I welcome you all to a very important and interesting article where we are going to do a 360-degree analysis relating to buying a car, whether it is good or whether it is bad. And not only that, we are going to talk about multiple factors, like how should you budget a car? Is there any thumb rule that you have to use while buying a car? What is the ideal time when you should purchase a car? We're also going to discuss how could you finance a car and very importantly, what various other factors you should consider before buying a car. We are not only going to talk about the quantitative factors, but we are also going to talk about qualitative factors in buying a car.
How to plan a budget for a car?
Now, if you choose to purchase a car, it is crucial that you have a correct budget in place. You must also make sure that you stay within that budget and avoid going overboard. Why is that, then? Because there are two sorts of assets—one that depreciates and one that appreciates—please grasp what those terms mean and what instances might be of each. An asset that depreciates over time is referred to as one whose value has decreased. Contrarily, assets that are appreciating are exactly the reverse; ideally, their worth will increase. But when it comes to examples of depreciating assets, the straightforward example of cars that we are currently discussing qualifies. What kinds of assets should I use as examples if I'm talking about ones that increase in value? For instance, gold real estate, or stocks mutual funds, perhaps? All of these might be perfect assets that increase in value. Please remember that investing more money or spending more money than you had planned to on a depreciating item could actually ruin your entire financial strategy. Yes, it is the answer. However, it won't be a major issue if you spend a little more on asset appreciation.
Thumb rule for creating a budget
But now that you are aware of all these fundamentals and have realized that well, I get that I need to set a budget for my automobile, but which car should I buy? You should be aware that in order to construct your own budget, you must have a sound rule of thumb. What might this guideline be? Usually, the thumb rule specifies a 20-4-10 thumb rule. What is this, exactly? Ideally, if you were to budget for your car, 20% of the whole worth would suggest that you could afford the honored price. The down payment you must deposit is typically 20% of the honored price. The first criterion should be whether you can afford the down payment. budgeting for the vehicle then what is this, then? 4. Four years is little, but that's how many years you should ideally have to pay off your car loan. And what is this 10.10? Well, in theory, no more than 10% of your monthly income should be used to cover your EMI payments. That concludes the discussion of our 20-4-10 rule, however, it would be fantastic if I provided some examples. based on your income.
Now, if a person has decided that he or she is going to buy his or her own car, then what could the value of the car based on the monthly income is what we are going to discuss right now, have a look at this table. By the way, whatever discussion we are doing, we have assumed that the car loan interest will be at 7.5%. So, assume that your annual income is in the range of six to 10 lakhs in the case of Mr. B or Miss B I have taken that the annual income range is 10 to 18 lakhs and for C it is above 18 lakhs right. So, first now, this is the range this is just for your understanding so that you can decide where you fit in okay whether you are in the category of A or whether you're in the category of B or C, but if I were to do a concrete calculation, I need to take a single figure. So for A, I have taken the annual income as 7 lakh for B 15 lakhs, and for C 44 lakhs I'm sure you might be irrational but what about below six lakhs?
Well if you ask me my personal opinion if a person's income is below six lakh assuming that he or she is the breadwinner in the family with some responsibilities then ideally this is not the right time to buy a car that person can think about taking it on rent only need-based right but buying a car ideally is not an option for such a person is what my personal opinion is okay going ahead with the example if annual income for a seven lead than obviously monthly income divided by 12 comes to four A B C I've calculated by dividing it by 12 Right now assume that Mr. A feels that okay I should buy a specific XYZ car and the car value again on road price I'm talking about is 6 lakhs B has chosen a car who's the on-road price is 12 lakh and see 20 lakhs ticket. Now, going back to our rule of 20-4-10 Ideally, what will be the down payment will be like 1 lakh 20,000, 2,40,000 4,00,000 respectively. Then we calculated the loan amount will be a simple six lakh minus one lakh 20,000 Which will be four lakh 80,000 Same for B and the same for C right. Now, what will be the EMI, EMI will be 11,605 for a 23,000 to one for B and 38,686 for C. Now, we have used the normal PMT formula for that, and based on that we have calculated the EMI as I mentioned, car loan interest rate is assumed at 7.5%. Right. Now comes the big question, if you remember it was 24 and 10. And what was that last 10? The last 10 was that ideally, your EMI EMI amount should not exceed 10% of your monthly income. Now, if you calculate 11,605 divided by 58,333, then your EMI comes at 20% of your monthly income for B, and see it is going to 19% of your monthly income. And that is why if I'm taking this 10% cost slab as per rule, which is which are all these figures, then there is a shortfall of 5700, roughly 10,700 roughly and 18,600 Roughly for A, B and C, and in this case, they will not be able to buy the car of this value. neither A nor B nor C.
Problem in 20-4-10 rule
What was causing the problem was the rule of 20-4-10. Was it 20? Which was causing the problem? No. Was it 4? No. Was it 10? Yes. As for this rule out of your total income, not more than 10% should go towards the repayment of EMI for your car loan, right. But then what is this kind of expenditure? Can I say this is like your need or this is like your want? Obviously, it's like want it's not a necessity. It's a luxury spending that we are discussing right now. Correct? Now, in this case, is there any other rule which can take care of luxury spending? Our answer is obvious as what is that is the 50-30-20 rule. if you didn't read my article on this rule plz check that one after this where enough told that out of your total income 50% can go towards your needs 30% can go towards your wants and 20% mandatory savings and investment right now this 30% If I replace with the 10% in our original rule, can the entire math change? Yes, we're going to go towards that. But wait before that. Now going on to our original downpayment figure, what was the downpayment figure if you remember that was 1,20,000 rupees. Now the big question is if I don't have that one lakh 20,000 rupees, then what am I going to just liquidate or premature some of my FTEs and just pay that amount? That would be bad financial planning. Ideally, should be setting aside some amount, making sure that you have that one lakh 20,000 with you, and then thinking about the down payment, right. But then how much should I save for how many months should I save so that I get my down payment amount of one? lakh? 20,000? This is the big question right now. Correct? Let's do some simple mathematics. How much was my monthly income? It was 58,333. Right? Now, if you remember the 50-30-20 rule 30% I'm allowed to use for my ones for my luxuries. So 58333 into 30% will come to roughly around 17,500 Correct. Now per month 17,500, I'm allowed to set aside for my down payment.
How much money did I require one lakh 20,000? So one lakh 20,000 divided by 17,500. If I do that, that is coming to roughly around 6.85. So around seven months, in simple words. Ideally, I should be systematically keeping aside 17,500 so that at the end of seven months, I'll have a pool of roughly 1,20,000 rupees which I can utilize to do the down payment. Well here comes the revised calculation in the car we have 50-30-20 but if you remember the problem was only with the last point of 10 and we are revising it with 30%. So even if I say 30% of my monthly income goes to 17,500 for 37 500 for B and 60,000 for C Now we are left with a surplus basically means that in this case, it's still roughly coming out to 20%. And you're 19 and 19% of your monthly salary, in simple words with the car where you will be able to buy a dream car.
Well, I hope with this elaborate example, you have understood that based on your income level, what could be the range of the car that you can buy? But is that the only cost that you should keep in your mind while buying the car? The answer is no. There are many other costs which are involved while buying a car. Or in fact, even after you buy the car, there are a lot of recurring expenses, like what the very first recurring expense type that we can talk about is something like petrol or diesel. Again, understand, if you go for high-end cars, ideally, the average or the mileage is less, and you end up spending more on petrol or diesel. The second one could be something like insurance again, the higher the value of the car hire will be your insurance amount. The third one could be something like your maintenance again, the same thing, the higher the car higher-end car, the more you will be paying more and more in maintenance. Some expenses, irrespective of the size of the car could be something like parking fees, it could be something like toll charges. So all these are the recurring expenses that you will have to bet, keep that in your mind.
The second one could be something like uncontrollable expenses inadvertently by mistake. If you park the car in a no parking zone, you're going to pay some fine for that as well. Right. So this could be a simple example of an uncontrollable expense. The third one can be something like an opportunity cost. So instead of buying the car, or instead of paying all those EMI up and down payments, Had you taken a decision to even keep that money in a savings account, your money would have in fact increased by 2.5% or 3%. Have you done an FD the amount would have been higher had you invested it more smartly, it could have gone much, much higher? So always remember, It's an A or B decision, the moment you are taking a decision to buy a car, you are going to have some opportunity cost also, which will be involved in it.
Is there any ideal time to purchase a car?
Now let's try and understand what could be the ideal age to buy your first car? Well, to be honest, there is no ideal age or ideal time to buy your first car. But I can surely help you out with a methodology with a structured way of thinking through which can make life easier for you to take a decision about whether you should buy a car or not. Okay. The first thing you should check is whether you can really afford to buy a car or not. That is nothing but the quantitative factors that you should check all those points that we discussed in the first half of the article, that 2014 rule and 5030 rule and all that right. So first things first, can you afford to buy a car? Yes or No? If your answer is no, don't buy a car right now. Does this mean that you can't buy a car at any time in your life? No. It means that just wait. Wait till you really you can afford to buy a car, save for a few more years, and then you can take the decision about buying a car or not right.
Now let's come to scenario number two, yes, you can afford to buy a car. Now please understand, just because you can afford to buy a car. Are you immediately going to go and jump and take the decision of buying a car answer is no? Okay. Now here come a few qualitative factors that you have to consider. I'm going to talk about four qualitative factors first. Number one could be something like your family needs. Assume that you have senior citizens at home who can require medical emergency at any point of day or night. In such a case a person may feel more comfortable if that person owns a car. That's a qualitative factor number one. One more example of this is let's say you have a pregnant lady at home who could need hospitalization at any point in time again, that time you will be mentally more comfortable if you own a car. The second point could be safety. Assume that again one of your family members did have a Corona in the last few months. And now you don't want that to reoccur any time further. And that is the reason why you would be more comfortable traveling in your own car rather than choosing to use public transport.
Possibility number three, Nothing doing no family requirement, no safety, nothing but you are absolutely mad about cars. You're crazy about cars. That could also be a qualitative factor. Or the fourth qualitative factor could be something like investing in a car to help you to get new business. Now you might be like why rationalize investing in a car to get new business? I'm sure there would be a few people who would say like don't judge a book by its cover and something like that. Let me first explain my example. Assume that you are into the sales and marketing job okay. If you have already done some jobs and if you have ever pitched elite clients, high-value clients, many times unfortunate truth is that those people will judge you by which car you are coming from, what clothes are you wearing, what gadgets you are bringing along the right and based on that one of the factor for them taking a decision can be whether you have that fancy stuff or not. In such a case if you have a decent enough car if you feel that such a car can help you to get new business that can also be considered as a qualitative factor. I hope all four qualitative factors are very well understood.
I agree that buying a car is best if the majority or all of these qualitative variables are satisfied, but a car is also what quantitative factors are. However, if none of your qualitative criteria is satisfied, you should ideally hold off on purchasing the vehicle. In that instance, ideally, you can choose to hire a car based on a need-based scenario. With the help of this full flowchart, I hope you will be able to make a wise choice using a thorough and organized thought process.
How should you finance your car?
Now comes the question of how should you finance your car. So, two possibilities do take a loan and buy a car or possibly number two cash down. Now for that decision, let me divide the people into two categories. Number one, you are a salaried person, Number two, you are a businessman. Now, if you're a salaried person, and very importantly, if you are a financially literate person, you should ideally not take a loan to buy a car. Ideally, you should do goal-based investing means that, whatever the amount of EMI that amount, you should instead do a SIP in some mutual fund, which can fetch you somewhere around 10 to 12% returns. So something like an index fund, so that the final amount that the mutual fund will fetch that you can use to buy your dream car, in simple words, buy a car without any financial burden on your part. But if you're a business owner, and assume you can prove that yes, you require that car for your business as well, then the depreciation on the car, you can take that as an expense. Even if you're taking that car on a loan, then interest on that loan also you will be eligible to take as a deduction. So if you're a businessman, these one or two angles come as an extra point while taking that final decision. One small additional point if you're a businessman, now assume that I'm a businessman, I can do cash down still, but I might not do that. Why? Assume I can get a car loan at 8%. While I believe that I can generate at least 10% return from my own business. For those who are learning say this is something like IRR I can generate 10% From my own business, why should I block my entire working capital and use it for a cash down payment? So instead, I might go ahead with a car loan. So I hope you have understood both these angles for a salaried person and for a businessman as well.
Well, now that you have understood everything about how to budget a car and when to buy it, what are the costs associated with buying a car and the advantages? Now let's discuss the last but not the least part, which is about car resale? Well, normally car resale is one of the toughest tasks to execute, due to various reasons something as there is no assured guaranteed value at the end of the life of the car. Finding the right or correct buyer can be a challenge. There could be a lot of price negotiations that can be involved and finally, with the launch of EVs, you might not be sure whether you might get the right value for your car or not. While having several issues with related to car resale, is there any alternative option wherein or scheme that can guarantee us the value of the car after a certain period of use? And the answer is yes, Mercedes has launched its star agility program, which assures you up to 60% of the car value as the buyback price at the time of purchase of the car. Obviously, there are certain terms and conditions like how is the condition of the car what is the number of kilometers run some other factors as well. But the star agility program makes the luxury-only experience much more flexible and convenient, as it provides buyers with three choices at the time of purchasing the car itself.
The first option is to upgrade to a new automobile. Both option number two and option number three allow you to keep or return the automobile, respectively. The nicest aspect is that you don't have to make a choice while making a buy. Well, you can still reflect and make a decision at the conclusion of the ten years. due to the car's guaranteed value. In comparison to other typical financing solutions on the market, the monthly commitment is up to 40% lower.
I hope I was able to provide you a thorough understanding of how to prepare to purchase your own vehicle. I believe you have a thorough understanding of both the quantitative and qualitative components.
