Up until very recently I was driving a twenty-four year old Mazda 626 and I have had a draft post on the “why” for months, probably even more than a year, sitting in my dashboard. Besides the fact that I am not too sure why so many people were so obsessed with the fact that I chose to drive an old car, I think the topic is a very important one and falls firmly into my passion of understanding the behavioural side of finance which is why I am glad I am finally pressing Publish.
The answer is simple really: basic maths.
On the 10th of January 2011, I started my first real job whilst most of my friends were studying towards their Honours degrees.
First pay cheque in and every kid from a private school spends it on a BMW! #vomit Quite happy with my 1994 Mazda and a personality!
— Tamzin Nel (@femmegypsy) January 22, 2014
Although the above tweet accurately reflects my thoughts; my mom, sister and I were sharing a room in my grandparents’ home in their retirement village at this time so practically I could not afford a new car anyway. My salary was good and soon after I started working my ma and I could afford to get a gorgeous apartment where the three of us lived for almost three years. I also bought my grandpa’s 1994 Mazda 626 for R15 000 cash.
On the 2nd of July 2012, I started working at Anchor Capital where I see myself working indefinitely. At this stage I could have afforded to buy a new car and even though I did do some online shopping, I just could not bring myself to actually making the commitment. Mostly, because I have always believed in buying a home first and I did.
On Spring Day 2013, I signed the offer to purchase on my first home (at the age of twenty-three). Had I bought a car, this would not have been possible as I would not have had enough disposable income at this stage to afford both a bond repayment and a car payment.
When I started working at Anchor I was looking at buying a Ford Figo which is, arguably, the best entry level car in the market. At this stage my monthly repayment would have been close to R3000 and the insurance quotes I collected averaged R1000 per month.
In order to keep things simple I am going to assume that I saved nothing during my first couple of months at Anchor and that I only started doing so when we launched the Anchor BCI Equity Fund (a unit trust). The fund launched on the 5th of April 2013 and has returned 80.4% since inception to end June 2015 (the market returned 51.2% and the peer group 37.6% over this time period). This translates into an annualised return of 31.3% and if I assume that I signed a monthly debit order of R4000 (the cost of the Ford Figo and insurance per month) the following inputs into my financial calculator
- PV = R0
- PMT = R4000
- I = 2.61% (31.3% / 2)
- N = 26 (2 years, 2 months)
- FV = R146 212
shows that I would now have almost R150 000 saved. A quick google search tells me that the car would, comparatively, now be worth approximately R80 000. In addition, the insurance on my Mazda was R150 per month – a full R850 per month saving versus a new car, or a saving of R35 000 over the time that I had the car. A total difference of R105 000.
So, why did I choose to drive an old car when I could afford to buy a new one? It is pretty self-explanatory isn’t it?
There are obviously other considerations to keep in mind such as repair & maintenance and safety being the obvious ones. I spent approximately R2000 per year on my car in services, R2000 in total on tyres, R1000 on a new battery and R5000 or so on a new clutch (co-incidentally, the first one the car had ever had replaced – there is something to be said for a car only having one previous owner) and other bigger repairs. Even adding in all of these figures, the above conclusion still holds.
So, why did I buy a new car now?
My Mazda had the three things I consider the most important in a car; aircon, power steering, a radio and safety features (such as airbags and ABS) which, besides, the saving equation, is why I kept it for so long. But, I always said I would buy a car when the following things happened: I had bought a house; I turned 25 (insurance payments are less); the cost to repair the Mazda far out-weighed the value of the car; The odometer reached > 300 000 km; and I started to feel unsafe, ie) the probability of the event of random breakdowns increased, especially because do a lot of night-time driving after events and functions etc.
So, this happened in March:
It is a Ford EcoSport and I LOVE it!
I have a couple of rules when it comes to buying cars, some of which I kept and some of which I broke: buy second hand (I really wanted a new car even though I know it is not the most sensible) and buy cash or make sure that the monthly repayment is no more than 10% – 30% of your salary.
Always remember that cars are exorbitantly expensive and only decrease in value so make sure that you save first (at least 15% – 20% of your salary). When you are old and frail with nowhere to live and nothing to eat, are you going to care that you maybe impressed someone whose name you can no longer even remember 60 years ago?
I mentioned Ford a couple of times in this post but it is in no way a sponsored post. I just happen to love the look of Ford cars. My other favourite is Audi and although I spent a long time considering the A1, it would just not be practical with a mountain bike on the back and exploring dirt roads across the country!