Nothing feels like more of an achievement when you have made these two purchases in your 20s or early 30s: a house/apartment and a car. We have dubbed these two assets as the allegory of the famous line “Mama, I made it!”. Rightfully so, those purchases do not come easy, but they do come with responsibilities and tradeoffs.
Too often, we get drunk on the euphoria of having these things to look good for social media, our peers and family members, that we forget to really assess the lifestyle we want, our financial goals and how these two purchases fit into those facets. Today, I want to shine a light on the second “key”, which is car purchases and vehicle finance. This one is perhaps the most contentious one yet, but I want to leave you with a better perspective on why not rushing to a car dealership for a brand-new car but rather for a pre-owned car is a way better financial decision, especially in your 20s.
1. Think about the trade-off and what you could be investing in
To be quite candid with you, if you would trade off the affordability of buying a pre-owned vehicle for buying top of the range cars fresh from the garage just because you would not want to be perceived as a cheapskate or a hit and miss, you have a much deeper self-worth issue that a brand-new car won’t fix. The numbers do not lie.
In a world where the wealthy own vast amount of land, stocks, companies, antiques, art and even entire islands (the Richard Branson’s and Tyler Perry’s of this world), it only makes sense to trade off the short term “satisfaction” of a brand-new car for saving towards an asset that will appreciate and that will outlive at least 2 generations after you. Of course, in a country like South Africa, having a car sure does make life easier but financially, it makes more sense to go for a vehicle that will fulfil its purpose (take you from A to B) and that will last for a longer time.
The real gain comes from the money you save every month that can be invested in assets that work for you in your sleep. Unfortunately, expensive vehicle financing will have you waking up every day and going to work for it. By month 5, you will wind up hating the sight of your German shepherd for making you a slave to its ridiculously high debit orders. Say goodbye to one day owning your own private jet or island!
2. Consider the value for your money
As soon as you have taken that photo with a ribbon on your car for Instagram, taken your first drive and parked it in your garage, your brand-new car will lose around 15 percent of its value. If you had to do the math, you’ll realize that by year 4, your car will only be half of its original value. So, it makes more financial sense to buy a car that is three or four years old because the depreciation rate is much less rapid after that. This means you can get more value for your money because you will be paying a lesser amount for a four-year-old secondhand car than for a brand new one of the same model.
3. Savings on insurance premiums
Insurance companies charge lower premiums for pre-owned cars because they have a lower replacement cost in the case of accidents. And, when we talk about buying a car, often the ancillary costs like insurance, fuel and service are left out of the picture. Save on those monthly car insurance premiums and get a secondhand vehicle.
This list of benefits is obviously not exhaustive, but it should be enough to get you thinking about “getting the keys the financially savvy way”. Am I being oblivious to our innate love for things that shine and glisten like the sight of a brand new car, no? In fact, I have got a Rolls Royce on my list of dream purchases. However, luxury cars should be a consideration once we have assets that work on our behalf that will sponsor those luxuries.
Until then, buy assets that will truly grow your personal balance sheet, with as little debt as possible. A pre-owned car is not your mandatory fate, but it is important to make purchases that align with your financial status now and won’t jeopardise your ability to make future purchases in things that really matter.
Author: Sthandiwe Msomi