So, back from holiday, and back to making up for any spending I did. I did use my tips from the other week btw, so our flights were cheap, the car-rental was acceptable, and housing was free (staying with family and friend does that to accommodation costs).
This weeks topic is cars as you might have guessed from the headline. I am not talking flashy cars here, but rather reasonably priced family cars (in my example I am using Ford Mondeo Hatchback 2.0 TDCi Zetec, and an estimated yearly mileage of 20,000, and the car having to be replaced after 100,000 miles, so at around 5 years of age). Rest value estimated at £2000 after 5 years, at 100,000 miles.
Alternative investments are evaluated at 4.9% APR for 5 years, and 4.3% APR for 3 years.
New Cars, the smell of new car, the feeling of driving it away from the dealer, and parking it on your drive. Realising that it has just dropped up to 30% in value.
All prices etc are compared against just keeping the £16,013, and investing it at 4.9% for the 5 years, which would give us £20,340 at the end, or £4327 more money.
Cash the car can be bought at £16,013, and sold for £2000, which for 5 years is £2802/ year. This means that you are £18,340 worse off for buying cash, compared to just saving the money.
If you chose hire purchase (HP) with an initial deposit of £500, 60 payments of £323, for a total of £19,880, and sold for £2000, which for 5 years is £3576/year (10.5%APR). This means that you are another £3867 out of pocket compared to cash buy, which means £22,207 worse off using HP, compared to just saving the money.
If you instead chose lease purchase (LP) with an initial deposit of £500, 60 payments of £263, and a final payment of £6205 for a total of £22,485, less re-sell value of £2000 or £4097/year (11.9%APR). In this case you are another £6472 out of pocket compared to cash buy, which means £24,812 worse off using LP, compared to just saving the money.
So when buying a new car, I found the following:
- Cash -> £2802/year and £18,340 worse off compared to saving the money
- Hire Purchase -> £3576/year and £22,207 worse off compared to saving the money
- Lease Purchase -> £4097/ year and £24,812 worse off compared to saving the money
So among new car options, the best one in this case was Cash.
Used Cars, no new car smell there, unless you buy a Wunderbaum with New Car smell
Used 10 Reg with 5000 miles at £14,000 as this one has done 5000 miles, we only get 4.75 years out of it, so the calculations are based on that, as we sell it at 100,000 miles. Here we pay cash for it, but we only use £14,000 out of our £16,000, and invest the other £2000 at 4.9%. We end up with a cost of £12,000 after we sold the car, and have now £2523 from the £2000 saved. So cost per year is £2526, and we are only £15,817 worse off compared to saving the money.
Used 59 Reg with 10,000 miles at £13,500 same as above, here we get 4.5 years out of it. We pay cash, and use £13,500, and invest the other £2500 at 4.9%. We end up with a cost of £11,500 after we sold the car, and the investment is worth £3115 from the £2500 saved. So cost per year is £2556, and we are £15,225 worse off compared to saving the money.
I think you by now will have guessed where this is going.
Used 09 Reg with 15,000 miles at £11,500 same as above, here we get 4.25 years out of it. We pay cash, and use £11,500, and invest the other £3500 at 4.9%. We end up with a cost of £9500 after we sold the car, and the investment is worth £4308 from the £3500 saved. So cost per year is £2235, and we are £14,032 worse off compared to saving the money.
Okay, last one I promise.
Used 07 Reg with 35,000 miles at £7700 same as above, here we get 3.25 years out of it. We pay cash, and use £7700, and invest the other £8300 at 4.3%. We end up with a cost of £6700 asuming that we get £1000 back instead of £2000, and the investment is worth £9542. So cost per year is £2061, and we are only £9798 worse off compared to saving the money.
- Used 10 Reg at £2526/year, and £15,817 worse off investment wise
- Used 59 Reg at £2556/year, and £15,225 worse off investment wise
- Used 09 Reg at £2235/year, and £14,032 worse off investment wise
- Used 07 Reg at £2061/year, and £9,798 worse off investment wise
Some people will now argue that if you buy the 3 year old car, you will only have a car for 3.25 years, and you wanted one for 5 years. You can carry on the calculations if you are interrested, and check what ends up the better deal. As long as you can keep enough of your money in investments, and spend less on the car, you are in a better position than the people who buy new cars.
So, this weeks conclusion is:
Don’t buy a new car, while you are trying to get rich. Buy a 3 year old car each time, and invest the other money. That way, you will get rich faster, and still be able to drive a reliable car.
Only buy a new car, when you have passive income that is greater than what you were, or are payed in your job. I will get to passive income when we get to investments.
Next Friday I will be suggesting books for reading.