I recently made my way to the local used car dealership and purchased a pre-loved 2021 Kia Cerato GT. While not the most exciting purchase, a good friend told me ‘very responsible,’ which also means not very impressive. I was definitely taking a back seat to playing the status game.
It’s got me thinking, why has it been psychologically difficult to transition from an expensive German built car to a new more practical Kia that has superior luxuries and advanced safety features such as blind spot monitoring, lane assist and adaptive cruise control. While I have mentioned the benefits, the negatives are more in the driver experience, such as step down in power and the loss of a very capable German built all-wheel drive system. While I am far from a car expert, on paper it seems the newer model Kia is a significant upgrade to the old German built car. So why has my mind second-guessed the purchase. Is it ego, the allure to play the status game, or is it hedonic adaptation, the psychological difficulty in the perceived reduction in lifestyle that I have become accustomed to. In reality, it is probably both. I would be lying to myself if I said I only enjoyed the German luxury car for its driver experience. Although it is nice.
This brings me to ‘very responsible.’ Financially the Kia makes sense. Let me go into it.
How much does the affordable Kia really cost on a yearly basis? This may shock you!!
I purchased the car for a modest amount of $29,300 with cash. I have a mortgage on my existing residence, so I have assumed an opportunity cost of my current mortgage rate of 6.5% pa, as I could have used the money to repay my current mortgage. To ensure that I am back in the same position, pre the purchase of the new car, I have assumed I would repay the money back over 5 years, which is the typical car loan period. I have also assumed that I drive the car for 20,000 km each year.
Annualised breakdown of Kia costs:
Car repayment - $6,879
Comprehensive car insurance - $1,030
Government registration - $961
Basic regular car service - $627
Tyre replacement ($200 per tyre replaced every 60,000 km) - $267
Fuel (combined fuel economy of 8 litres per 100km at a cost of $1.80 per litre) - $2,880
Total annual cost = $12,644
The median combined household income in Australia is $92,872, after tax it’s likely to be around $80,000. If we factor in that the average rent in Australia is $600 per week or $31,200 pa, then this leaves $48,800 pa remaining in surplus income. If we further reduce this amount by the above cost of running an affordable Kia, this reduces to $36,156 pa. This is before we have factored in a minimum savings rate of 20%, I will talk to this in another post. Once we have factored in the minimum savings rate, this leaves a surplus income of $20,156 pa. Now I do not know any couple, let alone the average 4-person family being able to live off $20,000 pa! It’s likely that a lot of families are not saving, or saving very little. Not to mention that the majority of cars I see on the road are $50-80,000 SUV’s and utility vehicles, and the vast majority of households are running two cars.
As you can see, housing and transport makes up the majority of household expenditure. When budgeting, if you can target and reduce these areas, you will get more bang for your buck. If anyone tells you that you can’t save money because you are buying a daily $5 coffee or $20 smashed avocado - I doubt this is the real issue. It’s more likely that you bought too much house or car!
While there is a lot of rules of thumb out there for how much you should spend on a car, I don’t particularly like these, as everyone’s situation and values are different. Some see a car as a mode to get from one place to another, while other’s get a lot of value out of driving something nicer. The rules of thumb are usually also based on one aspect of your finances, such as your income or net worth, and does not look at your situation holistically, such as whether you need something for work or weekend getaways.
What I will finish on, is that by looking at the numbers, you need to understand how much your car is costing you and make an informed decision. Don’t let your ego, keeping up with your neighbours, or the hedonic treadmill ruin your chances of getting ahead. Know the numbers, buy what you can comfortably afford! For the younger readers, ‘buy the least amount of car your ego can afford.’
For now, I will stick with my new pre-loved Kia. If our family income grows, I may stroke my ego again and buy something more luxurious as I do have a soft spot for cars. However, I am not going to sacrifice our future for the sake of ‘keeping up with the Jones’s’.
The Financial Poet.
Disclaimers:
The principal purpose of this blog is to provide factual information and not provide financial product advice. Additionally, the information is not intended to provide any recommendation or opinion about any financial product.
General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product. This post specifically excludes personal advice.
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