f you ask any wealthy person how they achieved financial freedom, they’d likely tell you that every rand (or dollar) that they spend is strategically invested for growth. They let their money work for them, instead of the other way around.
This got me thinking about good and bad investment choices. Are we being tricked or blinded into investments that might be hindering our ability to create wealth and be financially free?
The Depreciating Asset that Depreciates Your Wealth
An asset, by definition, is something of value that has a pretty high expectation of creating a future benefit (or return) to a person or company. When you think of investing in property, this makes sense. It’s an appreciating asset, gaining value over time. As a result, the future benefit is a high return on your initial investment.
But this is not the asset I’m concerned about – what about your car? For all intents and purposes, it’s considered an asset. But is it an asset that creates or steals wealth? Is your car making you poor?
What others had to say
I recently created two polls on Twitter, asking my audience 2 important, somewhat related financial questions. The answers left me stunned. The first question centered around how much people had saved up to this point in their life:
Question 1: How much do you have in your savings account?
Shockingly, just under 50% of people had absolutely zero savings because all their money was being channeled into paying off debt. Only 19% of people had over R100,000 (or $10,000) saved. Of that, only a small 4% of people had in excess of R1,000,000 (or $100,000).
Of course, this poll is limited in defining age groups and income requirements, but I still think it reveals a lot. More than 80% of people have less than R100,000 (or $10,000) saved. No matter what age group you’re in, this reveals that most people from this poll only have enough money saved to get them through a few months if they lost their source of income.
The second question asked how much people are spending to finance their car each month:
I was even more stunned at these answers. Over 50% of people in this poll are spending in excess of R2,000 (or $200) per month financing their car. Approximately 18% are spending in excess of R5,000 (or $500), with 8% spending in excess of R10,000. PER MONTH. That’s a mortgage right there. Can you understand why I believe that your car is making you poor?
Why Buy a Car?
It seems obvious. To get from point A to point B. Right?
But purchasing cars has developed into more than a tool of necessity. A car is an asset that essentially buys convenience and status. It’s not an asset that buys you wealth.
The moment you drive your new car out of the dealership, it’s already lost significant value. Within the first year, you could lose between 15-20% of the value, purely from depreciation. But, for some reason, we still consider it an asset worth purchasing?
I get it. Most cars are used to get you to your place of work, without which you’d have no income. But why do we see the necessity to buy cars that are not within our means or financially viable?
Maybe it’s to keep up with the Joneses? Maybe you enjoy the thrill of a fast sports car? Or maybe you’re simply ignorant to other options that might be a better fit for your budget? Whatever the reason, are we really willing to forego financial freedom or early retirement for these reasons?
How Much Does it Cost on Average to Own a Car?
According to statistics from WesBank, the cost of owning a car in South Africa rose 14% between 2017 and 2018, with an astonishing increase of 31% since 2013.
In 2018, the monthly cost of owning a car in South Africa, if you signed up for vehicle financing, was just under R8,000 per month. However, this was based on traveling approximately 2,500 km per month. So your total might look slightly different depending on your driving habits.
The situation is likely only going to get worse as the years go by, with an increasingly volatile fuel price, currently sitting at R14.23 per liter at the coast and R14.82 if you live inland (March 2019 prices).
The situation is not much different in the United States, with the average cost of owning a vehicle reaching $8,469 per year (or $705.75 per month).
In Singapore, you can spend anywhere between S$106,000 to S$183,000 to purchase a car, with additional expenses (such as insurance, maintenance, road tax, and fuel) adding up to S$431 per month (or S$5,177 per year).
Shockingly, many of these statistics show that owning a car is, in some instances, the equivalent of paying full rent for an apartment.
It seems, no matter where in the world you live, owning a car is making you poor. The question we need to ask ourselves is: Is it really worth it?
What Other Options Do You Have?
1 | Buy cash
I can hear many people protesting: “But Kyle. I need a car. The public transit system doesn’t go anywhere near where I work. And I like the freedom to take a drive across state or provincial lines when I want or need to.”
Hey, I’m not against owning a car. I’m just more for doing it in the most economical way. If you’re currently financing a car, your biggest expense is likely the monthly installments on that financing. Essentially, it’s similar to taking out a loan on a house or student loan debt to fund your studies. And, with that, come some pretty exorbitant interest rates.
If you really desire to own a car, consider putting it off for a couple of years while you save enough money to purchase it cash. This is not only an accomplishment worth celebrating, but it also allows you to save so much money on interest payments over the years. That money can then be invested in assets that will actually grow your net worth and not reduce it.
2 | Buy used
I feel ya. Nothing beats the smell of something bought new, especially a car.
But is it worth putting off your savings and retirement goals for the next 5 years? Is it worth your car making you poor? By then, will you feel the same way about your car as you did when you drove it off the dealership lot? My guess is, probably not.
There is no shame in buying second-hand. Not only do you forego having to deal with the outrageous depreciation that happens from day 1, but you’ll likely be more able to buy the car in cash, preventing you from paying interest over the next several years.
If you made the mistake of purchasing a car new, and you’re feeling the financial pinch each month, then consider downgrading. Sell your current car, purchase a used vehicle from a reliable source and invest the profit on your sales. Not only does this get you a car, but it also allows you to grow some money on the side. Sounds like a win-win to me!
3 | Take public transit
If you live in a metropolitan city, such as Singapore, New York, Chicago, or London, consider yourselves incredibly lucky to have public transit systems that work reliably and economically.
When I lived in Chicago between 2012 and 2017, I spent an average of $100 per month for unlimited rides on the CTA bus and train system. Compare that to the average cost of owning a vehicle ($705.75 per month). Not to mention, parking in cities of this size are notoriously expensive and hard to find. It’s no wonder why your car is making you poor!
If you have access to a public transport system, make full use of it. Yes, it might take you a bit longer to get to work or you may need to suffer being crammed into a train car with 300 other people, but is it worth the several hundred bucks you’d save each month? I’d think so.
4 | Use a more economical vehicle
Meet Milk Tart. She’s a scooter I bought 7 months ago that has reliably taken me all around Cape Town (a city that still lacks a robust and reliable public transit system – although I can appreciate that they are working on fixing that).
She may not be the fastest, most glamorous vehicle riding the Cape Town streets. But I was able to buy her new (with cash at a tenth of the price of the average car) and she only costs me around R500 per month (fuel, servicing and insurance included).
Granted, it may not be fun to drive a scooter in windy or rainy weather. But I keep reminding myself that my money is best used elsewhere, not on financing a vehicle that equals my rent and drains my salary.
Of course, I’m not calling for everyone to ditch their cars and now buy scooters. The point is to try and find a vehicle that is more economical. Maybe it has better mileage per tank of gas. Or maybe it’s simply smaller in size, which inevitably reduces fuel consumption. The goal is to find the balance between practicality and economical.
Other Ways to Invest Your Money
A good exercise to determine the value of owning a car would be to calculate how much your money could grow if you were to invest it in high-earning equities instead of purchasing a vehicle. Using the values quoted above, if you invested the money instead of a car purchase, you’d grow your money as follows (assuming investment in growth assets at a return of 12% per year):
In South Africa: In excess of R620,000 for a period of 5 years (enough to buy you two new cars)
For the United States: In excess of $57,000 over a period of 5 years
In Singapore: In excess of S$179,000 over a period of 5 years
When you view your financial investments in this way, it becomes much easier to see why your car is making you poor.
When Buying a Car Makes Sense
There are certain situations in which owning a car might make sense for you financially.
If you’re an Uber, Lyft or taxi driver and this is your primary source of income, then it makes sense that your car serves as an investment in your future.
As long as your net income from these services affords you a comfortable living (and enough to contribute towards your retirement), I would consider your car an investment that is actually growing your net worth.
In most instances, however, I still believe that owning a car is making you poor. There are much better ways to invest this money than in owning something that loses value every second of every day.
Answer a Single Question
Can you survive without owning a car?
If you answered yes to that question, consider how you might change your current situation to save money. Maybe it means you take public transport. It possibly means you should wait it out until you can afford to buy one cash. Or maybe it means you invest in something a little more economical, but with less of a “bling-bling” factor.
Whatever you decide, always be cognizant that a vehicle should be considered a luxury. In most cases, a car is making you poor. It’s now in your hands to take back control of your finances and invest them more wisely.
Whether you agree or disagree with this article, I’d love to hear your thoughts on what owning a car means for you. Is it an investment or a liability? Also, don’t forget to download our FREE Financial Starter Pack to help you get started on your journey to financial freedom!
Dr. Kyle O'Hagan is a UCT scientist and an avid personal finance blogger. With over 20 years worth of experience in the SA schooling system, he has come to appreciate the value of a proper education and feels that personal finance is an area that is often neglected, particularly at a young age.
O'Hagan is one of Personal Finance's New Voices and his finance blog is called the Saving Scientist.