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Commandments of a Cheapskate 2

I’d like you to meet Goldie.

JOHANNESBURG – If you ever attend an investment briefing and see a profusely perspiring woman with slightly overdeveloped upper arm muscles standing in the corner, don’t be alarmed.

You have not just witnessed the first case of bicep hyperhidrosis ever documented.

The woman in the corner is me, Ingé. Nice to meet you. (No need to shake my hand, I understand.)

While I’m usually all for taking responsibility, pro-accountability and the like, in this case I’m unashamedly going to shift the blame for the slightly awkward situation you have just witnessed to someone else. This time it really is all Goldie’s fault.

Although she is incredibly reliable, proudly South African and worth her weight in gold, Goldie – my 12-year old Toyota – doesn’t have power steering or an air conditioner. 

Buying a car

In a previous life, I wrote quite extensively on the automotive sector. And almost on a weekly basis, the petrol heads of the industry wanted to know when I was going to buy a new car. When I can sell her at a profit, I quipped dryly. I could never quite figure out what these people were on about. Goldie gets me from point A to B, has never given me a single problem and with impressive performance figures of 55 kW and 103 Nm, I am (almost) certainly never going to be fined for speeding.

To my mind, the quickest and easiest way to improve your financial situation is to rethink your approach to car buying. The absence of a monthly instalment – or even just taking on a more reasonable payment – can go a long way in making a difference to one’s budget and finances in the long run. In the current economic climate, it is really difficult to find a few bucks to reduce debt or to save and invest each month. Buying down (or postponing a purchase) can offer just such an opportunity.

Cash is king

In fact, I think it may be worthwhile to consider buying a car in cash. The interest saving on a cash purchase is usually sizeable enough to warrant some deliberation, but more importantly, buying cash forces you to keep your own greed in check. Think about it: You may be able to fork out the R7 700-odd monthly instalment required on a purchase of R350 000, but would you still be able (or willing) to pay R350 000 if you had to pay it in cash? A cash purchase will most likely force you to postpone the purchase and “buy down”, which – if you choose wisely – will also result in cheaper parts, services and insurance.

While I feel quite strongly about the cash purchase issue, I do realise that most readers will think I’m a complete lunatic (if we have to resort to name calling, I’d prefer it if we could stick to the “entirely bonkers” reference from Alice in Wonderland, but what the heck – I’ve been given the “you’re weird” glare on this matter so many times, use whatever term strikes your fancy).

So as a compromise, an actuary friend suggested the following:

Determine how much money your budget allows you to spend on a new car. Let’s assume it is R350 000. Financed over five years, at an interest rate of 11.5%, the monthly instalment would equate to roughly R7 700. Now, let’s buy down and spend 15% less on the vehicle than you can afford – R297 500. This would bring the instalment down to roughly R6 500. (Not to worry, social status burials are not nearly as expensive as one might think!)

If you bought the less expensive car, but continued to pay an instalment of R7 700 towards the loan, the finance period would reduce to four years. If you drove the car for six years and continued to save the R7 700 each month for the next two years, you would have a sizeable (roughly R196 000) deposit for your next car purchase. Repeat the process and you’d be able to pay for car three in cash! The model assumes that car prices increase by 7% annually. Savings accrue interest at 6% per annum. (If you’d like to play around with the assumptions, you can download the Excel file here.)

Goldie

Regardless of Goldie’s limitations, I am still in no hurry to buy a new car, although I must admit that an “upgrade” – whenever it comes – will most certainly include a few “extras”.

In the meantime however, I am seriously starting to wonder whether the lack of power steering and air conditioner may not be better security measures than an alarm and an immobiliser. After driving around the streets of Jozi for quite some time without a single break-in attempt, I can only come to the conclusion that even thieves are trying to keep up with the Joneses these days.

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Excellent article, could not agree more. I drive a 12 year old car. I bought it for R57 000, a few years ago. It is an elegant older shape Honda Civil and has all the extras one could reasonably want and I am frequently being asked if I would like to sell it. Why I ask would I do that? What better could I replace it with?

Excellent article Inge.
From personal observations, and I freely admit to being a petrolhead: A new car loses at least 20% value in the first year and, depending on model popularity, colour, state of the economy etc, another 10% to 14% per annum for the next four years. Then the devaluation seems to stabilise at roughly 8% to 10% per annum from the sixth year onward.

Any person who (1) buys a NEW car and (2) FINANCES it, has probably never done the real calculations, or else not fully understood the long-term impact on one’s financial well-being.

My solution, and it is probably not everyone’s cup of tea: Buy (one previous owner, well-looked after, mileage not that important) second-hand car that is between 2 and 5 years old. Best is if it has just gone out of its service plan. Interviewing and/or personally knowing the owner is almost more important than inspecting the car itself.

A second-hand bigger car (E-class, S-class, 5-series, 7-series, A6, A8 etc) offers much better value for money than the popular ranges (C-class, 3-series, A3, A4, Corolla, Golf etc), as the large-car market is smaller and the typical buyers in the luxury category are sheep who only want and buy new vehicles. The bigger car is also likely to have come standard with every conceivable convenience and toy – including the power steering and aircon that Inge has foregone until now. Think rand per kilogram, if that helps.

Avoid anything that is widely (and wildly!) popular like SUV’s, Hilux or Ranger double cabs, Corolla, Prado, Landcruiser 200, Golf, Polo, Fiesta, i20. You will be competing with half the taxpayers in the country and the prices will reflect this.

Only buy cash. Always keep enough cash on hand to service and maintain the car diligently without putting your short-term liquidity at risk. Keep the car for at least a decade or 200 000 km, whichever comes first. Rinse and repeat.

Could not agree more Darwin. 10 years ago I bought a mint condition A6 for 55k cash. I still have it – rust free and mechanically perfect. Every month I enjoy not having that payment to make!

Spot-on advice, Darwin!

Your point about personally meeting the owner and trusting what you see in that regard is really key to buying (anything!) on the 2nd market. No trust? No buy! And the more deals you do, the better your sixth sense at it becomes.

I have had such a lot of fun meeting interesting people, and buying as-good-as-new second-hand stuff (from washing machines to cars to machine-tools), and saved HUGE amounts of money, that it has now become an ingrained habit for the family when acquiring assets.

I do also pay a lot of attention to a car (or maker’s) reputation for RELIABILITY.

So no FIAT, Land-rover or BMW for me.

I’ve had FIATs (NEVER again!, Volkswagens, Fords, and then a Toyota Avante (17 years). Traded in for a Camry 220SEI (to your point about getting a bigger car with all the goodies) which I bought at 160 000km and traded in at 320 000 trouble-free km (engine still perfect!) for a short stint with a supposedly petrol-sipping Nissan Almera. No more Nissans for me after that experience either – Nissan’s focus is on cheap external bling to “sell” the car, but look under the skin at the engineering detail and finishes – not in the same league as a Toyota (IMO).

I agree, Darwin. Used the same strategy of buying only used vehicles the past decade or longer, in the 3-5 year old range (…i.e. car still in great condition, with years of life left in it..but at half the price you’d buy new, with bulk of depreciation taken by 1st owner). Mostly bought all cash (Certainly, it’s damn hard to apply such financial discipline as it’s not as impressive as those driven by those in one’s circle of friends/family). Without any car instalments for years, the extra cash-flow helped to dent outstanding homeloan, or taking more vacations 😉
(Accepted, this strategy mostly applies to those that do not derive any tax-benefit from a large Travel-Allowance such as reps or being self-employed, where SARS can subsidize part of a new car cost.)

Agree, avoiding popular or “main-stream” car models, tend to be a good used buy (as others perceives less value to that car brand). Yup, you’ll receive less for it when selling your French, Italian or Swedish car one day…but one already benefit outright by paying less to start off with. Plus insurance is lower on lower-valued cars.
Own example: purchased a 2011 FIAT Panda (64,000km) last year from a reputable dealer (not even private!) for…wait for it…R69,950 excl. on the road & lic/reg. Unreal!

One thing a person have to accept with non-popular cars, is that the few and far franchise dealers/workshops are usually not conveniently close “up the street” from your home or work.

On a lighter note… I initially planned to buy a used car in the R140-R170k range, and just for the sake of “having a joke/to poke fun at” I viewed online what kind of “rubbish” is available in the R50K cheapie range, thinking I’ll have a good laugh to see images of old-bangers with doors falling off, etc. After a while of online viewing, my anticipated grin on my face disappeared into a serious expression & instead was sitting up straight and taking notice. The rest is history..

(My bank’s finance person was quite disappointed with me going the cash route…)

Only problem is that when that E-class breaks, the cost to fix it is going to be sizable.

1999 Toyota Conquest 160i RSE – got all extra’s except central locking. Powerful enough and enjoy the aircon.

Not only the interest payments but the opportunity cost. Warren Buffet was famous for driving around Omaha in an old VW Beetle despite being a multi millionaire. Someone once suggested a $25000 motor vehicle would be more befitting of a man of his stature. He asked them what $25000 was compounded at 20% pa for 20 years was. Its almost a million ($958440). To quote Warren “too much to pay for a car”. Wise words. My 13yo Camry has 150000 on the odo and it suits me just fine.

How do you go about getting an interest rate of 11.5%?

Inge, you sound like the woman of my dreams:). I agree that you buy a car cash (unless the car you drive is a risk to your safety then you must borrow and replace). If you absolutely MUST borrow money, then spend it on a quality product that will last 10 years. Then you can pay it off in 5 years and save the next 5 years for your next car. As you suggest, buying a car cash also makes you think twice about all those ‘extras’ that makes the purchase price so much more.

LOL. Thanks @JapieM 🙂

And to everyone else for the comments and feedback!

@JapieM – Fully agree with your introductory comment although I feel that it could have been stated more emphatically.

And Ms. Lamprecht’s sensible principles extend equally well to aircraft ownership.

My actuarial team has also modelled this out and cash is the only way to take to the sky. The ‘buy down buy cash’ rule also applies : although everyone probably aspires to taking delivery of a brand new G650, my experience is that a 10 year old Global Express gets the job done just as well despite being marginally heavier on jetfuel. The substantial price difference between the the two can then be gainfully speculated for opportunistic island purchases (having a plane is not that exciting if you don’t have somewhere cool to fly to).

Well Done, Ms Weird!

Your common-sense advice is worth gold, and I love your very entertaining “cheeky” writing-style.

Keep it up like this, and you will soon establish a must-read following from the readership that knows value (and good reading) when they see it.

Great advice and logical, but buying a car is seldom logical.

I do think that most really only learn by doing, I purchased a 2nd hand car about 6 years ago at a good price and then bought a more expensive newer car a few years later. If I could go back then I would have held onto my car which had 0 issues and was a great car.

Paying cash doesn’t really make sense to me, I’m of the opinion that I would rather put that cash into a long term investment and it should outperform the interest payments on a vehicle loan over time.

The only spanner in the works here is costs beyond a certain age, eventually something expensive will break and you will have to fork out half of the residual value of the car. Buying a car with a year or two motor plan left is my preference, that way you can work out the hiccups.

Fully agree with the article.
I drive a 2010 paid up Subaru 2.5XT in the most god-awful orange car makers ever developed. Low on the shopping lists for redistribution and got it at a good price because it isn’t a popular car/colour.

I would add however that living close to work helps as well. Except for the car I have a paid up (obviously) 2003 Dakar that I commute the 10km to work with 5 days a week. Total petrol cost per month for work commuting comes in at R350. Helps on the savings.

I would further suggest that motor plans/maintenance and warranties be scrutinised in detail before being taken. Rather save that money monthly – at least you get growth/interest/dividends and if you never use it you get the full value of your cash.

A new car loses at least 20% value in the first year.You’re right except you forgot the 14% vat you paid as well so your new car has cost you at least 34% in the first year.

The import duty on a new car is 25%. You’ve lost that money to SARS on the showroom floor, before you’ve even taken the bow off the hood or turned the engine.

I also owned a Camery that was second hand and used it for 100 000 km and spent virtually nothing on it except service tyres and petrol. 10 years later u still see that car running around. Buy a good make.

Absolute music to my ears! Bought a 2005 Honda suv with 78000 kilos in 2011 for R120 000 – cash. Has everything that opens and close, including a sunroof. Had minor gearbox problems which was fixed before the service plan ended at 80000 kilos. Still has it and what a delightful ride on weekends and holiday trips. Soooo reliable and a pleasure to drive. I religiously service it with the agents. It now has 135000 kilos and it’s going to last me for at least 10 more years. There is no better way to save money …. good advise Inge!

Ek stem 100% saam Kaspaas. If your vehicle does not give you major problems, keep it until the wheels come off.
Very successful marketing strategies from car manufacturers has led S’Africans to believe it’s the norm to buy new (and then replace after 3 yrs with another new vehicle). Who wins? The dealers.
And we were “mentally conditioned” over the past few decades what a certain car in SA should cost (..we pay far more, thanks to local manufacturing inefficiencies in a protected industry), hence majority of new & used vehicles needs to be financed…otherwise we won’t be able to afford locally inflated vehicle cost.

The new car price is not the actual value of a car….the true value of a car is what is negotiated between willing buyer and willing seller on the used market.

Good choice on the Honda! What’s better: to maintain a 11-yr old Honda, even if parts are not cheap, will certainly cost you way less over time than to fork out R400K – R600K for a brand new 2017-model CRV (no guarantee a new vehicle won’t have niggles either).

I get it, but a new car every few years for me thanks.

@dananzi the tax payers of SA thank you for your support.

Let me know when you want to sell

End of comments.

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