Is buying car a sensible decision?

Buying a Car has become one of the goal of most of the individuals. It has become a matter of pride to maintain a car. For this either you accumulate funds for few years or borrow funds and pay EMI’s for years, or a combination of both. Now the question is, is it really worth to spend so much money in a car?

Let’s do analysis on few parameters.

COST: The most important factor to consider will be cost. Let us assume you buy a mid-range petrol car of around 6L or diesel car of 7L for comparison purpose. A comparison between buying a car and not buying a car, but getting the same comfort of riding in a car through rental cars like Ola, Uber, etc.

When you buy a car completely on loan

	PETROL	DIESEL
Loan	6,00,000	7,00,000
Term of loan	5 YRS	5 YRS
ROI	11%	11%
EMI	13,045	15,220

Further monthly running expenses

		PETROL	DIESEL
	Daily Running (kms)	50	50
	Days (active days in a month)	25	25
	Total running (kms)	1250	1250
	Mileage (km/lt)	12	15
	Total fuel (mthly required in lts)	104	83
	Cost of fuel (per lt)	70	60
	Monthly fuel expense	7292	5000
ADD	Insurance (avg pm 7000 p.a for petrol and 8000 for diesel vehicle)	583	667
ADD	Servicing (2 times servicing every year with total cost of 10000 for petrol & 12000 for diesel vehicle)	833	1000
ADD	Washing & Cleaning	300	300
ADD	Repairs	500	600
ADD	Chauffeur/Driver	10000	10000
ADD	Parking fees (Home and Out)	1000	1000
ADD	MISC	300	300
	Total running cost per month	20808	18867

    * You may think why am I considering cost of a Chauffeur, as most of us drive by self, but I am comparing it with cab service which comes with a driver. In order to get the same comfort of a Cab service, I have added salary of a Chauffeur.

At the same time looking at the cost of travel using cab services

Monthly run	1250
Cost per km	10
Total cost per month	12500

     * 10/km is the average cost considered, although some of the cab service providers promote it as 5/km but considering the charges they levy as fixed, per minute cost, etc will add up to around Rs.10/km.

With the above two tables you can see a clear cost difference of Rs.8308 per month (20808-12500) for petrol cars and 6367 per month (18867-12500) for diesel cars. This monthly savings along with saved EMI amount can be invested in any other asset class giving a return of 12% p.a.

Regular SIP	21,354 (13045+8308)	20586 (15220+6367)
Term	5 YRS	5 YRS
ROI p.a.	12%	12%
Fund Value	17,43,957	17,62,951

The difference in the networth of an individual after five years will be

		PETROL	DIESEL
	Investment Value	17,43,957	17,62,951
LESS	Car resale value	3,54,294	3,10,593
	Difference in networth	13,89,663	14,52,357

(Depreciation for petrol car is considered to be 10% p.a. WDV and for diesel vehicle 15% p.a. WDV)

This shows the person not buying a car becomes richer by more than 14 lakhs by the end of 5 years even after enjoying rides in cabs. The cost of commuting via cabs are going to become further cheap in future when auto driven cabs will be introduced, here driver’s salary will be saved. Already few companies like Tesla & Google have started test run of their auto driven cars and very soon will be launching in the markets.

COMFORT: When you ride in your own car, either you drive yourself or hire a chauffeur. Driving yourself may reduce your cost but increases frustration driving in ever increasing traffic, where in when you use cab facility, you have a driver on his duty and you don’t need to worry about driving. This also increases your productivity in your work, as while in transit you can study or do your office work, which was never possible when you are driving. Also the frustration of driving in heavy traffic can be carried to office or work place affecting your performance.

There are instance where you meet even with a small accident while driving may lead to a big fight on the road resulting in waste of time, money and further irritation.

Morning when you get ready for office and see car tyre is puncture, either you spend extra in auto rikshaw or hire a cab for that day or for days till you replace your stepney which is again a time consuming process.

FLEXIBILITY: If you happen to be the only driver in the house, then dependency on you increases and you need to do an extra job of a driver whenever or where ever your family has to go, you are always there even places where you are not invited and required. Loosing self dignity flexibility at times.

CONVENIENT: To drive a car you need a valid driving licence, which further adds to the cost. At times not carrying proper documents may lead to further hassles of dealing with traffic authority, paying unnecessary challans and further waste of time. Apart spend considerable time in maintaining all documents properly, remembering insurance renewal dates, pollution expiry date, etc.

Wherein using cab services will save you from all the above issues, no need of licence, no need to maintain documents, no need to deal with traffic authority, and so on. Whenever you need a cab, you can book it over the phone and travel, all other hassles are handled by the cab provider.

Also in case of maintaining your own vehicle, you are always scared of taking the car out due to heavy traffic and the first question comes to your mind before going to any new or unknown place is, whether I will get parking space or no. If you get parking space in the city then the parking fees can be as high as Rs.100 per hour at Airports or Big Malls. If you do not get the parking space then you spend hours in finding the space which might be too far from the place you actually wanted to visit, leading to unwanted walk and waste of time. I have seen people unable to spend time with family as they are always busy searching parking space.

Even to park your vehicle in your apartment you need to pay separate rents or to avoid rents you buy the space which may cost you in the range of 50 thousand to 2 lakh, which again adds to the cost.

Conclusion: Overall buying a car does not make commercial and mental sense. But this debate is valid if you buy a new car of middle or higher segment. But if you buy a car costing as low as 2-3L like  Nano or Alto or any other vehicle in that range that to some extent you can justify the cost, or alternately if there are solar or electric cars with heavy subsidy by government may make some sense. Till such time enjoying cab rides will be more sensible. In today’s world with lots of uncertainty, one should never miss opportunity to create wealth. We should always try and invest in such assets which appreciate and not in one which depreciates.

Although we have concluded that buying a car may not make commercial sense, but this is very subjective as in life you may not look at cost and finances in every matter. If you feel that maintaining the car is a matter of pride and a certain requirement to maintain status then this debate may not make sense to you. Buying a car may make more sense if you stay in a city or town where such public transport or cab facilities are not available.  

  

 

   

By Karim Lakhani - CFP CM Chief Financial Planner & Managing Partner 3rd EYE Financial Planners LLP