A lot of young people, especially graduates fresh off formal education institutions, rush to buy a brand new car after a few months into (or even before) their first job.
Arguably, it’s a trend further strengthened by typical societal expectations on young people, especially parents and friends. What most don’t realise is that such purchases are likely to be the step that locks them into a long life of debt.
There’s no denying that a car is necessary for daily transportation of the working class, be it for work or a run to the grocery store. Some might prefer the cheaper and more economical (though inherently more risky) option of a motorcycle, but whichever personal vehicle you opt for, for most people it makes little sense to purchase one brand new.
Cost of ownership
Purchasing a brand new car isn’t cheap, particularly in a country where high-income economy has yet to be realised, like Malaysia. Typical monthly salary of new graduates varies anywhere from RM2,000 to RM4,500, and typical price of a brand new medium-sized car runs from RM25,000 to RM60,000.
To afford such purchase, many buy into a bank loans typically stretching to 7 or 9 years of repayment schedule. By virtue (or lack of it, rather) of such loans and the interest rate associated with it, the actual price paid for the car is much greater than the price on paper at purchase time. That in itself represents a huge loss, but that’s not the worst of the deal.
The greatest downside of purchasing a brand new car when you’re just starting out is the burden of debt placed on you right at the moment when you’re just beginning your life. Many will say that this is the critical period that determines how your life plays out long after that period.
Taking a loan with a 9-year repayment schedule to purchase a new car that costs RM50,000 means making a repayment of about RM600 – RM800 every month. Immediately the folly of such purchase is apparent – it can never be a good move when you’re paying close to or more than a quarter of your monthly salary for a quickly depreciating asset.
It’s not enough to stay on top of debt
On top of that, you still have to pay for a host of other necessities – fuel, rent, bills and groceries, to list a few. If you live in a highly urban area, these items can easily eat up a huge portion of your monthly income. As a result, you have very little margin for other expenses, much less to save.
Now you might think that you’re living within your means, as long as you can pay off all the repayments and still have enough for other expenses. But the truth is, living paycheck to paycheck is not living within your means.
Consider this scenario. You have just started out at your first job after spending years on formal education. Since you’re just starting out, you’ll probably want to get married within a year or two, which can easily burn a RM30,000 hole in your pocket. (Yet another ridiculously expensive endeavour thanks to our society’s misguided expectations.) Because you have spent all your income on repaying your car loan, house rent, bills, etc., you have very little left to save every month. After two years, you decided to get married and use up whatever you managed to save.
Now you’re back to square one, still repaying loans and living paycheck to paycheck. But now you’re approaching the age of 30, and before long you’ll have kids, and all the expenses that come with it. Plus you maybe want a bigger house now that you’re living with a spouse, and some expenses will increase. Though you may think that your spouse will bring additional income, he or she will also have expenses to pay for, maybe even another car loan because you know, everybody needs a brand new car when they start working.
So it’s easy to see how it’s not enough to just be on top of your debt, living paycheck to paycheck. Not only does it leave you vulnerable because of very little or no savings, it also locks you in to that kind of financial constraint for a long, long time. Don’t just think of savings as needed just for the rainy days ahead. Learn to think further than that, that savings allow you to grow your asset and make your way towards financial independence. That’s all we should at least be aiming for – financial independence.
Make a savings objective
Without the brand new car and the shackle that is the monthly loan repayment, you can save more every month. For most people, it is not unrealistic to save up to RM100,000 by the time you’re 30. And when you have that much savings, it is much easier to grow that asset. The end result is that you’ll be able to really live your life later on, and not worry about making ends meet. And perhaps you’ll even get a much fancier car than you could ever get if you bought that brand new car early on.
I know it can be difficult to resist the temptation when every time you catch up with your school or university friends, everybody’s driving a shiny new car. There’s also the parents that measure how well their (and their friends’) kids do by the kind of car that they drive. These are absolutely ridiculous societal norms, but you can shield yourself from these destructive encouragements by forcing yourself to think ahead. Stop measuring yourself against your friends, or your mom’s friend’s kids, or that industrial trainee guy in your office. Instead, measure yourself against your long term financial plans and how well you are achieving them.
But seriously, the conclusion that I’m trying to drive home is that no, you don’t need a brand new car when you’re just starting out your life. You might think that you deserve it for all the hard work and sleepless nights you spent during those university years. Don’t kid yourself, the hard work is just beginning.