When it comes to milestones, buying your first car is a pretty big one. You could want one for any number of reasons—convenience (a.k.a. you've had it with abusive cab drivers), changing needs, increasing responsibilities—but you’ll know deep down when the time is right.
For 35-year-old Derrick, a sales officer with a leading bank, his early 20’s mindset dictated that he needed a ride for added pogi points. “The reason [I bought a car] was always para meron akong pang-date, para cool," he says. "I wanted a car so I could go out either with the boys or with a girl."
According to certified wealth planner Harold Gardon, that’s as valid a reason as any.
“There is no hard and fast rule when it comes to buying a car,” Gardon says. “For me, as long as it fits your budget and you already have an emergency and financial freedom fund and no debts, there is no problem.”
At first, Derrick wanted to go the conventional route and take out a car loan. “Instead, my dad offered that I could loan money from him instead. What happened was he paid for the second-hand car, and I paid him monthly. My salary at the time wasn’t a lot, but I was in sales so I had incentives which I used to pay for the car.”
Believe it or not, opting for a good quality used car is actually a solid investment. “Honestly, it is wiser to buy a second-hand car than a brand-new one. I know a lot of wealthy people who buy second-hand cars,” Gardon says.
He adds: “A second-hand car with low mileage, the ones being auctioned by the banks, are the best deals. But it depends on your objective. For those who can do delayed gratification and really live within their income, I would suggest to save 10 percent of your income until you can afford to pay for that car. So there are two ways to do it: 1) Increase your income, so it is easier to save more with that 10 percent; or 2) Find a cheaper car."
Say, you earn P20,000-net monthly. In three years, your P2,000/month savings will amount to P72,000, which is more than enough downpayment for your first car. Just make sure you understand that you have more responsibilities coming your way the second you drive your ride home from the dealership. There's a thing called repossession, after all.
Regardless if you opt for a second-hand car or a brand-new one straight from the dealership, Gardon says there are some general financial guidelines you need to follow.
“My guideline is that your total living expenses should be 70 percent of your income after tax while 20-30 percent should be saved/invested. Take into account that the cost of buying a car does not stop with monthly payments. Fuel, maintenance costs, insurance premium, and the change in lifestyle should be taken into consideration,” Gardon suggests.
“When it comes to buying a car and sacrificing things, it goes down to the budget,” he says. “Identify your needs and your wants. Needs are things that essential for survival. Wants are luxuries that we can forego. For example, you can give up Starbucks for water or 3-in-1 coffee; a movie and restaurant dates for Cable TV home dates and cooked food; or, brand-new clothes and shoes every payday for shopping every two months. After listing your wants, and you can realistically give up on them and still be happy, then go ahead and buy that car! Make sure you are not touching your child's educational fund, emergency fund, or retirement fund.”
If you’ve decided that a brand-new car is right for you, Derrick shares the following insights from his banking experience: “Number one [criteria for issuing a car loan] is tenure at work, matagal na ba sila sa work nila? If not, we look at their tenure at their previous job. Then we investigate line of work, salary, and most importantly credit standing. We do all these checks in the bank when someone applies for a loan.”
Gardon adds: “Have a budget. Compare your current budget versus if you already have a car. Public transportation cost will be replaced by fuel, parking, monthly payments, insurance, and maintenance. And because you already have a car, include lifestyle changes such as going out on the weekends and long holidays. Ask yourself, is it worth it? Can I do this?”
As for the don’ts, Gardon notes that you shouldn’t buy a car if you’re in debt and living beyond your means, you don’t have enough emergency funds, you don’t have retirement savings, or if you don’t have life and disability insurance. And it goes without saying, but do your research before choosing a make and model.
Regardless if you’re ready for your first car or not, remember money is just a means to an end. As Gardon puts it, “If you are in control of your finances, have no debt, and can afford a car whether brand new or second-hand, by all means, enjoy your money! You deserve it!”