Most of the time, this question knocks our head, up to what extent, buying a car depends on income especially, if you are staying in a posh city like Bangalore? Not only in Bangalore, where ever you go, any city in India or even abroad, your income decides your spending capacity. The more you earn, the more you can spend. In India, the car is treated as a luxury item. Luxury means it is not the core essential goods or services that someone has to have. People in India buy cars mostly to show off or just to feel good. Of course, a car has a lot of advantages over a two-wheeler or any form of public transport from safety, comfort, privacy point of view, but still, having a car shows/makes your financial status upgraded.
But, one should understand the fact that a car is a liability and not an asset. However, you can still think of buying a car and enjoy a better comfortable life with it. But the question comes, how much money you need to have to buy a car? There are many budget cars, best mileage cars, economical cars, etc which you may like to consider. But let’s just see when and how you can plan for buying a car.
Analysis of buying a car
Well, there are a lot of cars available in the market with a huge diverse price tag. So instead of going on any specific price range, let’s just generalize it and analyze. If you are someone who keeps an eye open for any financial growth opportunity or an option for a good investment, then you must have heard of ‘financial literacy’. It is also termed financial awareness.
As per the concept of financial literacy, the ‘50 30 20’ rule says, you need to spend 50% on needs, 30% on wants, and 20% must go on savings (after tax amount needs to be divided). Since having a car comes under ‘wants’, the spending on it should not cross 30% of your total income after tax.
Let’s understand this with a practical example and stats. So, things will be more clear and untestable. Let’s assume, you are planning for buying a car, the Maruti Baleno. In Bangalore, it will cost you around 10 lakhs.
- If you go for car finance and taking a loan of 6 lakh at a 10% interest rate for the next 5 years, then you will end up paying around 12000 EMI every month easily.
- The insurance of Maruti Baleno will cost you somewhere around 30000 per year which comes down to 1500 per month
- The Maruti Baleno will give a mileage of 16-17 kmpl in the city. Let’s assume, you will drive more or less 1000 kms every month. So, by the end of every month, you need to pay around 5000-6000 rupees for fuel (considering petrol price @ 85/- per liter).
- Even though Maruti has lower maintenance costs, it will cost you around 1500/- per month.
- Teflon coating or any sort of glass or paint protector, regular car wash, etc will force you to spend at least 1000/- per month.
So, by the end of every month, you will end up spending around 22000/-(12000+1500+6000+1500+1000) rupees on your Maruti Baleno.
Now, let’s be more practical and slightly harsh on ourselves to be in a safe financial zone forever. Instead of considering the 50 30 20 rule where we can consider 30% of our salary for our wants, let’s follow the ‘Rule of Thumb’. The Rule of Thumb says, if you are buying a car then, your expenses on the car (including buying & maintenance) should not be more than 20% of your income after tax.
That means, here, the total expenses on Maruti Baleno, which is 22000/- should not exceed 20% of your income. Let’s consider the upper limit and assume that 22000/- is 20% of your income after tax. That means, your salary/income is 1,10,000 INR.
So, we arrived at a conclusion that, like any other city, buying a car in Bangalore depends on your income for sure and as per ‘The Rule of Thumb’, your income after tax should at least be INR 1,10,000 to maintain Maruti Baleno.
Now, this buying a car analysis looks slightly at a higher side but it is practically justified. Because it is keeping you completely safe from any sort of financial crisis (since min. 20% is getting saved or invested every month). But what if you don’t have such income or you are not so well aware of finances. Don’t you deserve a car? The answer is, Yes! Of course, you can think about buying a car. But here comes another eye-catchy term or better to say the question,
Should you buy a new car or a used car?
Well, this can be explained in 2-ways keeping emotions and finance on two different sides. If you are someone who has a soft corner for buying a car, a new one, if you love to enjoy the feel of having a new car, loves to rev on an empty road with a piece of nice music with the amazingly smelled new car (sounds funny but many of us do like the smell of new things), then go for a new car. But if you are planning for buying a car, don’t compromise your finances a lot. Up to some extent, you can but never ignore the importance of financial literacy in life.
If you are someone, who wants to have a car not just for luxury or show-off, or if you are not so obsessed with buying a car and seeing a new car parked in your garage, then used cars are the best option for you. The best part of having a used car is the low depreciation cost. When you feel like selling it off in the future, you really don’t have to worry a lot about losing money.
Let’s just have a look at some of the basic differences,
Difference between a new car and a used car
|Comparison||New Car||Used Car|
|Cost||Vey high||Quite less comparatively|
|Depreciation||Very high||Pretty much lower|
|Resale||Not entertaining financially||Doesn’t affect much financially|
|Features||A lot||Comparatively less|
|Value for Money||Depends||Yes (in general)|