In addition to expenses on building a house, perhaps the next most expensive item for most of us is on our family automobile. For Nagas, the temptation to project status through the car we drive goes back to the mid-1960s, when our first-time State politicians and bureaucrats had new vehicles given to them with special name plates.
Today, every Naga who has earned enough money seems to be after buying a car, even if it is not an absolute necessity. Upon marriage, he would purchase a small new car. When the children come along, the family would move up to a bigger brand-new car or an SUV. This could be a Hyundai (price: Rs 4 lakh), a Ford Figo (price: Rs 4 lakh), a Maruti Swift (prices: Rs 4 – 7 lakh), a Volkswagen Polo (prices: Rs 6 – 9 lakh), a Ford EcoSport (prices: 6 – 10 lakh), a Renault Duster (Prices: 8 –13 lakhs), or a Mahindra Scorpio (prices: 8 – 13 lakh). If the family head was promoted to a gazetted-level position, then he would demand the government to add another one with all maintenance charges paid, too.
Now, let’s talk economics into our vehicle obsession. First of all, a new car is the largest purchase most of us make that actually goes down in value---and it goes down in value like a rock. Let’s put the numbers in perspective. If you buy a brand-new Hyundai car at Rs 4 lakh, it’s going to depreciate rather quickly, about 50% in the first two-and-a-half years of ownership. That means you are losing Rs 6,666 every month in depreciation. If spending money isn’t a big problem for you, then try this: once a week on your drive to work, roll down the window and throw Rs 1,666 out. Can you afford that? I don’t think so. But that’s exactly what you are doing every time you buy a brand new car.
So, when managing your own finances, don’t put it all into a “basket” of depreciating assets. By the way, there is no such thing as a good deal on a new car. The moment you drive it off from the dealership shop, you are immediately losing money, and you can’t drive that car fast enough to catch up. Then, is it ever okay to buy a brand new car? Sure, when you are super rich and can actually afford to throw away money just for the fun of it. But until then, do what most high-net-worth people do: buy a
slightly used car and pay it with cash.
Just about everything that we buy goes up in price with time. So, assuming an inflation rate of 3% per year, and purchasing a new Rs 4 lakh-car in current value every five years in the next 25-year period, your total expenses would be as follows: your first car which you buy this year would cost you Rs 400,000; your second car, Rs 463,000 in 2021; your third car, Rs 537,000 in 2026; your fourth car, Rs 623,186 in 2031; and your fifth car, Rs 722,444 in 2036. These expenses would come to a total of Rs 2,745,630, and that number does not include your costs on repairs and maintenance of the vehicles.
Let’s imagine, this time, that you finally decided to buy only
slightly used cars for the next 25 years of your life so that you could invest one-fourth of your money in mutual funds each time you buy a car. For example, let's say you invested Rs 100,000 today in mutual funds, which would yield an average rate of 10% each year for the next 25 years. Just on this investment alone, your money would grow up to Rs 1,083,471 by the end of 25 years, which would be 2041. Similarly, if you were to buy another
slightly used car in 2021 and invest one-fourth of your money, you would have Rs 115,750 to invest for 20 years, which would give you another Rs 778,708. Likewise, on the third car, you would have Rs 134,391 to invest for 15 years so as to earn Rs 561,385; on the fourth car, you would have Rs 155,796 to invest for 10 years to earn Rs 404,095; and on the fifth car, you would invest Rs 180,611 for 5 years to earn Rs 290,876. Thus, your total investment earning at the end of 25 years would be Rs 3,118,535. That’s a great deal for driving a
slightly used car and investing one-fourth of your money in mutual funds.
Talking about purchasing cars, I have helped six young IT graduates from India in just the last three years to buy both used and/or brand new cars in Dallas, Texas. As for my wife and I, we have never bought a brand-new car so far. We have a 1999 model Toyota Corolla, which already has 245,000 miles on it, but it still works perfectly fine, only requiring oil-changes and other maintenance works now and then. And when I am back in Nagaland, I drive a second-hand Chevrolet car. Despite people telling us to buy a new car, we have chosen to live a more economical life, which has enabled us to invest a little bit of our money in stock markets and mutual funds.
So, here’s my take: Life is not about showing off or making ourselves feeling significant through outward displays of wealth such as the cars we drive. Rather, we must be bottom-line focused. And one of the ways to do that is, to be content to drive
slightly used cars and invest a portion of our funds for a more financially secured life tomorrow.
