Everybody wants a new car. Everybody fantasises about his or her dream car. Like everybody else, I also have a dream car that I intend to drive in my lifetime. We cannot deny we have an emotional attachment to cars.
We admire them from a far and declare that we shall get ourselves one just like the one we are admiring. We feel good when we are driving a nice car. We notice how people around us react to our cars.
You envy the special parking that the watchman gives the people with the nice-looking cars as you are told to go park in some obscure spot where you may not even have wheels by the time you come out.
Cars have become status symbols. A sign that you are headed somewhere. There is nothing wrong with aspiring to have your dream car, but will that car drive you straight to poverty? (pun intended). I was on a radio show this week talking about debt.
I had just described good debt as the kind that puts you in a better place financially. Then someone tweeted me to ask if getting a better car using a car loan is good debt. No, it is not.
You’ll be in a more comfortable car, but not at a better place financially. But, I am not here to bash cars. After all, I also yearn for my dream car like everybody else. However, you have to analyse whether your car is driving you to poverty because I’m sure
that is not the destination you want your car to take you to.
BOUGHT ON LOAN
Let’s start with the math. Many people decide what car they want and then go and find what is available and how much it will cost. When we decide which one we like, we start noticing it on the road and we figure out what we can do to be the person
sitting at the wheel. A few have cash available to go buy it. Many of us, however, will look at our payslip and if we think we can manage the monthly repayments we buy the car we want on loan. Some of us know we can’t manage the monthly outflow
because we have other loans and we know we are always late on rent, but we take the car loan anyway hoping a deal or two will miraculously come our way and enable us to repay the loan. We even cheat ourselves that driving this particular car will open
doors to promotions or certain people who will throw these deals our way. We are already mentally hooked even before we take control of the steering wheel.
DO THE MATH
So a friend of mine, let’s call him Jeff, has just upgraded from a Honda to a Subaru. When he bought the Honda, he paid in cash. However, the Subaru which cost him Sh1.5 million has been bought through a car loan.
He is required to repay the loan in installments of Sh40, 000 a month, so in a year he will have made Sh480, 000 in car loan repayments. In addition to this he will spend about Sh20, 000 in fuel.
That is another Sh240, 0000 per year. Insurance per year on his car is Sh80, 000. In a year he will spend approximately another Sh200, 000 on parts, repairs and servicing and incidentals (e.g. that parking spot I mentioned earlier).
That brings us to grand total of one million shillings. This is only one year. In five years it will be five million shillings or more because as the car ages it is less fuel efficient, needs more parts replaced, etc. At the end of that time the car will be worth Sh500,
000 so Jeff will have made a loss of four and a half million shillings. Some of you drive bigger cars than Jeff. Please make the necessary adjustments to your calculations. Jeff’s Honda used to cost him Sh300, 000 a year.
Now let me explain why I told Jeff, he couldn’t afford his car. It has nothing to do with the fact that he could get and service the loan. The car has left Jeff in a position where his ability to save and invest has been compromised. Jeff is going to save less
than what he spends on the car and that is why it has made him poorer. With this new burden he cannot even match in real investments the million his car is costing him. It’s like having a glass that is broken and leaking water. All cars leak money.
They are an expense, even the small Honda he had had its costs. Would you buy a bigger glass that leaks more water or would you start accumulating glasses that don’t leak water?
When you have enough water you can indulge in the fancy ones that leak a bit. But to get to that point, you have to buy more of the ones that don’t leak. Investment and consumption should never compete.
Yes, we will do both, but you honestly have to decide which one is going to be the master. You have to decide to build with more effort the things that will enable you to drive that car sustainably. If you keep focusing on buying more expensive cars akin to
fancier glasses that leak more water, you will reach a point where you cannot sustain that expenditure because all your money went there. All glasses leaking water eventually means no water.
You worked all those years for a car that has rewarded you with poverty. So there is nothing wrong with the fact that you want a better car. There is nothing wrong with the car in itself, just make your
decisions rationally, and decide who the master will be.