Owning A Motor Vehicle: You Can’t Afford It.

What does it actually cost to own a motor vehicle in 2024? The reality is that majority of the people who own a motor car can’t actually afford the vehicle. This issue has been exacerbated by the rising cost of living that has hit the world in recent times.

Finacial advisors and experts around budgeting and growing personal wealth advise that when purchasing a motor vehicle, one should spend less than 40% of your annual income on the vehicle. The reality is that for many households running two motor vehicles this is simply not possible.

(Source: A Proven Plan for Financial Success – Ramsey (ramseysolutions.com)

Some advisers are even suggesting even less be spent on motor vehicles.

Sam Kitchen of Secured Wealth had this to say on the matter.

“10-15% of the annual household income should be spent. The exception is if you love cars you can go to 25%. My point is try to minimise paying interest on depreciating assets. A car lease for $60K will be the same cost as a 150K home loan. After 5 years you have a $35K car or a $280K home asset”

Sam Kitchen: Secured Wealth | www.securedwealth.com.au

Note: Majority of these financial advisors also advise not purchasing a depreciating asset on finance but rather to save and purchase outright. Thats a who separate article.

The “need” for a motor vehicle, be it a second-hand worn-out vehicle or trying to keep up with the Jones’ by purchasing a vehicle that comes with luxury car tax means that majority of the suburban households are middle class, financed two or more motor vehicles and will forever be stuck in middle class. This is not about Financial advice or economic predictions, however it is about revealing the unexpected and often unaccounted for costs in the family budget.

With the above-mentioned scenario many households are already stretched to the financial limit simply because two motor vehicles sit in the driveway that have cost the household up to 70% of their annual income and are now paying this huge amount off over five years at around 12%.

Monthly repayments on your motor vehicle have the budget stretched but many consumers are not taking into account the additional costs that come with owning a motor vehicle.

Below is a list of things you may have forgotten to budget for. Note: Australian NSW costs are forecast.

Fuel costs increase at the same rate as all other consumables that are putting the pinch on Australian families. At around $2 per litre of fuel its not unusual for the average family motor vehicle to go through $400 (subject to many variables) a month in fuel.

CTP. Compulsory third party insurance is another unaccounted-for cost many forget to budget for. The prices of this can range for $400 a year up to $1000 for some commercial vehicles (Toyota Hilux, Ford Ranger) etc.

Comprehensive insurance will fluctuate depending on driving history, your age and the type of car you have but as a rule of thumb, this will cost you the same as your CTP.

Servicing. This is where people get caught out. A new vehicle should require less financial out lay than an older vehicle however this is not always the case.

A new Japanese or Korean motor vehicle should cost you between $500- $1000 a year in upkeep depending on variables (brakes and tyres will aways cost more)

A European vehicle such as a VW, Audi or BMW will likely be closer to $2000 per year.

The most frequent scenario we see is the following. A new Range Rover has been purchased on Finance and well exceeds the 40% of income rule in some cases the upfront purchase of the car is close to 100% of a household annual income. The owner rationalises the monthly payments over five years as “we can afford that”.

The owners have done the same thing with their mortgage or in some cases, wrapped the purchase of the car into the home mortgage. The budget allows for 4% on that Range Rover OVER 30 YEARS. Are you mad?

The budget also hasn’t allowed for fluctuations in interest rates.

JLR is making a massive 12% profit off your $200,000 purchase. However, the budget has not allowed for 22 inch tyres at $500 each and that wear out in 10,000kms because of the weight of the car. Nor have the budgeted for the Brembo brakes fitted to the two-tone brick that cost up to $2000 per axel to replace every 20,000kms.

The owners of this flash Range Rover look the part but now can’t afford the brakes and tyres that the vehicle needs in the first eighteen months of owning the thing.

The result, no matter which way you have funded this car is, the household can’t afford it. Our Raneg Rover owning friend looks the part but is absolutely maxed out on debt that they cant afford the basic maintenance on this vehicle.

Our scenario is extreme, but we see it even with the less luxurious brands. Before you consider purchasing a motor vehicle do a budget for it and don’t just consider the repayments. You have many other expenses involved with motor vehicle upkeep.

One final point: All of this budgeting is for a deprecating asset. That $200,000 range rover will be worth $30K in five years’ time, you would have forked out 200K plus upkeep costs, plus interest and have a chunk of scrap metal in five years’ time.

Finacial advisors never advise these vehicles. A recent study of over 1000 self-made millionaires in the USA found that the two most common vehicles driven by millionaires are Toyota and Honda.

(Source: Geroge Karmel)

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