Are cars a good Investment?

By June 20, 2017 Trading 2 Comments
Are cars a good Investment?

Car is a depreciating asset in terms of accounts and finance and hence should be looked at as an expense instead of an investment over time. Also, one must pay maintenance and insurance costs over time which further can be a drain on income. One should be aware of these two facts before purchasing a car. The utility of car is unquestionable as a mode of private transport and the convenience it offers. Often commute and travel are daily hassles of a family and hence cannot be ignored. All this is now changing with the advent of ride-hailing service companies like Uber and Ola. With changing times the financial calculations have changed because people are starting to get an alternative for car ownership.

According to a 2015 study, data suggests for every 1000 people India has just 32 passenger vehicles. A number that is abysmally low and makes it one of the most attractive markets for automobile manufacturers. More than 2million cars were sold in 2015. India has been growing for more than 7% in terms of real GDP for the last decade and with rising incomes car ownership percentage has been growing too. The car you choose is widely regarded as an expression of your identity, reflecting your priorities and revealing your status. Car companies have been selling this dream of “a happy family in a car” in almost every advertisement. So how much should one put in a car is the question.

Also Read :- Invest In shares to bring home your dream car

The car ownership calculation should be based on two factors, one utility and other as your infatuation or love for car ownership.

Mathematics should be used to solve problems like these.

  • Let’s say you buy a car of INR 6,00,000
  • Insurance costs: INR 10,000 annually
  • Maintenance costs: INR 20,000 annually
  • Fuel spend: 5,000 monthly
  • EMI on 5L@10% for 5 years costs you monthly 10,000
  • Total costs approx. 2.1L annually (excl. depreciation)

So, a monthly budget of around INR 18k should be set aside for car ownership in the above case. Assuming a family wouldn’t want to spend more than 20% of income on car the family income should exceed 90k/month.

Based on the above calculations, a family earning nearly 12L/annum should at best go for a 6L car and so on. A family with lesser income should go for a lower priced car and family earning higher can still afford to pay higher. All these calculations highlight an example and are an attempt to put the calculations in perspective. An individual family might have different preferences.

Also Read : How expensive car should one buy relative to income?

To conclude, cars as an investment are a poor choice. In a country where nominal interest rates have been in the range of 6-12% in the last 20 years and large cap equity indices have returned more than 14% annualized, car should be considered as an expense and not as an investment. Long term wealth creation happens best when your savings are higher and channelized into financial assets when they are cheap. Real assets depreciate in value and have maintenance costs associated with them. More often than lot in longer term they have costs associated with them.

Subscribe now to get latest updates!

2 Comments

Leave a Reply