Does the salary to car value ratio actually mean anything?
Discussion
Hi,
Looking at car forums in the USA, there is a saying "if you cannot afford to buy it twice, you cannot afford it". Is there any real wisdom in this if you're buying a car outright with cash? I'd say this makes sense when it comes to maintenance e.g. if you need to buy new tyres and it wipes out your monthly wage completely with no slack, then you can't afford it. My technique is to divide up yearly running costs (say yearly tyres, insurance, tax, everything else) by 12, to know what the car costs monthly and ensure that it is not a lot.
Similarly, is there any meaning or reason why people say you should only buy a car that is 1/4 the value of your yearly salary? If we all follow that, we'd all be driving some really old cars! If you're earning 30k in your first year of work and starting from scratch, I would not buy a car 30k car, regardless of depreciation or not. If I have been earning 30k for 20 years and still am, with plenty of money in the bank, that is different. It does make it hard to swallow buying a car that pricey, but I don't think it means anything and does not take into account running costs (which on some high value cars, can be low). Even then, if the car will depreciate like a rock, I would not buy it.
Thoughts appreciated!
Looking at car forums in the USA, there is a saying "if you cannot afford to buy it twice, you cannot afford it". Is there any real wisdom in this if you're buying a car outright with cash? I'd say this makes sense when it comes to maintenance e.g. if you need to buy new tyres and it wipes out your monthly wage completely with no slack, then you can't afford it. My technique is to divide up yearly running costs (say yearly tyres, insurance, tax, everything else) by 12, to know what the car costs monthly and ensure that it is not a lot.
Similarly, is there any meaning or reason why people say you should only buy a car that is 1/4 the value of your yearly salary? If we all follow that, we'd all be driving some really old cars! If you're earning 30k in your first year of work and starting from scratch, I would not buy a car 30k car, regardless of depreciation or not. If I have been earning 30k for 20 years and still am, with plenty of money in the bank, that is different. It does make it hard to swallow buying a car that pricey, but I don't think it means anything and does not take into account running costs (which on some high value cars, can be low). Even then, if the car will depreciate like a rock, I would not buy it.
Thoughts appreciated!
Jonno02 said:
I couldn't afford to buy my car twice, but I can afford the lease cost associated with 'owning it'. I don't want to own it. I don't want to have the unknown financial responsibility of a depreciating asset. I want to know exactly what it'll cost me for 2 years and if I'm happy with the price, I'll pay it. I owned my last car and it stung me come trade-in time because the market is constantly shifting. If the market shifts with my lease car, I don't take the hit.
That and I like to change my car often.
Agree. I wouldn't mind buying a second-hand car that has taken the hit on depreciation and will depreciate slowly. But every car does depreciate differently I guess.That and I like to change my car often.
Has anyone paid 90-100% of their yearly salary on a car and not regretted it or struggled with finances?
Zoobeef said:
No, I had about £45k in the bank so it was only a portion of it. Also its gone up in value considerably so it was a good investment.
I'm planning something similar with another car, difference is, while the car holds its values fairly well, it will not go up to make any significant profit after selling it.I'd have more than half the value of the car left in my account if I do buy so I won't be stretching, but struggle to justify the purchase! (But not financially, just a lot of people say not a wise move but for no real reason). Running costs are fine.
Edited by Z064life on Monday 26th June 14:21
Ares said:
Or how intelligent. With the deals around at present, why the hell would you tie capital up and lose money?
If it is a dream you really want to achieve, that would be one reason.It may sound stupid but then for youngsters (say 21-35), ambition is not something like paying off a mortgage until later life (as beneficial as that is).
I personally would seriously consider leasing any car but not a supercar because then there are too many rules regarding track use and modifications (and sometimes you just want to modify an already fast car!).
Other than the dream car thing, I'd happily lease a runaround between £1-200.
Ares said:
It doesn't have to be dream territory.
I currently have a 640d GC. Bought brand new, it costs me £561/mth and I put £4,000 down. This was on a 4 year PCP (12k/yr - currently 3yrs 3 months in). The current settlement figure is £22k and the car is worth somewhere between £25-27k.
That means, to date, it has cost me just under £26k for 39 months. If I sell it tomorrow, I'll get £3-5k 'back'.
If I'd bought it brand new, and sold it tomorrow, it would have dropped a lot more than £26k in that 3yrs 3 months, let alone the net £21-23k.
It's also been risk free, and a fixed outgoing.
My next car is being leased. £65k Alfa Quadrifoglio, again over 4 yrs, but at 15,000 per year. £572/mth, £1,700 upfront, and includes RFL for the duration.
Over the 4 years, 60,000 miles it will cost me £29,156. Even with the best deals available, a £65k Alfa will easily lose £29k (44%) of it's value over 4 years and 60,000. And that's before you factor in £1800 of RFL that the private buyer will also have to pay for.
On top of all of those, my investments over the last 3 years have risen by 20-25%. So tell me again why I would tie my capital up in a car for no commercial reason...and with significant Opportunity Cost??
If the car will depreciate there is no real reason to buy the car outright, but car ownership is about more than just depreciation and also about getting the ownership experience you want. For example, I'd rather take the hit on buying outright a car I can drive as I please and not lease one where I can't track it or modify it in subtle ways. That's only if I could justify the depreciation and live with that.I currently have a 640d GC. Bought brand new, it costs me £561/mth and I put £4,000 down. This was on a 4 year PCP (12k/yr - currently 3yrs 3 months in). The current settlement figure is £22k and the car is worth somewhere between £25-27k.
That means, to date, it has cost me just under £26k for 39 months. If I sell it tomorrow, I'll get £3-5k 'back'.
If I'd bought it brand new, and sold it tomorrow, it would have dropped a lot more than £26k in that 3yrs 3 months, let alone the net £21-23k.
It's also been risk free, and a fixed outgoing.
My next car is being leased. £65k Alfa Quadrifoglio, again over 4 yrs, but at 15,000 per year. £572/mth, £1,700 upfront, and includes RFL for the duration.
Over the 4 years, 60,000 miles it will cost me £29,156. Even with the best deals available, a £65k Alfa will easily lose £29k (44%) of it's value over 4 years and 60,000. And that's before you factor in £1800 of RFL that the private buyer will also have to pay for.
On top of all of those, my investments over the last 3 years have risen by 20-25%. So tell me again why I would tie my capital up in a car for no commercial reason...and with significant Opportunity Cost??
I've seen the current shape M5 depreciate to 33-35k after three years. That is ridiculous for a car that is 80-90k brand new. If I wanted one of those, as I am not a millionaire, regardless of tracking the car or not, I'd buy an old one second hand or on finance (whichever works out more cost-effective).
Other cars are different and for something I really want I'd put it down to a life experience and buy. But if I have done the life experience, logic will prevail.
Gassing Station | General Gassing | Top of Page | What's New | My Stuff