Most people consider their car to be an asset but in financial terms, an asset is something that generates income or grows in value. Unfortunately, few cars fit this definition. This is according to get\Worth director Colin Morgan.
Owning a vehicle is costly, but with a different approach, it could make a huge difference to one's wealth over a lifetime. By means of a simple example, excluding inflation and interest, one can easily understand the real cost of a vehicle over a lifetime.
Paul purchases a vehicle for R200 000 and every three years, he sells his current car and buys a new one. He drives 30 000 kilometres per year and his car reduces 20% in value in year one, 10% in year two and 5% in year three. This equates to a selling price of R130 000 each time he gets a new car.
Between the ages of 25 and 73, Paul would own a total of 18 cars and would have spent R1.260-million of his wealth.
When one adds some perspective, the picture changes considerably. The example assumed that Paul would sell his vehicle at a retail price. If the dealer gave him 10% less than the retail price, then the selling price would drop to R117 000 each time. This would mean that the total spend by age 73 would be R1.494-million.
Then one could add interest. Assuming Paul would have earned or paid interest on the money used to purchase the vehicle at just 3% per year compounded. This would add R626 000 to his lifetime cost, bringing the total to R2.12-million.
"These are simplifications and there are numerous other factors that magnify the effect of vehicle ownership on your wealth in the real world. Examples include financing and interest rates, insurance, optional extras and warranties," he explains.
Morgan provides guidelines on how to improve one's wealth over a lifetime by making the right decisions and following a different approach.
- Purchase a vehicle at a reasonable price, don’t overpay
- Do thorough research and compare prices
- Negotiate a good deal
- Beware of hidden costs that could inflate the final price
- Sell your vehicle carefully and make sure that you get the best possible value
- Be wary of trade-in prices. In many cases this is subsidised by one paying a higher price for the new vehicle than you would have if you didn’t have a trade-in
- Look at the cash price of your car as a real benchmark of value
- Spend less - don’t buy the most expensive car you can afford
- Look for cars that hold their value better
- Understand the financing, make sure of the upfront financed amount and how it is made up, and also the interest rate. These are the factors that affect your long-term wealth, rather than your monthly repayment amount.
get\Worth helps its customers to manage the wealth impact of car ownership by providing the necessary tools and information to make informed decisions.
“Our primary objective is to acquire lifetime customers rather than just buying and selling cars, even if that means putting your interests ahead of ours to achieve your wealth outcomes,” he concludes.