxi home with your groceries than pay for your own car – And just as convenient!
Another option is walking. We try to do that whenever we can. It’s a healthy choice, environmentally friendly and best of all, free!
Practical Choice or Status Object?
There may be situations where you absolutely need to own a car because of your line of work (e.g. delivery driver or salesman) or because you have no other available transport options (e.g. living remotely). If that is the case, you can still be financially smart about your purchase.
There are a lot of options available to you when you are buying a car, ranging from low-cost no frills vehicles to luxurious lifestyle choices. As we all know, branding and status are very well-developed in the automobile industry. What you have to remember is that in developed nations all cars go through a thorough safety accreditation process (e.g. crash tests). It means that even cheap cars are safe cars.
So if you want to spend more money, you need to think about what you are spending that money on. Having shiny new leather seats or the sports version of a car might be nice, but you have to think about whether it is worth it. Does it help the product better achieve its purpose? If the purpose is to drive to and from work, then the answer is probably not!
It’s thus very important for you to think about why you are buying a car. Do you need a practical means of transport or do you favour aesthetics and brand? Most major automobile manufacturers have a regular brand and a more prestigious brand that comes with a price premium.
Ultimately, the core engine and much of the base frame are the same, i.e. built by the same manufacturer using the same parts. The differences lie in design and finishing. Some of the most popular car makers that take this luxury approach are Volkswagen with Audi, Toyota with Lexus or Honda with Acura. So, ask yourself – Are you willing to pay extra money for almost the same thing?
The other fun fact is that a lot of marketing emphasis is put on how powerful an engine is. Higher end models tend to have more horsepower! This is great if you need to accelerate quickly (how often do you try to get away from the police?) or if you like going more than 200 km/h (good luck finding a road that’ll let you – not to mention that the tires often aren’t made to keep up with that kind of speed).
So, yes, great if you live in Germany where they have motorways without speed limits, not so relevant if you live anywhere else. That means it doesn’t make a lot of sense for you to spend money paying for a speed that you can’t actually go to. Don’t fall for a marketing ploy, the maximum speed limit in Australia is still 130km/h … And even Chery cars can go that fast!
How Much Does it Cost to Own a Car?
You will probably have heard this before, but cars are bad investments – Especially new cars. If you buy a brand new car, it loses 10-15% of its retail value as soon as you drive it off the lot. And it will then continue depreciating at a steady 10-15% for the first few years.
It means that the higher the price you paid for the car, the more money you will lose in absolute dollar value. Unlike a house where you could potentially make a profit when re-selling it, a car will always be a financial loss.
If you decide to go with a second-hand car, you can avoid the first few depreciation hits, which are the heaviest. However, you will still be facing recurring costs such as registration, insurance, maintenance, and petrol. It’s still going to be a money pit!
GoGet publishes a good estimate on the cost of car ownership which I am repeating here. It is a rough estimate of annual costs.
|Initial Purchase (Toyota Yaris 5 doors automatic hatch)||$20,000|
They find that for an entry-level model, the monthly cost of owning a car would amount to around $645. A higher-end model would command a larger initial price and depreciation, and higher costs for insurance, maintenance, registration, etc…
Keeping this in mind, the costs of the other alternatives we previously mentioned should be compared against this number. If you’re looking to buy a car, first ask yourself: Would it cost you more than $645 a month to:
- Walk or run
- Take the train or bus
- Buy a bike and ride
- Buy a motorcycle and ride
- Pay a taxi when you need it
- Rent a car when you need it
If you can cut out your car expenses, you can save a lot of money. Assuming you could deposit an extra $600 a month in a savings account that pays 5% per year, this would amount to $40,804 after 5 years. Enough to buy two cars!