My partner and I are in a very fortunate position where we both own a fully paid for car. This is great and super convenient, but does it really make financial sense?
I’ve been thinking about selling one of the cars so decided to share the facts and figures.
This situation may not fully apply to you but hopefully some of the thinking can spark off ideas for yourself and you can evaluate your own situation.
Let’s just get this point out the way. Yes, it will be super inconvenient! One of us (probably me) will need to rely on public transport as well as ride-share services and it’s inevitable that I would take longer to get to places. I would need to plan trips better and would most probably spend a fair amount of time waiting for my transport or being delayed because of my reliance on others.
This is a huge factor that cannot simply be ignored, but it’s worth doing the financial calculations to determine the actual cost of my current convenience.
The monthly cost of owning a car
So before we even think about the cost to buy a car, let’s look at the monthly cost of running the vehicle. I’m going to use my actual costs for the example but why not reach for a pen and paper and jot down your costs. And in case you’re wondering, I own a Suzuki Jimny 4×4, 2011 year model and I bought it second-hand.
First up is the most obvious cost, the fuel. The price of petrol has skyrocketed over the past few years and even when international oil prices come down the government taxes go up. There seems no end in the upward cost of fuel but there is unfortunately nothing that we can do about it. I luckily live close to my office so my monthly fuel budget is only R800. (I say “only” as I know some people spend over R2,500 per month on petrol!)
Insurance is next of the list. I have fully comprehensive insurance but have not opted for any of the extras such as a hire car for when mine is being repaired after an accident; I’m trying to keep my insurance premium as low as possible. Yet, it’s still R609.15 per month. See how I managed to save on my insurance!
Then one doesn’t always think of maintenance, tyres and wear & tear. This is a little tricky so I used the AA (Automobile Association) calculator to work out my rate per kilometre. This however includes fuel and possibly other costs which are not clearly stated. I decided for this exercise to not use the AA Rate but to rather estimate the costs myself. Looking at the past 2 years, on average I spend R4,000 on my car maintenance which works out to R333.33 per month.
But that’s not all folks! The annual license disc costs R435 (or R36.25 per month) and then of course there are fines for speeding or parking illegally (sometimes unintentionally). I rarely get fined but it’s safe to allocate R50 per month (or R600) for the year.
So far the total monthly cost is R1828.73 but over and above that are toll roads and e-tolls if you live in Gauteng. And excess on insurance claims if you’re unlucky. I will not take these into account though.
The alternative costs
Now let’s look at my costs if I had to use alternative methods of transport. There are two options; firstly without making any routine changes and secondly with some minor changes.
Costs with no routine changes
Sticking to my exact routing of driving into the city every morning for yoga and then going home to shower and get ready for work, and then going to work; alternative transport would be expensive. I would probably need to use Uber (or similar ride-share) all over in order to stick to my schedule and that would cost an estimated R174 per week day and give or take R400 each weekend. So roughly speaking it would equate to just over R5,000 which is a lot more than my current costs!
It’s obvious that my routine would need to change!
Costs involved should I make routine changes
I could get a lift with my partner to yoga each morning shower there and travel home with him. This is slightly inconvenient as he practices for approximately half an hour longer than me and I would need to wait around for him. Then, after getting home I could catch a taxi (a minibus taxi) to work for R12 one-way. I would however get to work at least half an hour later than usual and would need to work a bit later too. And no popping in to shops after work or quickly running errands.
Other changes would be to either use taxi’s over the weekend or simply plan my day around Nathan and the availability of his car.
Total costs in this scenario; R24 per week day and no costs over weekends. Thus R480.
So to recap, it currently costs me R1,800 per month to own and run a car (rounded) compared to R480 per month with a few small changes and inconvenience. Looking at this scenario is seems almost silly to own a car if I could be saving R1,320 per month!
Lost investment opportunity
Another thing to consider is the lost investment opportunity; how much money are you losing by buying a car rather than investing it.
If you purchase a car for R160,000 cash you are essentially buying a depreciating asset which costs you money each month. R160,000 invested in a moderate portfolio growing at 12% per annum would earn you R19,200 interest in the first year and R21,504 in the second year, etc. Over 10 years you could have earned R283,693! Whereas you car after 10 years would probably have a resale value of perhaps R90,000 (if you’re lucky). Have a look at this post to learn how to calculate the interest on an investment.
So invested R160,000 grows to R443,693 but by buying a car your R160,000 drops to R90,000! That is a huge loss! R353,693 over 10 years. It’s incorrect to simply divide that figure by 120 to get a monthly cost (remember compound interest), but for the sake of simplicity we can do that and see that it is a lost opportunity of R2,947.44 per month. Scary thought!
Now add this loss to the monthly costs and you can see how much you are paying for concenience! It’s worth it if you’re able to make much more money specifically because you own a car, but if it’s purely for convenience then it’s quite a lost opportunity!
Another quick calculation to do is looking at buying the same R160,000 car but taking out a loan and paying it over 5 years. Assuming an interest rate of 15% the monthly instalment will be R3,806.39 and the car will actually cost you R228,383 (quite a lot more than what you bought it for). So in just 5 years you end up paying R68,383 more for the car and yet the car has depreciated in value. You will never see that money again!
It’s often very necessary to own a car in order to get to work and to be able to do things to earn money. But, cars are expensive and debt even more so! It’s far wiser to invest your money so you need to decide how much you are willing to give up in order to own a car and if you really need two or more cars in the household then you should consider the type of car and why you need it. Convenience can cost you literally hundreds of thousands of rands!
There’s never an easy answer as everyones circumstances are different and they even change as time goes by. It’s a good idea though to reassess your situation every now and then and do some calculations.
Personally I am still undecided but will certainly post about my decision once made.