We all dream to own the best luxury car as it has become a status symbol than what its actually intended for – taking us from one point to another. It is a necessity (should I say a luxury?) that we all want to own. The best sedan or an SUV in our residential premises grabs the eyes of our neighbours making us appear rich but actually depriving us of our cash.
One of my good friends bought a Bajaj Dominar a few months back for nearly ₹1,75,000. Spending such a significant amount on a bike and exhausting all the cash makes me aghast! If he had spent 10% of the total savings, it wouldn’t have surprised me but depleting most of the savings is what startled me a lot!
I am not judging him for doing that as it is his own decision where he is wholly entitled to take that decision. He may be happy owning a bike and delaying financial independence by some years. Maybe he doesn’t think about financial freedom at all. But if we are serious about getting rid of our day job then controlling instant gratification is a must! Delaying these high-value expenses should be avoided at any cost. The same money if invested will take us a long way to become financially free.
Another friend of mine bought a sedan availing a loan of ₹7,50,000 for 6 years, paying rest of the money in down-payment and exhausting 70% of the savings.
We usually think that we could buy a decent car on loan, pay EMIs which are affordable for us and we shouldn’t be wasting money. But this is far from reality! When we buy a car on loan, we are already paying compound interest to the bank. Most of the time we would be paying about 25% of the total loan amount as interest.
Nominal rates on a car loan vary from 9.75% to 10.6% depending on our credit profile, salary and tenure. Considering the lowest rate of 9.75% if we take a car loan of ₹7,50,000 for 6 years then our EMI turns out to be ₹13,800 per month. We repay a total amount of ₹9,93,601 at the end of six years. The total interest paid is ₹2,43,601 which is a staggering 32% of the principal and 25% of the total repayment amount.
As we can see from the above example that we pay 32% more than the cost of our car which is a depreciating asset. Basically, we are paying 32% more than the price for an asset whose value decreases the day we buy it and goes on decreasing the more we use it!
Instead, investing this money in equities will fetch us more value over the same period! I am not suggesting that we shouldn’t buy a car! It’s okay to buy a car but
When pursuing our journey towards financial independence, we get swayed away by these instant gratification products which give us only temporary happiness. Other times its just an extra cost which can be avoided easily! Every penny saved and invested adds to our networth over time. I am not saying to be minimalistic but focusing on the point that
If I ever buy a car, it will be paid in cash and its value will not be more than 8% of my liquid networth.