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Balancing cars and wealth: The cost of a vehicle over time

2017-06-09 09:59

CARS VS WEALTH: Owning a vehicle is costly, but with a different approach, it could make a huge difference to one's wealth over a lifetime. Image: iStock

Colin Morgan

Cape Town - Earlier in April 2017 Wheels24 reported that the South African motoring industry’s first quarter of 2017 was characterised by a slight strengthening in the performance of the Rand.

Yet the positive benefits of a sturdier currency were short-lived, according to the TransUnion's SA Vehicle Pricing Index (VPI). 

READ: Car-buying guide - 4 ways to survive SA's Junk Status downgrade

The VPI report revealed an increase in pricing for new vehicles to 8.8% up from 6.6% in Q1 2016, while used vehicles prices have risen from 2.2% in Q1 2016 to 3.7% in Q1 2017.

Following the recent economic downgrades by international credit ratings agencies, South Africa’s ailing economy is set to take its toll on motorists and new car buyers.

GetWorth director, Colin Morgan, says: "Most people consider their car to be an asset but in financial terms, an asset is something that generates income or grows in value. Unfortunately, few cars fit this definition.

"Owning a vehicle is costly, but with a different approach, it could make a huge difference to your wealth over a lifetime."

Morgan provides guidelines on how to improve one's wealth over a lifetime by making the right decisions and following a different approach.

1 Purchase a vehicle at a reasonable price, don’t overpay for the sake of buying a new car.
2 Do thorough research and compare prices.
3 Negotiate a good deal.
4 Beware of hidden costs that could inflate the final price.
5 Sell your vehicle carefully and make sure that you get the best possible value.
6 Be wary of trade-in prices. In many cases this is subsidised by one paying a higher price for the new vehicle than you would have if you didn’t have a trade-in.
7 Look at the cash price of your car as a real benchmark of value.
8 Spend less - don’t buy the most expensive car you can afford.
9 Look for cars that hold their resale value.
10 Understand the financing, make sure of the upfront financed amount and how it is made up, and also the interest rate. These are the factors that affect your long-term wealth, rather than your monthly repayment amount.

Buying scenario

Morgan provides the following example:

"Paul purchases a vehicle for R200 000 and every three years, he sells his current car and buys a new one. He drives 30 000km per year and his car reduces 20% in value in year one, 10% in year two and 5% in year three. This equates to a selling price of R130 000 each time he gets a new car.

"Between the ages of 25 and 73, Paul could own a total of 18 cars and would have spent R1.2-million of his wealth.

"When one adds some perspective, the picture changes considerably. The example assumes that Paul would sell his vehicle at a retail price. If the dealer gave him 10% less than the retail price, then the selling price would drop to R117 000 each time. This would mean that the total spend by age 73 would be R1.4-million.

"Then one could add interest. Assuming Paul would have earned or paid interest on the money used to purchase the vehicle at just 3% per year compounded. This would add R626 000 to his lifetime cost, bringing the total to R2.12-million.

"These are simplifications and there are numerous other factors that magnify the effect of vehicle ownership on your wealth in the real world. Examples include financing and interest rates, insurance, optional extras and warranties." 

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