Indianmoney Facebook Indianmoney twitter Indianmoney LinkedIn Indianmoney Google Plus Indianmoney Youtube Indianmoney Instagram Indianmoney Medium
 
 

MONEY TRAP - 6 : Spending More Than One Year Income On A New Car

    Mr. C.S. Sudheer | Thursday, June 23,2016, 06:29 PM
 

There is a famous saying “The car you drive says a lot about you”. It reflects your personality. You love cars. Driving fast and watching other cars disappear in the rear view mirror, is a pleasure money simply can’t buy. Watching your dog hang his head out of the car window and enjoy the morning breeze brush past his ears….Priceless. Tired of your old car? It’s time to buy a brand new car. Your neighbor has bought a brand new car…Your best friend has bought a brand new car…Even your cousin has a brand new car. You’re earning well and buying a brand new car is something, you simply can no longer postpone. But there is a small worry in the back of your mind. How much should you spend on that brand new car?

Buy a car to satisfy your need

The car you buy, should satisfy a need not a want. You buy a car to travel from point A to point B. The car serves your basic need….Transportation. You do not buy the car to impress all the people you see on the road. You are a careful spender and want, bang for your buck. Every rupee matters to you. You will not waste your hard earned money buying accessories for your car, you don’t really need. Goodbye….Alloy Wheels…Dash mounted TV screen…In-car microwave for that hot burger… Why spend hard earned money on horse power? You are not Michael Schumacher racing in a Grand Prix. Racing from home to office and back at breakneck speed, is not your cup of tea. You are a slow driver. Why waste money on a high end car, which has a powerful engine and blows a hole in your pocket? You can easily afford to buy a brand new car, which costs not more than 40%-50% of your annual income.

Buying A Car You Can’t Afford Is A Trap

You just want to splurge on a big car. Money is not a problem. If you are one of the lucky few who can say this, then you can buy pretty much any car you want. This financial advice is definitely not for you. But what if you don’t earn much and still want to splurge money on a brand new car? What if you want to spend more than a year’s income on a brand new car? Listen to this story.

Rakesh was a 23 year old computer engineering graduate. On passing out of college, he got a job in a reputed IT Firm. He was offered a monthly take home salary of INR 70,000 a month. Rakesh gladly accepted the offer and relocated to Bengaluru. Rakesh loved driving cars. Even in his college days, Rakesh never missed borrowing his friend’s car and going on long drives. Now Rakesh had a chance to realize a long cherished dream. Rakesh availed a car loan of INR 10 Lakhs from a reputed bank, at an interest rate of 11% a year and a tenure of 3 years. He had to pay an EMI of INR 32,000 to the bank. Rakesh bought a beautiful SUV with the car loan sanctioned by the bank. A sports utility vehicle popularly called SUV is a 4 wheel drive, used for on road and off road travel. Many of our citizens simply love SUV’s. Rakesh used his dream car to go on long drives. He had finally realized his long cherished dream. But Rakesh had forgotten a golden rule while buying his car. Never spend more than 60% of your annual take home salary on a new car. Rakesh had a take home salary of INR 70,000 a month. This meant Rakesh should not have bought a car costing more than (60% of INR 8.4 lakhs annual income), which was INR 5.04 Lakhs. But Rakesh bought a new car costing INR 10 Lakhs. This was more than his one year income.

Though Rakesh earned a monthly take home salary of INR 70,000, he had to pay an EMI of INR 32,000 to the bank. Rakesh also had to pay his rent and eating out in Bengaluru was quite expensive. Rakesh also splurged his money on a lavish lifestyle. Fine clothes….The latest laptop and Smartphone….Soon Rakesh was forced to borrow money from friends, to pay the EMI’s on the car loan. He kept promising his friends… I will pay you back tomorrow. Fed up with his false promises, his friends stopped lending him money. Many of them even started asking for their money back. Rakesh still had to pay a couple of years worth of car loan EMI’s to the bank. Soon Rakesh fell into the loan trap. He stopped paying the car loan EMI’s. Bank officials threatened to seize his car. His friends kept calling him for their money. Rakesh was in a dilemma. He just did not know what to do?  Time for a saying “Car sickness is the feeling you get when the monthly payment is due”.

How did a rising software engineer Rakesh, fall into the loan trap? Rakesh committed two mistakes. Rakesh bought a new car spending more than a year’s income. He should have bought the car, spending not more than 60% of his annual take home salary. Knowing that he could not afford a car of INR 10 Lakhs, Rakesh availed a car loan. This is when he broke the second golden rule. Car loan EMI should not be more than 15% of post tax monthly income. Rakesh had to pay a car loan EMI of INR 32,000. This was much more than 15% of post tax monthly income. Rakesh was heading for the loan trap the day he bought his dream car.

Good financial health calls for disciplined investment decisions. The team of wealth doctors at IndianMoney.com is always there to help and guide you. You can explore this unique Free Advisory Service just by giving a missed call on 022 6181 6111. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.

Mr. C.S. Sudheer

Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.

/
Get It now!

How about our new look!

 
Great!
Mm.. Ok
Bad