How much should you spend on a car? Whatever the amount, you should make sure that you can afford it.
But it’s also not that simple, because one out of every four bankruptcies in Malaysia is due to car loans.
If you’ve been wondering how much you should spend on a car, here are some popular opinions out there:
1. What percentage of your monthly salary should go towards your car payment?
Some say 15% of monthly salary.
Be disciplined enough to put aside RM800 per month. RM500 for monthly loan repayment, RM300 for the upkeep and spare parts.
Some say no more than 1/3 of their pay.
If you follow the principle of partitioning your monthly wages, you will have enough to cover the petrol and car maintenance.
Let’s say you bring home RM3,000 after deducting EPF. Your monthly car payment should be RM1,000. If you are smart you will get a Myvi with a monthly payment of RM800.
You can now save RM200 monthly for emergency repairs, road tax and insurance.
Some base it on annual income, that the car price can be equivalent to 36 months of your salary at most.
So, popular opinion says its ok to spend between 8 to33% of your monthly salary on your car payments. That sounds like a good amount as you still have about 92 to 67% of your salary to play around with, right?
No, not really, because…
2. Car ownership costs much, much more than you think
Your car instalment may be just a few hundred Ringgit per month, but you need to pay for a bunch of other stuff too.
Depending on variables like your car model and frequency of usage, you have to at least double or triple the car instalment amount.
You need to pay for the road tax, insurance, servicing, maintenance, car wash, petrol and toll charges.
You will also have to pay for major repairs if you get into an accident, replace the battery and alternator, fix the aircon, get new tyres and settle traffic summonses.
So not only do you need more money than you think for car-related expenses, it is essential to have some emergency savings.
3. The lower the cost of car ownership, the better
So by now you know that if you have RM1000 extra in your monthly budget, you should not get a car with a RM1000 monthly instalment.
You get a car that costs half that amount, or even less. You’re going to need the other half for other car-related expenses.
There are two ways to reduce the cost of car ownership:
(1) Get a basic car with minimal cosmetic add-ons. Spend the minimum on basics. No extras, no accessories, no mods. Extra is a want, not a need.
(2) Buy a second-hand car and pay for it in full.
This works out well if you have savings. By paying for a car upfront and in full, you’re eliminating five to seven years worth of monthly car instalment payments.
You can also combine (1) and (2) above to significantly lower the cost of your car ownership.
4. What if your dream car is out of your budget?
I’s okay to want your dream car. If you can’t afford it now, then the solution is two words: delay gratification.
Delay the purchase by a year or two, place the money aside and put a huge down payment so that instalments won’t be a burden later. Modern vehicles are a depreciating asset anyway.
You can also use a simple calculation. If the total amount used for public transport and ride-hailing such as Grab is less than the cost of owning a brand new Perodua Axia then don’t get a car yet.
You may think that purchasing a car is a practical decision. But let’s not forget it is also an emotional decision.
The car you choose reflects your personal identity. You want your family to be comfortable when travelling.
Some potential clients you’re hoping to do business with do care about wealth and status.
But all of this may push you to buy a car that’s out of your budget. So do choose wisely.
This article first appeared in www.ringgitohringgit.com
Suraya is a corporate writer-for-hire and the blogger behind personal finance website Ringgit Oh Ringgit. She is more of a minimalist, less of a consumerist, a konon DIY enthusiast, a let’s-support-small-businesses-over-big-corporations kinda girl. Prior to her current role, she worked in various capacities within the non-profit industry.