Monday, March 03, 2008

Personal Finance Part 7 - Car

Tha latest news in the almost never-ending series on "inflationary" price increases includes new adjusted pump prices from Caltex for all three classes of petrol. Regular 95 now costs S$2.046 per litre, Regular 98 at S$2.12 and Premium 98 at S$2.286 per litre. As Singaporeans may know by now, there is a worldwide commodities "boom" which had led to prices of everything from steel, oil, pork and flour rising quite a bit. This has inadvertently resulted in an inflation rate of 6.6% which was recently reported in the news. Yet, when I recently passed by a car road show at Suntec City atrium (open area near Carrefour), there were scores of people literally lining up to purchase cars !

Well, this post is about cars and the cost, benefits and disadvantages of owning one. Readers should be aware by now that I do NOT own a car and have no intention of owning one in the near future. It is in my interest to evaluate the real cost of owning a car, both in monetary terms and social terms; and today's Business Times has a good article on the approximate costs of owning a car which I shall proceed to list down. Singapore is basically one of the most expensive places to purchase a car (yeah, even a second-hand one !), yet it is a fact that more and more Singaporeans are owning cars as the total car population has actually increased about 6%, such that the government has to resort to measures to limit the car population by increasing ERP charges on road usage. Sounds like a pretty drastic measure to me.....as I do not see a big problem with our current public transport system (I take buses all over the place), except for the occasional long wait and over-crowded buses.

Anyhow, let me break down the numbers according to BT and comment on them. According to the article, if you spend S$50K on a car with a 70% loan at 3% p.a interest for 7 years, then you will end up paying close to S$130K after 10 years. The breakdown is as follows:-

Cost of Car including COE - S$50K (assume a medium size car with average horsepower, though I think most families seem to like the MPV, while youngsters love the sports car variety with 2 doors)

Car Loan (70% of purchase price at 3% p.a. for 7 years) - S$7,350 >> I guess 3% per annum is a reasonable rate though I've never enquired.

Insurance (S$1,500 per year for 10 years) - S$15K >> This seems like a hefty cost to me because S$1,500 per year is S$125 per month which is quite a high fixed cost. Just to provide a comparison, my monthly transport bills come up to at most S$80 to S$100 using buses.

Road Tax (S$500 per yearfor 10 years) - S$5K >> This is basially the "cost" of using roads. It's something like a TV licence fee which you have to pay even if you don't watch the TV ! So take it that this is the tax you pay just to put your car on the road (not to use the road !).

Parking Charges for Home and Office (S$250 per month x 12 x 10 years) - S$30K >> Wow, another very hefty bill to pay just to park your car ! The problem with parking is that it can be a real nuisance when car parks are full, there are insufficient spaces or it's hard to maneouvre. I personally disliked parking when I took my driving test, though I never knew that season parking charges could be so high. The author assumes S$90 per month for HDB parking I guess, while the rest of the S$160 is to park at the season lots at your office block. If you don't drive to work (which sort of defeats the purpose in having a car eh ?), then you can just assume S$90 per month in car park charges, which means S$10.8K instead of S$30K after 10 years. Still a pretty large sum by any standards.

ERP Charges (S$3 per day x 240 working days x 10 years) - S$7.2K >> OK, maybe it's my imagination, but I think most people will spend more than S$3 per day to get to and from work, especially those using CTE tunnels and hitting MULTIPLE gantries. I think some people could end up paying as much as S$6 to S$9 per day if they are "unlucky". So this cost can balloon into something of a nightmare, especially since the government is considering implementing GPS-based ERP charging. This means that you can literally be charged per kilometre of travel instead of just passing through certain roads. A scary thought, and ERP will certainly be the bane of many drivers as time passes. This is the main reason why I do not own a car; the usage of the car per month (assuming S$5 per day in ERP) easily comes up to S$100 and that's not counting petrol costs yet.

Petrol Costs (S$200 per month x 12 x 10 years) - S$24K >> Now we come to the ultimate money-drainer, which is petrol costs. The author assumes a petrol cost of S$200 per month; but this cost may vary significantly depending on your frequency of use, model of car (whether it drinks petrol like you drink water) as well as, of course, oil prices. I would say that larger cars probably need about S$80 for a full tank and if the family/individual drives often, then he needs to pump once a week which comes up to about S$320 per month. Thus, using this figure, this expense may come up to S$38.4K in 10 years time using a pessimistic scenario.

Maintenance and Repairs (S$300 per annum x 10 years) - S$3K >> Somehow I find it hard to believe that one only spends S$300 per year servicing their car. I would think a regular spare parts check would cost at least S$50 to S$100 each time, and for the total to be much higher. But I shall leave the figure as it is for now.

The rest of the assumptions are for fines and accidents, which I assume one should and would not incur unless one was driving recklesly, or drink driving ! The BT article totals up the figures to give an approximate S$132,550, which boils down to about S$1,105 per month. If you take into account the "additional" potential extra costs, the cost per month is about S$1,360. Thus, for a person who takes home about S$3K (median income level per individual), this makes owning a car very challenging indeed !

To end off, all I can say is that if one forgoes a car, he can hope to achieve financial freedom sooner. But the material comforts and convenience of a car cannot be under-stated, and those who seek this or who require a car because of an infirmed member of the family or young children should ensure they work out the numbers as I had, to see if they have sufficient funds to sustain a car. As I always say, it's easy to own a car, but darn hard to maintain one !

P.S. - Comments are most welcome and I would like to hear from car owners as well as non car-owners to get more balanced views.

Note: Edited total for petrol costs to S$24K from S$12K as pointed out by Aspellian. Thanks !

30 comments:

gimz said...

Hi,

I believe the cost of car might be higher than what was estimated because many would get a bigger car loan, which increases the costs.

The estimation on petrol and ERP could well be way off as well.

Indeed owning a car is expensive, some realise it and buy it anyway while others realise it after they bought it.

While it is easier to find out the monetary costs of cars, it is quite near impossible to value the intangibles attached along with it. Convinence, "face", etc, just to name a few.

I heard of people who refused to sell their car for "face" issue. But similarly, others take up excessive liabilities even though they do not own cars. I guess its just the norm attitude now to "spend on credit", with cars being the most noticable.

Anonymous said...

3% pa financing for a car seems way too cheap.

remember that the cheapest loan is a home loan rate from HDB and that runs at 2.6% pa. a loan for a car (a depreciating asset) from a private bank is much more expensive. i don't know myself, since i don't own a car, but i suspect 6-9% effective would be a better estimate.

even if you have real data, you need to know some financial math to calculate the rate as car companies usually quote a flat rate and not an effective rate.

la papillion said...

Hi mw,

Just to share a sad case with someone I know.

He got a Mercs, pays a $2000 per month installment/maintenance plan. He did it when his business is doing well..but atlas, when it's not doing well, he still have to pay off the $2000 per month bill.

When asked why not choose a smaller and less branded car, he replied that he is doing business and so have to have a certain prestige. He even went so far to get a special license plate to match the 'status' of the car.

It goes to show not many people do a estimate of their future prospects before signing up a heavy debt to get the goods they want NOW.

Anonymous said...

MW,

Interesting article U put up. I dont' drive in Singapore, though I had a car when living abroad in the last 7 years (courtesy of company).

One thing driving the car population is also because a lot of companies have car allowances... if you don't buy a car, you don't get the allowance.

As for me, I have never driven in Singapore, taxis and trains are so convenient ( I live near a train station).

One thing you might want to consider for an argument against car ownership is the investment aspects of the cash that could be generated thro' compounding if one had used the money to invest... It is not too difficult to get 20% a year if one is a decent investor like you..

Even in a bear mkt like the current one, it is still possible to do that...

Cheers,
MM

musicwhiz said...

Hi Gimz,

Yes, some people would probably choose 90% or even 100% financing (I am not sure if this is possible though) and end up with a larger loan to pay and a lot more compounded interest to foot. I guess petrol costs and ERP can escalate as well but I was just using some of the figures provided by BT.

I guess some people may not have done their sums before buying a car, so this BT article sort of sums it up quite nicely for them. Though I must say, it will be better if they budget for slightly more as costs can increase in future due to inflation.

A car definitely has a lot of intangible "benefits" attached to it, which makes it hard for one to give up. I guess "face" is always an issue though I do not see that often among the social circle I mix with. Most have cars because they find it convenient, rather than using it as a status symbol.

And for your final point, yes I agree the younger generation (in their 20's) tend to use credit excessively. It will be good to curtail their spending a little and parents have to play a part in educating them properly.

Regards,
Musicwhiz

musicwhiz said...

Hi Anonymous,

Yeah I think 3% is a little too good to be true too, but that was the % provided by BT and I have heard that the effective interest rate (since it's a flat rate) is around thereabouts.

Regards,
Musicwhiz

musicwhiz said...

Hello LP,

Thanks for sharing your story. I do have a friend's sister who also bought a car cos her business is doing splendidly now. It's not a big car but I did note that her spending has increased in proportion with her earnings (what you would call lifestyle inflation), and purchases expensive branded furniture and luxury timepieces etc.

The danger of course as you say is in over-extending yourself when times are good, such that you end up in severe debt when things go bad. As of this writing, her business is still doing great but from her spending patterns and consumption habits, it will still be hard for her to save anything substantial. The last I heard she was planning to "upgrade" her house to a condo in Orchard area (which costs a bomb).

So the danger of earning a lot of money is in whether you can keep it and grow it. Many people are blinded by sudden wealth and proceed to spend it without considering the future consequences of their actions.

Regards,
Musicwhiz

musicwhiz said...

Hello MM,

Yes, you are right. It's an opportunity cost when we use the money to purchase and use a car instead of investing it and growing it. This is essentially Mr. Dennis Ng's argument in that purchasing a car could set you back by as much as S$300K over time, if you factor in opportunity costs too.

However, I would like to add that 20% per annum for consistent periods is close to impossible and only Buffett has achieved it with 21.1% compounded growth over 20+ years. I think a more realistic return for me would be 10-12% which is almost the stock market average return over the years.

Regards,
Musicwhiz

Anonymous said...

MW,

I would like to disagree with you on that 20%...

WB cannot do it because he is TOO BIG... remember, when your fund gets TOO BIG, you are the market so how do you beat it??

Small players like us with a couple of million dollars can run circles around the index...

Just like this year STI has dropped close to 18%... and I have been in full cash the whole while in Jan...

U might want to consider looking at trend following and understanding it..

The SAC Capital Partners have been returning close to 45% yearly after fees (50% fees) cos' they are a trend follower.

One should be open to all possibilities. Whatever makes you money.


Cheers,
MM

musicwhiz said...

Hi MM,

Actually, I was referring to WB's annual returns since he started BRK, which he mentions in his Annual Letter 2007 that it averages about 21.1%. Of course, as you pointed out, the "fund" will be harder to grow as it gets larger and even WB himself has admitted as much.

Smaller, "nimble" players like retail investors do stand a higher chance of getting that above 20% return, but to do so CONSISTENTLY is the difficult part. You mentioned SAC Capital Partners getting 45% yearly but may I enquire on how consistent they were in doing so, and how many years are their returns measured against ?

My ultimate aim is to average at least 10% per annum over the next 20-30 years (until I retire). Currently, trend following is studied by me but I do not think I have the mental fortitude to practise it as yet. Still, I will take your suggestion into consideration.

Thanks and regards,
Musicwhiz

Anonymous said...

Hi,

The current industry rate for car interest rates are between 2.5% and 3%. I am not sure who we are talking about, but most people do not take out >70% loans, and those who do are either stupid or have not done their calculations.

Anonymous said...

Hi MW,

Regarding SAC Captial Advisors, I believe their returns since 1991 has been 40-45% yearly (after a 50% fee). Unfortunately, they are not open to small fries like me cos' it is strictly for high net worth (really high) clients.

U may want to pick up the book Trend Following by Mike Corvel from the library. He did a book on the subject.

Not asking you to change your strategy. Just tot you are open enough to look at other strategy.

I do admire your fortitude in sticking to your discipline. Keep it up. :)

Cheers,
MM

gimz said...

Not sure of how many people actually take up > 70% loan but from what i hear from my frens, 3 out of 4 family cars are bought with loans greater than 70%

This might be distorted, perhaps someone working in the car industry might provide a better view.

Anyway alot of people are willing to spend their lives slogging for their "dream". Be it dream car, dream bag, dream house, dream tour, dream watever....

Nothing wrong or right about it, just a matter of perspective.

musicwhiz said...

Hi Anonymous,

Yeah I think it would be foolish to over-leverage too, especially since cars are depreciating assets.

Regards,
Musicwhiz

musicwhiz said...

Hello MM,

Hey thanks a lot for replying to my question on SAC's returns. From your description of them not allowing "small fries" to invest, I would assume they operate like a hedge fund only open to sophisticated investors with high net worth ? If so, then I can understand if their returns are so high as they have access to a wide range of trading and investing instruments and techniques.

I will check out the book if I have time, thanks. Been really busy with my work life as well and can hardly find time to read my existing books (which are half-complete LOL !). So I will probably get down to it soon sometime in future.

Thanks and regards,
Musicwhiz

musicwhiz said...

Hi Gimz,

Yeah perhaps I should conduct an informal survey among my friends who have cars on how many % is actually financed. This may give a better idea of the amount of loan people are willing to take up. Though as I mentioned somewhere in my comments, anything >80% would be seriously draining for one's finances.

Yes, you are right that everyone chases dreams. However, if I may add, I think those dreams need to be rooted in prudence and reality as well. Example is not to hanker for a Ferrari but instead just settle for a simple saloon car. We have to spend within our means; if not our "dreams" may turn into nightmares eventually ! :)

Regards,
Musicwhiz

Aspellian said...

Hi MW,
Nice article.

my personal experience is as follows:
i owned a small hatchback off-peak car (OPC). this gives u $17k rebate off the cost+COE price. so my net car cost is $23k. Road tax only $50 a yr ($500). i mainly drive at night and weekends as my job nature is deskbound n in town. Car small, petrol <$80 a mth ($12k, assuming oil prices cont to increase). only seasonal parking at HDB at $90 a mth($11k).
it has been a fabulous driving experience of exploring places minus the long and winding bus/mrt rides and also allow commuting between the inlaws conveniently.
mine is a positive experience at $65k for ten yrs... ya, it still worked out to be average $500+ a month... lifestyle wants....

by the way, petrol cost is $24k and not $12k per your blog. there's also scrap value to consider. Cheers.

musicwhiz said...

Hello aspellian,

Not too sure what an OPC is, as I am not familiar with car models and types. But the way you describe it, it sounds reasonably priced and does not consume excessive fuel. And I do agree that exploring the little-know places in Singapore in the comfort of your own car can be a great joy. As you said, $500 per month is the price to pay for such a "luxury", but if it's a lifestyle choice then I guess it's OK.

Thanks, will amend that note on petrol. My calculator (or brain) must be getting rusty haha.

Scrap value to consider - yes, but how do you determine the scrap value ? Is there a website you can recommend ? I guess every car will have scrap value so this will reduce its depreciation somewhat.

Thanks in advance,

Musicwhiz

Anonymous said...

Hi Musciwhiz

very informative article , i have cut and paste your blog n send to my friends who drive and they were shocked !

I hope you could do likewise for someone like me keen to invest in property (other than HDB). there are many overseas properties in the papers and it looks tempting.


Thanks

Aspellian said...

Hi MW,

Off-PeakCars (OPC for short) is not a car model. It is simply the red-colored carplates u see on the road. Some call it the weekend cars.

U have restricted access during weekdays and sat. You can only drive within 7pm to 7am(weekdays) and 3pm onwards (sat/eve of public holidays). No restrictions on Sunday and public holidays.
If you wish to drive during the restricted hours, you put a $20 OPC coupon.

The attractiveness about OPC is that you can a $17,000 rebate from the LTA. if your car cost (with COE) is $40k, an OPC is only net $23k. Not very cheap but alot more affordable. That is if it suits your lifestyle to have a car with restricted driving hours.

Hope the above clarifies. Cheers.

PS: I am also not sure about how/where to calculate scrap value.

Aspellian

shctaw said...

Everytime when I gather enough money to purchase a car, I choose to pay down my home loan.

It has been 5 years since, and my home loan is close to fully paid.

If I have choose to buy a car, I would still owe my bank a lot of money.

Your home is your asset while a car is a liability.

Buy asset and reduce liability to gain financial freedom.

musicwhiz said...

Hi Anonymous,

Haha I guess your friends did not do their sums properly when deciding to buy a car ! To me, this is considered "big ticket" purchase and therefore a lot of calculations, projections and budgeting is necessary in order for me to make an informed decision.

I cannot really do the same for property as I am still a newbie when it comes to property. Give me a couple more years and hopefully I will blog about it !

Regards,
Musicwhiz

musicwhiz said...

Hello Aspellian,

Oh I see so you were talking about weekend cars. Yes I know about them and the red plates, just did not know that they are also known as "OPC". Hehe.

Thanks for giving the numbers for OPC, it is something to consider but not for me at the moment. Petrol costs are likely to rise further in the face of US$110 per barrel oil, so I will take a wait and see attitude.

Regards,
Musicwhiz

musicwhiz said...

Hi shctaw,

Yep, very well-said ! A car is a financial liability because it depreciates so quickly and has hardly any meaningful scrap value; but some people may prefer the convenience which is an intangible benefit. They may feel that the costs justify the benefit. To each his own, I guess.

I will also advocate reducing your home loan instead of buying a car, but that's just my personal opinion.

Regards,
Musicwhiz

Anonymous said...

Looks like many readers do not know how the car loan interest rate works. Hope this helps: when the car company quote you a 2.8% loan.. the 2.8% is imposed on the full amount of loan e.g 100k loan (for simplicity) for 7 years, you are actually 2.8% per annum on the entire sum of $100k for 7 years.. ie. 2800x7=19.6k on interest alone. Then they work backward... 100k + 19.6k = 119.6k divided by 84 months (7 years x 12) = $1424 per mth.

This is unlike housing loan when your pay interest on outstanding loan value (due to monthly rest or daily rest calculation).

So typically for a car loan, you are paying effective p.a. interest rate of 5+ to 6+ %

That's why car interest is one of the most expensive around. Don't be fooled by what they advertised 2.5% !!!

SJ Reader

musicwhiz said...

Hi SJ Reader,

Thanks for the information. This puts a new "twist" when advertisers speak about their "competitive" rates ! Guess one has to do their due diligence first before they take the plunge. As I mentioned, purchasing a car is a major decision and represents a major liability (outside of a house), so one should always do sufficient homework before plunging into it.

Regards,
Musicwhiz

Anonymous said...

Hi Musicwhiz,

It is me again.

The interest rate for my cashline and credit card loan of which I used to finance my 25 lots of Ezra is 3.88% pa (daily rest). Those who wish to finance their car purchase should try DBS where it is cheaper.

To date, I have managed to reduce my outstanding loan to $30,000.

I have just received my performance bonuses (including growth bonus) of $10,000. Another $16,000 (market adjustment bonus) will be due in 4 months' time.

Should I use my bonus to reduce my loan or buy another 5 lots of Ezra if its price falls below $2. If I chose the latter, this will reduce my average cost of Ezra. I had earlier bought 25 lots of Ezra at $3.36.

If people can take a car loan for a depreciating asset at 5-6% pa over a 10 years period, why not continue accumulating underpriced but appreciating Ezra shares at a much cheaper loan.

I may look stubborn but I appreciate your comment in view that the stock market may be approaching its bottom.

ROBERTAY

musicwhiz said...

Hi ROBERTAY,

Good to hear from you again. I was just about to do up my review for Ezra's 1H FY 2008, incidentally. Perhaps you can wait for it then post your comments under there ?

I think for your decision, a lot has to do with your goals. Do you wish to own part of Ezra for long-term in order to realize value in the long-run ? If so, then averaging down would be a possibility you can consider; though as I said, I never like to encourage people to borrow in order to purchase shares. If you feel Ezra can give you a better return than 3.88% p.a., then by all means the money should be channeled there. Reducing your loan is not a bad idea if you think the company is not going to return you an amount in excess of 3.88%. Current yield for Ezra's special dividend is about 2.7% based on last done price, so the dividend cannot cover your interest and is also lower than inflation; so you will have to bank of sufficient capital gains for you to justify averaging down. This boils down to the confidence you have in the business moving forward, as well as Management's capability to execute.

I am here to analyze and give my views on the company and hence am not in a position to advise on whether they are going to do well or not. I just state the facts as they are and it is up to the astute reader to form his own opinions/conclusions.

One more thing: You never know when the market will reach a "bottom", so trying to time your purchase is pretty fruitless, in my opinion. If you see value, then just buy with a margin of safety. Many people try their best to time the bottom but in the end, you may miss a lot of the run-up (when it comes).

Good luck !

Musicwhiz

nhyone said...

If everyone looks at the cost of car ownership so objectively, I think the car population will drop by 30%. :D (Which is a good thing.)

It is possible to own a car "cheaply" in Singapore: go for a COE car. However, this route is not recommended if you don't know anything about cars.

Also, it's usually very difficult for drivers to give up their cars. Once people are used to the convenience, they will never go back to public transport.

musicwhiz said...

Hello nhyone,

Not sure what you mean by a COE car ? You mean a rental car or a smaller car (I heard China made ones only cost less than S$20,000).

Yes, I have heard this first hand from friends who own cars. They don't even feel like walking from point A to point B even if it's just a ten-minute walk - they'd rather drive ! Makes me think of the movie Wall-E, set in 2810 where all the people are so enamoured with technology and are so fat that they can't even stand ! A bit extreme but we may be getting there soon enough haha.

It's hard to "persuade" people to go back to public transport once they get a car. The convenience is so addictive (so I've been told).

Regards,
Musicwhiz