How much should I spend on a car? I’ve thought about this question many, many times.
The answer is simple: whatever is the amount, I should make sure that I can afford it. Like every other purchase.
But it’s also not that simple, because if it is, how come 1 out of 4 bankruptcies in Malaysia is due to car loans?
If you’ve been wondering how much you should spend on a car and avoid it being repossessed by the bank, here are some answers. Thanks to all contributions from the RoR audience!
#1 – How many % of monthly salary to go towards car payment?
How much should a person spend on a car, actually?
Some said 15% of monthly salary just for the car instalment:
Tasya Omar – Ideally, the monthly loan repayment should not be more than 15% of the monthly income. Of course, not everyone gets RM5k as their first salary. If one is disciplined enough to put aside RM800 per month – RM500 for monthly loan repayment, RM300 for the upkeep/ spare parts and whatnot – I think that should be ok.
Some said no more than 1/3 of their pay:
Jonathan Goh – Not more than 1/3 of their pay or the monthly repayment. If people follow the principle of partitioning their monthly wages, they will have enough to cover the petrol and car maintenance.
Let’s say a guy who brings home RM3k after deducting EPF. His monthly car payment should be RM1k. Now if he is savvy he will get a Myvi with a monthly payment of RM800. He now can save RM200 for the car in case of emergencies/auto insurance
Some base it on annual income, too:
bumped to this, perhaps from the monthly earnings, one should able to cope on the maintenance cost etc pic.twitter.com/SYVMPyt9ih
— 🍰 (@trancedisorder) April 23, 2019
(Effectively 8.33% of monthly salary for car instalment, and no more than 15% of monthly salary for all car expenses)
Amirah Nazarudin – I followed that the car price can be equivalent to 36 months of your salary, at most. I heard this advice after attending a seminar 3-4 years ago. Couldn’t remember who it was.
But to me, a car is a liability. I’ll try not to spend so much on it. Having Proton is good enough. If I do want to splurge I’ll go for Toyota or Honda.
(Effivetively up to 25% of monthly salary for car instalment)
So… it looks like it’s common to spend between 8-33% of your monthly salary on car payments. That looks like an okay amount right? You still have 67-92% of your salary to play around with.
No, not really, because…
#2 – Car ownership costs much, much more than you think
Your car instalment may be as cheap as 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. The car insurance. The car service and maintenance and car washes. The petrol and tolls.
Additionally, and unfortunately, car ownership is a major contributor to unexpected expenses too. Throughout the duration of car ownership, many will have to shell out money for major repairs after getting into accidents, to replace batteries and alternators, to fix the aircon, to get new tyres, to settle unexpected summons, and more.
So not only you need more money than you think for car-related expenses, it is essential to have emergency savings.
This prompted this rule of thumb by a RoR audience:
Viknesh Victor Sekaran – My rule of thumb is to only buy the car you want if you wouldn’t think twice about the cost of changing all 4 tyres. For example, Vios continental tyres would cost around RM1k+ to replace. You can get more familiar with tyre prices by Googling the tyre specifications
#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 shouldn’t get a car with RM1000 monthly instalment. You should instead get a car that costs, say, half that amount, or even less. Because you’re going to need the other half for the 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
Andaq Fithry – I spend very minimal on the basic. No extra, no accessories, no mods. Extra is want, not need. At my age, I don’t want to spend money on strut bars, gt-wings or performance kits. Those are extras. I’d rather spend on other kinds of extras like flood insurance, windshield coverage, etc.
(2) Buy a secondhand car and pay it in full
This works really well if you have savings. By paying for a car upfront and in full, you’re eliminating 5-7 years worth of monthly car instalment payments.
It’s a popular strategy among personal finance bloggers, too. Here are some that I know:
- Mr-Stingy bought a 9-year old Myvi for RM20,000.
- Mimirello bought a RM12.5k 2004 Kelisa.
- Airy Lil M bought a RM5,600 Kancil and spent an additional RM2k fixing it up (she’s since upgraded her car, to a RM24k Perodua Axia)
You can also combine (1) and (2) – that would significantly lower the cost of car ownership for sure!
#4 – What if the dream car that you really, really want is out of your budget?
My dad is a car guy, and while I don’t understand his love for cars, I know that it’s something that makes him really happy. I like seeing him happy.
I think it’s okay to want your dream car. If you can’t afford it now, then the solution is two words: delay gratification.
These guys suggested saving up and making a huge down payment for the car:
Calvin Boey – (To get your dream car,) delay the purchase by a year or two, place the money aside and put a huge downpayment.
Samuel Jin – I think owning a car you will really like to drive is important regardless of the price because modern vehicles are depreciating asset anyway. Save up enough to pay more on the downpayment so that instalment won’t be huge burden afterwards.
While these guys suggested avoiding car ownership first:
Moses Francis – Personal take is, if single you no need a car. You can just rely on Grab and trains. I’ve sold my car and never been happier. I believe the relationship status matters too (with car ownership). Especially if a person is married – they might have some emergencies with kids and can’t rely on Grab or public transports.
Caleb Woon – For me, I used 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 (petrol, instalment and other fees), then I won’t get a car yet.
You may think that a car purchase is a practical decision. But let’s not forget it is also an emotional decision.
You may have these thoughts yourself:
- I am cool and edgy, so I should get that cool and edgy car so everyone knows it (me).
- I need freedom and convenience. And the ability to go anywhere I want. (me).
- I have a family. I don’t want people to think I can’t provide for them.
- I need to impress my clients. A cheap car won’t cut it.
- I am single. Need to show potential partners that I have money.
All of the above are valid points. The car you choose does reflect your personal identity. You do want your family to be as comfortable as possible while travelling. Some clients you’re hoping to conduct business with do care about wealth and status.
But all of them may also push you to buy a car that’s out of your budget. And cause your bankruptcy.
Instead of ending this article with ‘don’t buy a car that you can’t afford to pay’ tone, I want to ask you this instead: what car do you want and why do you want it? What exactly about it is appealing for you?
Let me know in the comments section. A little bit of soul-searching and self-awareness exercise will do you good 🙂