Sometimes you hear people giving some advice that doesn’t quite make sense and sometimes you hear people give advice that just sounds plain stupid! I’ve just heard this about cars. Never spend more than your day rate on a car.
I had an interesting conversation with a colleague today. He’s about 10 years older than me an a contracting veteran. He’s a family man too and has three kids (in private school) and he appears to be sensible with money – not a big spender and have plenty of savings. But what he told me about car loans just shocked me!
Never spend more than your day rate on a car
Day rate by the way is how much you get paid per day – typically 8-10 hours. I’m on an hourly rate at the moment with 40-50 hours a week in the contract. 10 hours per day still puts me nowhere near the Mercedes.
Anyway, he was browsing cars and had a lovely looking Mercedes SUV up on the screen which only costs £699. That’s £699 per month of course and comes with a £3999 deposit. It works out a bit like this:
|Mercedes-Benz GLE 300d AMG Line
Personal Contract Hire Example
|Duration of Agreement||48 Months|
|47 Monthly Payments of||£699.00|
|Miles Per Annum||10,000|
|Excess Mileage Charge||15p per mile|
Total cost over the 4 years is just £37,551 – assuming you don’t scratch it. That’s twice as much as I’ve spent on cars in total over my lifetime – but hey, I drive like a pauper.
Personally, I think that that is a lot of money to spend on a petrol powered wheelchair – there are similar cars which cost half that amount new and you can probably own something a bit older for the price of the deposit alone. But the UK loves buying their new cars – well, renting/hiring the cars.
The conversations turned (as it often does with contractors) to money and I was instructed to not spend more than my day rate on a car (which is a good bit lower than £699 I might add).
He felt that he could negotiate a better deal and maybe offer a £6k deposit to get the car for £500 or so – but it would still be above his golden rule of “no more than your day rate”.
Both of our cars cost less combined than “owning” a car like that for just over a year. Our cars are old and maybe cost a bit more to run but they are ours and although I calculate the depreciation, we own them outright.
This golden rule shocked me as it seemed so simple but also so dangerous. If you pay (roughly) 25% tax on your income (the perks of being self-employed) it would mean that payments on the car equal 16 days pay from a year. Assuming you work 230 days a year that’s about 7% of your income going on car payments. Or to put it another way, the first 3 weeks of the year is spent making the car payments.If you add on the other costs associated with cars like:
You could easily be looking at a total cost of ownership in excess of 12% of income – of someone who is well paid (for the lower paid it could easily be a quarter or third of your income).
I suggested that an older less expensive car could do the same job – but I was told that if you have it you should spend it and anyway, the kids like a good car and he needs a 4×4 and a new one at that because the weather in Scotland is bad. I think that it’s a status thing – but maybe he enjoys and appreciates cars. I spend more on good beer at home, what’s wrong with being snobbish about the car you drive?
At this point, I wasn’t going to argue. People can do what they like with their money. Also, I’m new to this game; maybe a contractor can buy the car through their company and write down the repayments as a deduction and save a bit of money on the tax? The HMRC gives you the option of taking 45p/25p per mile driven or money spent on the car.
For me, I will do high mileage in this job (130+ per day or 30,000 per year if I keep it up) and the 45p/25p should work in my favour.
Maybe I’ve been in Scotland for too long but I see this new job that I have where business expenses can be claimed and I have a long commute as a way to make/save money (30,000 miles a year is £9,500 that I can claim as a business expense) whereas others seem to think that it’s an opportunity to just spend more – as your income goes up so too should your spending.
That’s why there are some contractors here that have been in the game for 20 years and are still only a few pay checks away from being broke.
I plan to keep our old cars and save our money and I’m putting “never spend more than your day rate on a car” in the category of “personal finance numbers that are bullshit”.