One of the best pieces of advice I received was from Robert Kiyosaki: “Buy Assets First, which then Pay for your Liabilities”.
A key example of this is when many of my younger clients who work up on the mines are asking about the best way to finance the new $75,000 Ute that they want to buy. Obviously they’re earning an excellent income and want to have the toys to show for it!
My response is usually along the lines of “As soon as you drive that brand new Ute off the car showroom floor, it is going to lose $7,500 in value.” You instantly lose 10% of the purchase price.
The first lesson is never buy a brand new car! My advice is to leave your ego at the door. You can find a great second-hand car or demo model, where that initial 10% hit in lost value has already been taken by someone else. The second lesson is never get a lease, which is often referred to as a “fleece”… A general rule is whenever you use a tax break to justify the purchase of a liability you’re getting ripped off!
Pay cash for a car and try to look for something between
$10-$20k in value that is less than 3 years old.
If you have kids, some of the best advice you can give them is not to get an expensive car straight out of university. Many people get their first proper job and go straight out to finance a new car. I know I did! I thought I was Big Bank Hank, rolling around at 20 years of age in a Lexus coupe.
I justified the purchase to myself as a reward for all my ‘hard work’ and I ‘deserved’ it. All the usual stuff which makes you feel better about the purchase. I made the mistake so many of us do in our early 20s of taking out the big car loan at 14% and struggled each and every month with the cash flow to pay the $1,000 a month repayments.
The novelty of the new flash car lasted all of 90 days. Like all expensive things in our life, we soon become accustomed to it and the excitement wears off. So of course then I needed a ‘better’ car! I was working so hard that once again I could justify it to myself. Now what to get…
I could’ve been sensible and grabbed something reliable, economical and not too showy, but NO the Ego was running the show at this stage and it wasn’t going to settle for an average car. Before I knew it I was the proud owner of a new Audi TT. My loan doubled in size and so did my repayments
and I was seriously under the pump having to come up with $2,000 a month in cash to satisfy my Ego’s needs! Not very smart!
Once again the inevitable happened, after 3 months or so I didn’t have the same excitement I used to have when I jumped into it each morning. It was after all, just another car! Perplexed by the need to continually feed the ego, I decided my last move wasn’t the smartest and promised myself the next car was going to be different! And different it was… When the time came for my next car I had learnt a lot from my past mistakes. No more loading up on a 6 figure car, it was time to make a shift.
I went to the bank, withdrew $10,000 in cash and purchased myself a solid, reliable second-hand Holden Commodore VX which had done 75,000km. No frills!
The improvement in my cash-flow was exceptional! It was like I got a $2,000 a month pay-rise, because I didn’t have any car repayments to make.
This is the strategy that I’ve stuck with over the years when it comes to buying cars. If I get the urge for a new car I know that I’ll buy second-hand and will wait until I can pay in cash before buying it.
Interestingly enough, quite often the cost of an average car loan is around $800 a month, which is very similar to what the net out of pocket cost is for a $400,000 investment property… Which option do you think will be worth more in 10 years’ time?