Planning to Buy a Car? This is How Much You Should Be Spending
If all we want is to get from Point A to Point B, we would all be buying the cheapest possible car that is certified safe to use on the road.
However, that is not the case most of the time. You may tell yourself that your planned car purchase is a practical decision. And maybe that is true—you need a car to go to work, go for studies, send your children to school, and so on. But let’s not forget the emotional reasons behind your wanting your selected car model.
Why do you want a particular car model
You might use these excuses to justify a particular car model:
? I am cool and edgy, so I should get that cool and edgy car that reflects my personality.
? I need freedom and the ability to go anywhere I want, even jungles or across deserts (even though you are a city person. Moreover, you live in Malaysia, so what desert?).
? I am single. I need to show potential partners that I have money.
Now, it is important to know that thinking all those things are very common, in addition to the direct result of various marketing campaigns from all these car companies. Also, all of the above are valid points—the car you choose does reflect your personal identity. You do want your family to be as comfortable as possible while travelling. Some clients you are hoping to conduct business with do care about wealth and status.
However, none of those matters if you buy a car that is out of your budget, and gets repossessed by the bank for nonpayment. So here is where the rational side of you need to stand up against the emotional side. Ultimately, how can you tell if the car fits in your budget or not?
How much should you spend on a car?
The answer to the above question is simple: whatever is the amount, you should make sure that you can afford it. Like every other purchase.
But if it is that simple, how come 1 out of 4 bankruptcies in Malaysia is due to car loans?
Therefore, here are four (4) car budgeting guidelines you can use to assess your own car affordability:
#1 – The annual income guideline
This guideline suggests that the car you choose should not cost more than your annual salary. Therefore, if your monthly income is RM3,000, then you should look for cars costing around RM36,000 or less.
#2 – The 15% guideline
The 15% guideline advises that the car’s monthly payment does not exceed 15% of your take-home pay. The lower the percentage, the better.
For example, a car costing RM40,000 with a 3% interest or profit rate for a tenure of 7 years will incur monthly repayment of approximately RM576. Therefore, the 15% guideline suggests your take-home pay should be RM3840 or higher.
The safest possible situation is to include other car-related expenses into the 15% guideline: car instalment PLUS petrol, toll, parking, car service, road tax, car insurance and maintenance. In this case, if all the cost of car ownership totals up to RM1,500 per month, then your take-home pay should be RM10,000 or higher.
#3 – The four-tyres guideline
The four-tyres guideline is a simple yet fast way to guesstimate how much you should set aside for your car for emergency reasons. Can you comfortably cover the cost of replacing all four tires of your car, without resorting to loans, credit card or dipping into your 3-6 months of emergency savings?
Think you are a safe driver and safe from these expenses? Think again. Ask anyone who has ever owned a car and they will tell you about the last unexpected expenses that simply came up out of nowhere. We are not just talking about shelling out money for car repairs after getting into accidents, but also replacing batteries and alternators, fixing the air conditioner and broken windows, paying unexpected summons, and more.
#4 – Skimp now, splurge later guideline
What if you have a specific dream car in mind, which you do not want to compromise on? In this case, you can use the skimp now, splurge later guideline—aggressively save up money first.
There are many ways to skimp on transportation costs. At the same time, look for ways to increase your income.
It is okay to want an expensive car
As an ending note, it is important to share here that it is not wrong to desire an expensive car. As long as you budget and finance it in a responsible way, feel free to spend your money on anything that gives your life meaning and satisfaction.
Remember, only you can look out for you. Be generally sceptical of car salespeople; their aim is to earn a commission upon selling cars, and not necessarily your well-being or cash flow. Run the other way if any of them say you can afford expensive cars on RM3,000 monthly salaries and go back to the guidelines above to learn the true budgeting and spending for car ownership.
This article is contributed by Suraya Zainudin-writer, speaker and digital marketer for one of Malaysia’s top personal finance websites.
The opinions expressed in this article are those of the author and do not necessarily reflect the views of the Credit Counselling and Debt Management Agency (AKPK).
