Many people congratulated me after the purchase of a new car recently. Why do we do that? What did I do that deserves congratulations? (Actually, for those in my inner circle and the salespeople I dealt with, I’m sure it was more from relief). Is it because it’s an emotional decision and a relatively big spend? There are no congratulations when a big investment is made.
It’s okay to make an emotional decision that will cost a lot of money. It’s not okay for the decision to be made in a fog of emotion, and then justified with flawed logic.
There are assets that are expected to appreciate in value and others which will definitely depreciate. Those that will depreciate are almost always purchased to be used as utilities, or to satisfy a desire. If it is an emotional purchase, like a car, then accept it as one, be conscious of the emotions being satisfied, and understand the cost.
Anyone who says owning a car is a necessity is kidding himself or herself. With taxi services like Uber and car-pooling like Go Get, there is more than enough convenience and utility around without having to buy a car. Getting from A to B is no longer the real reason for buying a car, so it’s important to have a clear understanding of the emotional benefit for the significantly higher cost. And the cost can be significant.
Take for example a $50,000 car that depreciates to say $20,000 in three years. It would probably cost around $5000 per annum just in the fixed cost of registration, insurance and maintenance, and that’s before the cost of fuel, parking or fines. So the total cost is around $20,000 per annum. With an average of $20 per trip, that would pay for around 19 Uber trips per week.
Financing it is even worse. When it came to paying for the car, the accountant taking my deposit explained the advantages of having a guaranteed buyback. I asked what the guarantee was and he said “50% of the original value”.
The way it works is you finance the car and make payments on only 50%, so that at the end of the term, there is still 50% outstanding and they guarantee to buy it back at that level. So less of the purchase price is paid, resulting in more interest and ‘kicking the can down the road’. But the car appears more affordable. As I said to him, “the financing option is for people who can’t actually afford the car in the first place”. He smiled. Between the interest, fringe benefits tax and costs of administration, financing is not viable. It is almost never viable to finance a depreciating asset.
It’s not a financial decision. It’s an emotional decision, justified by flawed logic. There could be a variety of emotions: fun, status, and freedom are just a few. There will also be emotions down the track, like the potential for buyer’s remorse, and regret.
Some would say that I take all the fun out of the purchase. Like all planning, dealing with all the issues up front, both technical and emotional, makes the purchase less exciting in the short term but provides more satisfaction for longer. Emotional awareness is liberating.
If you are making a big purchase that is for a depreciating asset and has high emotions, you need to contemplate regret and quantify the annual cost of satisfying your emotional need. Make sure you can afford it and what choices are being made.
Research also shows that spending on experiences is perceived as three times more valuable than on things. Doing is more valuable than having. Buying a car is a bit of both. I’m definitely treating mine as more doing than having.