Alright, that shiny metal with a very inviting smell although cars these days are perhaps not even that much metal anymore. Cars are celebrated in most communities as some sort of success and achievement. At times, it almost feels like you have arrived if you can walk around with car keys in your hands.
It’s not just any car, either. There’s a certain type of car that makes everyone think you’ve “made it.” A brand-new one, preferably a luxury model with all the cool tech features you barely need or even know how to use.
The 4X4 you never use
The other day, I was talking to a friend who works at a car dealership. He told me that sometimes people buy a 4X4 instead of a 4X2 and pay a massive price only to find out a couple of years later, when they trade their SUVs in, that the 4X4 button was never pressed. Can you imagine it’s like installing a trailer hitch at an additional cost, and you don’t even own a bike, nor do you know how to ride one?
I asked him, “Does this happen often?”
His reply: “Yes, it happens most of the time.”
Emotions vs. Mathematics
It’s fascinating how our buying habits are inspired more by emotions than by math.
One might argue that I can afford the monthly payments. Sure, you can but that’s not the full picture of the price. Do yourself a favour: calculate the full retail price and the total amount you would pay in instalments, including interest, and then tell me if you can afford it.
If most people did these calculations, I guarantee they would walk away from the dealership and my friend might go hungry.
The cost of a brand-new car is not just the instalment or the retail cash price. It’s also the added interest and the expensive insurance (because it’s brand new), and, of course, the depreciating value of the car.
Not anti-car, but anti-hype
I’m not advocating walking or cycling to work, although you could do that if you want. Biking might work in the USA or other developed countries, such as Australia, but not in South Africa, unless you live relatively close to your workplace. Besides, here in KZN, where I live, with all these hills, a bike might kill you. (Just joking you’re more likely to be killed by a reckless driver than the hills.)
Given the unreliability and safety issues of public transport in South Africa, most people would dramatically improve their well-being and happiness index by owning a car. But is a luxury car a good deal? That’s another story, I’m sure you know my answer.
The balloon payment trap
Unfortunately, most people view cars as symbols of success. That’s why they are even willing to indulge in the big “B” word yes, Balloon payment.
Salespeople asked themselves, What’s the best way to make people buy expensive brand-new vehicles? And they succeeded. Some people nowadays own cars that are more expensive than their homes. Thanks to the balloon payment, they are ballooning their debt levels. Whenever I hear the B word mentioned, I smile and walk away. Since you and I are pursuing financial independence, we should be wary of terms like balloon payment and its associated words, such as brand-new car.
The harsh math of car ownership
Although brand-new vehicles smell great, they don’t do great things for your potential to build and grow wealth.
Let’s do a quick calculation:
You’re keen on an SUV and qualify for vehicle finance. With insurance and monthly payments, you’re paying R10,000 per month over 72 months.
R10,000 × 72 months = R720,000.
By the time you finish paying for your car, the car will be worth way less than half of what you paid. Let me show you the numbers again. Next time you see a new car, you will run away.
It took you 6 years to pay R720 000 for your cool SUV by year 6 when you finally finish paying the last payment your SUV will be worth 50 – 60% less of the original retail price, technically congratulations you just succeeded in burning your cash, you are poor than 6 years ago your shinny thing, not shinny anymore and possibly few dings and scratches is worth R288k if you are lucky.
That’s why financial gurus call cars “depreciating assets.” I wouldn’t even call them assets at all.
The opportunity cost of buying that SUV instead of investing say, in a tax-free savings account ETF is enormous. If you don’t believe me, get yourself a compound online investment calculator and enter 720k and see what’s happening!
A better way forward
If you buy a good second-hand, reliable car and invest the difference, you will be far better off than burning cash on these adult toys while seeking the attention of others.
Cars, in my view, are the quickest and easiest way to be poor. Reign in your emotions and do the math first. Don’t follow the crowd.
It’s almost a norm that when someone gets their first job, they buy a brand-new vehicle. I understand the family pressure, but please run your race. Don’t drive a brand-new car while sitting at net zero on your investable assets. There’s nothing wrong with buying this brand-new, money-consuming machine, that is, if you can truly afford it. Go for it if you have some cash to spare for the shiny metal. I am not talking about instalments here. If you can pay for your brand-new car cash, then you can afford it. Go ahead and enjoy the smell as well as the depreciation game since you have some money to play with. Only a few folks can afford this; the rest of us won’t go this route.
Do yourself a favour, run your race, don’t race the Joneses they’re already broke. Resist the temptation of brand-new cars, and your future self will thank you later.
Trading Time or Buying Freedom 
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