How Much Should You Spend on a New Car?

I’ve heard this complaint many times. I am one of those who complain about this too: “The cars are so expensive in Malaysia.”Well, to what extend the high pricing of consumers vehicles in Malaysia? Let me first tell you my experience chatting with an American over breakfast.This happened on 28th July 2012. In the beautiful morning, I drove 10 miles to Portland, Oregon to meet Noah Brockman, a business coach who had just helped me on my online project called Founder Method, which is a membership site providing guidance to Malaysia entrepreneurs.We sat down in a fine restaurant. We shared information on a lot of stuff and eventually we got to the point of discussing the difference of lifestyle standard between Malaysians and Americans.“For a Honda Civic, how much do you think I pay for installment every month?” I asked. I sold this car before I moved to stay in the USA for 12 months.“About RM1500?”, Noah took a guess.“Wow, how do you know? I paid RM1,425 every month. It’s pretty close!”“I don’t know about the price in your country, but here, a Honda Civic cost around US$17,000. With zero down payment, it will be around $1,500 to pay it off in one year.” Noah explained his calculation.“Damn! My installment is for a 7-year loan!”, I exclaimed.

Why is a car priced higher here?

Without blaming anyone, let’s see the taxes imposed on the vehicles here before hitting the road. There are import duty, excise duties and sales tax being imposed on cars.

Source: http://www.maa.org.my/info_duty.htmThese taxes are also one of the highest in the world. This makes most foreign cars extremely expensive for the local buyers. These explain why a Honda Civic here cost RM120,000 meanwhile only US$17,000 in USA.

Malaysians pay a lot for cars

It is a commonly known fact that a young fresh graduate might be paying 30-50% of his salary just to own a car that seems like a necessity, especially if you are working in the big cities.For example, if you get the lowest specification Perodua Myvi model (manual 1.3 liter, solid colour) priced at RM41,924.30 on the road, zero down payment, and 9 years loan repayment, your monthly installment is RM489.51.Source: http://www.autoworld.com.my/v2/tools/loan_payment.aspNow add on the petrol, toll fees, parking fees, and maintenance expenses, you’ll most likely spend around RM800 per month just because you own this car. For a fresh graduate earning RM2,000 a month, RM800 is 40% of your salary.Don’t sweat. I’ll be giving you some suggestions below in order not to overspend on cars. Since we can’t change the National Automotive Policy on our own, the logical thing to do is to play within the rules. There are many ways to spend less on car including not to get a new one, or not to own one at all. Either way, it involves living below your means.Now let’s get to the question we are discussing on this article – how much should you spend on a new car?

How do you know if you can afford a new car?

The answer is the 20/4/10 rule. Michael Kling at Wise Bread (personal finance blog) shares this easy-to-remember rule:Put down at least 20%Finance the vehicle for no more than four yearsKeep total monthly vehicle expense — including principal, interest, and insurance — under 10% of gross incomeApparently, Michael is living in the USA and he is talking about a different living standard.But the principles hold true for us who are living in Malaysia. If cars are expensive, it simply means we should get cheaper options.If you are following these rules, before buying a Myvi, first you got to have at least 20% down payment ready in your bank account, which is about RM8,400.Secondly, by financing the remaining 80% on a 4 years hire-purchase loan, you’ll be paying RM779.79 per month.According to the third rule, you got to keep your total monthly vehicle expense under 10%. By excluding the maintenance, petrol, toll and parking expenses, you got be earning around RM8,000 a month in order to afford a new Myvi.Okay. I know this is kind of hard to swallow. How many years do you need to climb the corporate ladder in order to get to the income level of RM8,000 per month? Some people take as long as 10 years to get there.

The millionaire next door is driving a Myvi

The truth is that there are many frugal people driving a Myvi in Malaysia. I’ve heard a story from my friend, Lee, who is a top level manager of a property development project in Penang. He told me that a middle-age man drove a Myvi to his office. That guy went in wearing short pants, and bought 8 units of RM400k/unit properties in one shot! You see, even the millionaire next door is driving a Myvi.So if you are not earning more than RM8,000 a month but drive a car as good as Myvi or even better, you really need to take a close look at your finances. Are you heading towards the right direction?

Car Loan vs Housing Loan Psychology

After paying many years on both car loan and property loans, here is the main difference I realized – it is totally the opposite feeling when you pay the nth installment.The feeling of paying a car loan1st installment – “I pay so little to enjoy such a nice ride! Totally worth it.”50th installment – “When is the final payment going to come? I am tired of this old car.”The feeling of paying a housing loan1st installment – “It is going to take forever to pay off this mortgage.”50th installment – “Oh… I am paying so little to enjoy this expensive home.”The answer is obvious – don’t buy a car you can’t afford. Until the time you can really afford your dream car according to the 20/4/10 rule, you might be interested in one of the money tips I shared in my bestselling book Top Money Tips for Malaysians – How to get your first car free. Check it out

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