Buying a flashy new car can be an attractive lure for many young Australians. Quite frankly, buying your first car comes with some considerations. Before the fact so that you don’t fall into the trap of many. Here are our do’s and don’ts when making that crucial financial decision.
Buying a car – a need or a want?
This is a question we should ask ourselves before we buy anything, not just a new vehicle. Realistically, the above question boils down to the notion of whether or not you need a car to get around. Maybe to your first job after university; or, whether you want a car to get around easier or with more style. Let’s face it, despite being one of the most urbanised countries in the world. Where 85% of our population lives in cities, using public transport can be a huge crush on your ego.
As host Andrew Baxter says, you have to ask yourself if you’re buying a new car for you, or if you’re buying a new car for how people look at you. Whether you need a car, want a car, or lie somewhere in the middle. Just make sure your intentions are set correctly before you go and splurge on that new Mercedes.
Considerations, before the fact
Let’s face it, upgrading to a new car isn’t always just about money. It’s also a lifestyle decision which is also important. Co-host Mitch Olarenshaw mentions that as a young bachelor. Having a nice new car has some benefits beyond the scope of money and investing. Despite that, there are a few financial considerations you must first take into account before you go and spend.
The first is to understand that a car is NOT an asset – it is a toy. Therefore, for anyone looking to borrow money for a property or invest their money elsewhere. Both your lending capacity and serviceability may decrease immensely.
Secondly, if you live in a big city like Melbourne or Sydney and plan on driving to work each day – where are you going to park it? Many forget the fact that parking for extended periods in inner-city areas can cost up to $150 per day – an extra cost that must be accounted for.
And lastly, make sure you weigh up how much it costs to insure this new car of yours. Depending on your age and driving history, this can sometimes be an exuberant expense that will inhibit you from saving the money you could.
Paying cash vs. on finance – which one is best?
This is a tricky question especially given car finance interest rates are sitting at all-time lows of between 2.5 – 6%. Host Andrew Baxter says that ultimately this decision will have to come down to how you are structured. Anyone who is set up as a company would be silly not to buy the car on finance given the tax deductibility, whereas those who are ‘pay as you go’ employees would have to pay the lease using their after-tax dollars.
This would anyone set up in a company structure is essentially paying 30% for the same vehicle given the tax deductions, which in that case means if you merely an employee do not buy the car new – instead, let someone else wear the depreciation before you get it as you’ll pick it up much cheaper. Just remember – you are buying a toy and not an asset, so try and get the cheapest deal you can.
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Buying a car from your investments – a better idea
Amidst the rise of social media apps like Instagram and Snapchat where many young people fall into the trap of feeling they need to look a certain way by driving a car is a real problem in today’s society. Quite frankly, if you can play it smart and remove your ego. There may some much more savvy options out there that’ll set you up for life versus having the immediate gratification of a new car. The rich don’t get richer because the odds are skewed in their favour, they get richer because they make better financial decisions for themselves.
Buying a shiny new car is an attractive lure. However, there are so many other places that hard-earned money of yours could be working, like the property or stock market for example. Here, you give yourself the chance to buy nice things from the proceeds of your investment, not with your savings. Reach out to the Andrews team at Australian Investment Education to learn how to do so.