Every financial advisor faces this million-dollar question:How much should I spend to buy a new car or a second-hand car.
The old school of thought still prevails, people buy high end car to show off their stature and to prove the social status in the community.This thought process has been influenced by their immediate friends and relatives who own high end cars that grants a sense of achievement.In hindsight they are over bored by upgrading to premium cars, maintaining the car and went behind the large price tag. At times they do agree that they made the worse financial decision.
As a financial advisor we come across such cases multiple times.Fortunately,there is a basic rule one can follow to buy a car i.e.,20/4/10.20 stands for the down payment.One should be ready with 20% of down payment of the on-road price of the car.4 stands for loan tenure,it should not be beyond 4years.Nowadays banks offer loan for 7years to reduce the monthly EMI and to optimize the eligibility to give the car loan.0 stands for all your expenses related to that car like EMI,Insurance,maintenance,fuel charges etc.Let us break this down to get a better clarity.If the on-road price of the car is 20lakhs then one should be ready with 4lakhs as down payment so that the loan is not a burden on you.
One has to ensure that only up to 10% of the family annual income and annual expenses towards that car should be considered.Bad planning can affect the future outflow of expense and can save you from taking immature financial decision.
No one can stop you from buying your dream car.Another strategy to choose the dream car is to follow the goal-based planning mechanism.The key here is to maximize the amount for the down payment so that the EMI and other expenses are intact by owning the dream car. A lot of premium car owners get fascinated with the materialistic pleasures and in few years, they sell the car.The summary of one of the automobiles research highlights that the resell percentage of premium cars are high because of the society pressure.The core reason behind this is the myopic view meeting financial goals and poor decision-making skills.It is vital to consider the current,future income plus expense to decide on selling the car or to rework on the EMI payments so that recovery of the opportunity cost is taken care off.Since it is a large purchase,one should carefully consider all the factors to take a favorable decision.
People generally get influenced by seeing neighbor’s or relative’s car but when you spend seeing others car,that is one of the worst financial decisions for your family.This behavior of human,getting influenced by seeing others and spending money to buy same car might create financial problem for self.
Lastly,in long run one needs to understand the impact of car loan towards the financial goals.When you spend a large amount of money,one may assume that the investment will receive a return on the money that is put into it.Unfortunately,buying a car is not an investment as its value depreciates overtime and it keeps on reducing while losing opportunity of growing the same amount of money.Nonetheless,opt for the above-mentioned strategies for the best bets.
Now we know that what metrics we should use to buy car next questions comes how to accumulate down payment money maximize financial benefits.Depends on how much before you are investing for your dream car depending on time frame you can look to invest in mutual fund create corpus to buy your dream car.If time frame is 5years you may look to invest in equity mutual and reduce your burden of loan and live loan free or a less loan life.If time remaining is less than 3years you may look to invest in debt fund or balanced advantage category to create corpus for your dream car.
It always make sense to work on your goal based plan and select funds for each goal using mutual fund route depending on time frame you can select fund and for that you should contact your SEBI registered distributor.
Views are personal: The author is Vishal Goenka,is Mumbai based Mutual Fund Distributor
Disclaimer:The views expressed are of the author and are personal.TAML may or may not subscribe to the same.The views expressed in this article/video are in no way trying to predict the markets or to time them.The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice.Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you.
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