WHAT CAN I RESPONSIBLY SPEND ON A CAR?

 

 

Written by Theresa Bhowan Rajah

As a young professional, you’re about to embark on the natural next step of your journey towards independence. You have just landed your first real job so you’re ready to purchase your very own set of wheels.

So, you’ve started shopping around and you’ve found something you can envision yourself driving. with a monthly instalment you think you might be able to afford, and now it’s time to sign those papers. But are those instalments the only money you’re going to be spending on your new wheels each month?

Well, Yolanda Haripersad, of the @financially.fabulous.females Instagram page, posted a beyond important video that teaches you what your vehicle expense ratio should be, and she delves into the unseen expenses of having a vehicle. Yolanda’s Instagram page is geared and guided towards equipping South Africans youth with invaluable financial knowledge that often goes by overlooked, and that most certainly is not taught at school.

What Are Your Car Expenses?

Although one may be led to believe that the only payment they will make on their vehicle is their monthly repayment, Yolanda reminds us of the vehicle-related expenses that are all too easily forgotten.

First, is the vehicle repayment amount which is pretty much consistent and stays the same every month if you take a fixed rate.

Next, is your insurance payment. In many cases, a bank will not approve finance for your vehicle if you do not take insurance, which makes it a necessity over and above your monthly vehicle payments.

Then, you have your licence renewal costs which is a yearly amount that you pay.

Finally, you have the fuel and maintenance costs of your vehicle. Fuel costs are always volatile and seem to be ever-increasing, and while maintenance costs are mostly considered when your car heads in for a service every 15 000 km or every year (depending on which comes first), people often forget about replacing their tires or tire rotations that falls within these maintenance costs.

What Is Your Vehicle Expense Ratio

Yolanda explains that your vehicle expense ratio is the amount of money you spend on your vehicle expenses, and what this amount is in relation to your income. Basically, it is all of the above-mentioned expenses added together as a whole, and the percentage it forms of your total income.

According to Yolanda, her best estimation and guideline is that your total vehicle expenses should be no more than 15% to 20% of your income. For example, if your total vehicle expenses including all the above-mentioned costs work out to R5 000 and your total income is R20 000, you would divide your vehicle expenses by your income and you would receive the percentage of your vehicle expense ratio.

In terms of the example given above, your vehicle expense ratio works out to 25% of your monthly income. This is out of the “sweet spot” range that Yolanda recommends. The reason why you need to have a vehicle spend ratio in which you should stay is that it allows you to keep your head above water financially and makes sure that you don’t spend more than you can afford on a vehicle.

How To Find The Sweet Spot

Here are ways to get into the ideal vehicle spend ratio of between 15% to 20%.

The first way is to increase your income and unless you have a couple of side hustles, investing knowledge to grow your money, or more time in the day to take on more work, this may not always be realistic.

Alternatively, you may want to bring your vehicle expenses down. While your monthly vehicle repayments may stay the same for the most part, you could reduce this amount by putting down a deposit on your vehicle, and making sure you don’t finance your vehicle for more than four years. In the video Yolanda advises that it is not savvy to balloon finance your car. We covered the pitfalls of balloon finance extensively in a previous article, as tempting as it might sound to forgo a deposit on a car. Additionally, you may want to consider reducing travel or petrol expenses, and you could try negotiating your insurance costs on an annual basis as Yolanda recommends.

Lastly, you may want to try and avoid any unnecessary aesthetics or enhancements to your vehicle unless you have the expendable funds to do so. Adding enhancements like sound systems, and even racking up some speeding fines are all things that should be actively avoided to make sure you stay in the vehicle expense ratio sweet spot, let alone forgoing any warranties the vehicle might come with.

For more invaluable financial education, follow @financially.fabulous.females on Instagram or consider working with Yolanda by reaching out to yolanda@financiallyfabulousfemales.com