For many Canadians, it’s simply unavoidable to need to drive – from home to work, to school, or to access necessary utilities and daily tasks. Canadians have registered over 33 million vehicles as of 2015. Vehicle purchases or leases and upkeep costs (including insurance) can be one of the three biggest expenses most people will commit to in their lifetime, after housing and education. What are the true costs and benefits of car ownership and how are they affecting your personal finances in the long term?
Percentage of Income
Some financial advisors suggest that it’s best to look at the cost of a vehicle as a percentage of your annual income. Suggestions range from ten percent to twenty-five percent on the more conservative side of the scale. Rob Carrick of the Globe and Mail has suggested that all household car payments plus insurance should not eat up more than six per cent of gross household income. Is there a “perfect” percentage for everyone? No. This depends on your existing financial obligations, and on the degree to which an up-to-date and frequently maintained vehicle needs to be an integral part of your living and working routine.
Wheeling and Dealing: Auto Loans and Financing
Many people will not be able to purchase a vehicle outright, and opt instead for a loan or financing agreement that allows them to make monthly payments with interest against the full value of their purchase. Recent data from J.D. Power & Associates shows almost two-thirds of car buyers are financing their purchases over six to eight years. This length of term will keep one’s monthly payments low, but has the significant disadvantage of keeping you indebted for longer as the vehicle you purchased depreciates over time and may demand further upkeep. Some car loans have a fixed rate, but others have a floating rate that will edge up if borrowing costs trend up from their current historically low levels.
Vehicles are one of the purchases that, as the old saying goes “loses value as soon as you drive it off the lot.” Compared to a house or other asset, which might appreciate in value over time, most vehicles’ value drops precipitously. This drop in value varies between makes and models, but typically is between 15-35% in the first year and up to 50% or more over three years. Factor depreciation into the long term plan for owning your vehicle! Consider what it would be like for your personal finances if you were to lose the difference between the purchase cost and the resale value tomorrow instead of in five or ten years.
Finances: On the Move
Having a vehicle can be one of the pillars of your personal independence and autonomy. However, it is critical to remember that your investments and savings, including such assets as home equity, are not the place from which to draw financial resources for this purpose. If you’re looking to borrow, make sure you have the credit profile support to do so, a carefully planned budget, and a method to control and pay off any other existing items that might be on your debt balance sheet. Your personal finances may change lanes periodically, but the focus should always be on the most important destinations and how to get to them.