Every financial advisor is faced with this million-dollar question: How much should I spend to buy a new car or a second hand car.
The old school of thought is still prevalent, people buy high end cars to show their stature and prove social status in the community. This thought process has been influenced by his immediate friends and relatives who have high-end cars that provide a sense of accomplishment. Last time they got bored of maintaining the car, by upgrading to premium cars and went past the big price tag. Sometimes they agree that they have made a worse financial decision.
As a financial advisor we come across such cases many times. Fortunately, there is a basic rule that can be followed for buying a car, i.e. 20/4/10.20 stands for Down Payment. One should be prepared with 20% of the down payment. The on-road price of the car is for 4 loan periods, it should not exceed 4 years. Nowadays banks offer loans for 7 years to reduce monthly EMIs and optimize eligibility for car loan lending. 0 is for all your expenses related to that car like EMI, Insurance, Maintenance, Fuel charges etc. Let us break it down to get better clarity. If the on-road price of the car is 20 lakhs then be prepared with 4 lakhs as down payment so that the debt is not a burden on you.
One has to ensure that only 10% of the annual income of the family and the annual expenditure of that car is to be considered. Poor planning can affect future expenditure outflow and save you from making immature financial decisions.
No one can stop you from buying the car of your dreams. Another strategy for choosing the dream car is to follow a goal-based planning mechanism. The key here is the maximum amount for the down payment so that the EMI and other expenses remain intact. Dream Car Owners A lot of premium car owners get enamored with material pleasures and in a few years, they sell the car. A summary of one of the automobile research shows that premium cars have a higher resale percentage due to pressure from society. The main reason behind this is short-sighted approach to meeting financial goals and poor decision making skills. When deciding to sell a car or renegotiate EMI payments, it is important to consider current, future income and expenses to take care of recovery of opportunity cost. Close. Since this is a major purchase, one must consider all the factors carefully to make a favorable decision.
Generally people get impressed by seeing a neighbor or relative’s car but when you spend by looking at the car of others, it is one of the worst financial decisions for your family. This behavior of human being, getting influenced by seeing others and spending money to buy the same car can be financial problem for itself.
Lastly, one needs to understand the impact of a car loan towards financial goals in the long run. When you spend a large amount of money, one can assume that the money invested in the investment will yield a return. Unfortunately, buying a car is not an investment because its value depreciates overtime and it keeps on reducing while losing the opportunity to increase by the same amount. Nevertheless, opt for the above strategies for the best bet.
Now that we know what metrics we should use to buy a car, the next question comes how to accumulate the down payment money to maximize financial benefits. Depending on how much you are investing for your dream car, depending on the time frame you can look to invest in mutual funds. Corpus to buy the car of your dreams. If the time frame is 5 years then you can invest in equity mutual and reduce your debt burden and live a debt free or less debt life. If the balance time is less than 3 years then you can invest in Loan Fund or Balanced Advantage category to build corpus for your dream car.
It always makes sense to work on your goal based plan and select the fund for each goal using the mutual fund route, depending on the time frame you can select the fund and for that you need to contact your SEBI registered distributor. should contact.
Views are personal: The author is Vishal Goenka, a Mumbai-based mutual fund distributor
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