Buying a car

After writing on heavy topics like the definition, theory and psychology of FF, it’s high time for some light relief and this post will be about the more practical issue of buying a car, which is very topical for me right now

 

 

(Source of image: http://conversation.which.co.uk/transport-travel/are-car-clubs-cost-effective/ )

The car is often described as the second biggest purchase you’ll ever make. And for many people it’s much more than a transport device, but a source of pride and pleasure. However in my case let me tell you up front that I’m not a car enthusiast. For me, it’s really just to get from A to B. So based on a clinical, economic approach, then how does one go about buying a car ?

As with most purchase decisions nowadays, one is immediately confronted with many choices :

·         Buy or lease?

·         Borrow or pay with cash?

·         What type of vehicle?

·         New or used?

·         Dealer or private seller?

Let’s go through these one by one, but firstly we should start with the basics. Sticking with the economic viewpoint and ignoring any personal sympathies or biases towards cars : It’s important to realize that a car is a liability, not an asset.

[Aside : If I recall correctly, I first learnt this concept from Robert Kiyosaki’s well known classic Rich Dad Poor Dad. I gather this book might be a bit taboo nowadays, but I also read on Early Retirement Extreme’s blog that he had listed this as one of his top two books. So this gives me comfort to come out of the closet as a fan of this book. ]

The reason to view a car as a liability is because it does not generate income, depreciates in value, and incurs ongoing costs. Now, there is an argument that one might “need” a car to get to work and earn salary. I acknowledge this might be the case, although one should also consider public transport, cycling, etc. Others might also argue that some vintage cars could appreciate in value. Anyway let’s not get stuck in these ratholes, if I can ask you to indulge me in this general notion of a car as a liability. Following directly from this, most financially educated and disciplined people will never borrow to fund a liability. Please note this does not imply you should always borrow to acquire assets! But at least it is an option to consider in the case of assets, provided the alternatives and risks are clearly understood.

So these basics enable us to answer the first two questions… Buy or lease? Borrow or pay with cash? Since a car is a liability and we should avoid borrowing for liabilities, therefore you should save up and delay the car purchase until such time as you can afford to buy with your own cash. It might not be the answer most teenagers itching for their first wheels will want to read, but I’m afraid it’s the only logical way if you have any serious ambition of FF. Delayed gratification is a very important habit to develop.

Next on the question list: What type of vehicle? Well, this is a personal question. As I declared at the beginning I’m not a car guy. If it’s a personal passion or hobby, you may have many other criteria to add into your decision making. And anyway in this case it probably won’t be a purely economic decision. But as for me, the type of vehicle is purely determined by our needs. The internet is a powerful tool and car sales websites are very useful. I recently went through the process and was hugely impressed by the search functions available. You can enter your location, maximum price budget, minimum number of seats, auto/manual, vehicle type (sedan, wagon, SUV, etc) and any other requirements you might have. Just keep tightening the search until you get a small enough number of cars to conveniently look through, e.g. 30 or 40. I also added things like maximum mileage. You get the idea. Basically sit down and think about your needs from the vehicle. Use a car sales website to search for vehicles that meet your needs. And then keep recycling back to finetune your search, as sometimes looking at vehicle ads leads to other ideas or re-consideration of needs/preferences. Hopefully after a few loops you will narrow down to the type of vehicle you want. This process takes a bit of time and effort but is well worthwhile. It means you will have ownership over the decision after exploring the various options available, which is much better than just asking your best buddy’s opinion, or buying the same car as your folks have without thinking.

We are making good progress. Now we know what type of car we will buy and we have committed to save up and fund the purchase with cash. The final step is the buying part… New or used? Dealer or private seller?

Firstly, a bit of my personal background and baggage. My parents are strongly of the “new car” philosophy. When I bought my first car as a 20 year old, I just followed in their footsteps and bought new. This car lasted me about 5 years after which I sold it second hand for roughly half the purchase price, due to overseas relocation. Overall it was a happy first car experience, but equally I could not help but notice the rapid depreciation in value. After this time, I was “lucky” to live in big cities with very handy public transport systems, and we decided to live without a car for the next decade! This is lucky in the financial sense of avoiding a liability for ten years, but I will admit there were certainly times that I missed the joy and convenience of driving. Anyway, the days of being carless are now over for us, and with much more experience and opinions of my own, I am no longer a new car buyer. The reason is simple. Most of you will have heard people say that new cars lose 10/20/30% of their value as soon as you drive out the showroom. I don’t know the exact percentage and it might depend on the make/model, but even if it’s 10% at the low end, this seems a serious waste to me.

If you’re still with me up to here, we are now ready to secure our desired used car, but should we buy it from a dealer or private seller. I would be open to either, but based on the limited sample of two used car purchases that I have made, both were from private sellers. The first one has turned out well (for a year at least!), and the second one just happened so I can’t tell you yet, but let’s keep our fingers crossed. Clearly there can be more comfort buying from a used car dealer, as you should get a small warranty period up to one year. However, the better value is often from private sellers, since dealers will include additional margins in the price to cover costs and achieve profit targets. Most private sellers do not have such business constraints and merely want to dispose their vehicle to the best paying buyer.

There you have it, all questions have been answered (Buy or lease? Borrow or pay with cash? What type of vehicle? New or used? Dealer or private seller?)…..

Well, actually there is probably one more important question to address at the higher level : How many cars to buy for your household ? Again this is obviously a personal question and heavily dependent on your situation and needs. But my simple answer would be as few as possible and to err on the side of having less cars than needed instead of more. The reason again is straightforward, a car is a liability, one should minimize their liabilities. As mentioned earlier, we lived without a car for over ten years and I believe this considerably helped our progress towards FF. Sorry for stating the obvious but while this is common sense, my observation of what many families do is quite the opposite. They seem to accumulate cars and have a bias to have more cars than needed, just in case someone comes to visit, conflicting appointments at the same time, etc. In my view these are not good reasons to have an extra car (and all the costs and time drains that accompany it). Your guests can always hire, and you can always re-schedule appointments, make arrangements to car pool etc. The money you will save can pay for quite a few taxi fares if needed.

This is turning into a lengthy post, but moving into the final part I would like to summarise my recent car purchase. We started with very vague ideas of possibly a light SUV or station wagon, and while we would prefer one car only, we might opt for a second car for convenience and since many families with two kids have two cars. After some searching, discussion and iteration, we gradually converged to the view of a single, bigger car with 7+ seats to allow us to take day trips with extra flexibility. Avoiding the second car is a huge saving in time and annual costs (rego, insurance, servicing, etc). Having narrowed our criteria, it left us with two basic options, either a medium SUV (7 seats) or people mover. SUV’s seem to be all the rage nowadays, but for us we definitely won’t be heading offroad and 4WD seems over the top to me for city driving. SUV’s also tend to be heavier and less fuel efficient than equivalent people movers. Finally, people movers tend to be a bit more spacious, especially comfort levels in the rear row of seats for any extended journey. Therefore, we finally knew our target, a 7-8 seat people mover. Up until now I haven’t mentioned budget as it isn’t really a huge constraint for us these days, but we had discussed $25,000 as maximum and $20,000 as the desired target. After a week or two of searching, we found a car that fit our needs perfectly. Admittedly this 10 year old vehicle with just over 100,000 km was a bit older than we initially had in mind. However since it was a single owner with full service history and excellent visual condition, we were willing to give it a shot. Best of all, the price was less than $10,000, not that it was a primary consideration but obviously a very handy bonus.

Please note there is a significant multiplier effect of buying a lower cost, used vehicle. It reduces the stamp duty, the annual insurance cost, etc. Furthermore and more important to me, it helps me to relax. If I spent $50,000 on a new car I would naturally be more stressed about everything, e.g. where I park, any small scratches, young kids spilling drinks, etc. I probably also might be tempted by the car salesman to top-up on optional extras (“Since you’ve spent this much already, what’s another $2,000 it’s less than 5%). When you pay less for your vehicle, you will have less knock-on costs and you also worry less, which for me is a big plus.

Well, I think I’ve exhausted this topic. Fingers crossed this latest car purchase works out for us ! I hope this gives you some food for thought and please feel free to comment with any feedback and/or alternative views on how to go about buying a car.