Contractor Wisdom: Never spend more than your day rate on a car?

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.

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:

Personal Contract Hire:
Mercedes-Benz GLE 300d AMG Line
Personal Contract Hire Example
Duration of Agreement 48 Months
47 Monthly Payments of £699.00
Initial Rental £3,999.00
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.

Image result for banger car
GFF’s next car – ain’t she a beaut?

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:

  • Petrol
  • MOT
  • Servicing
  • Maintenance
  • Insurance
  • Tax
  • Parking/permits/storage

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”.

Thanks, GFF

13 comments

  1. Wow – yes what a post. You’ve hit the nail on the head. Let’s keep renting / buying cars so we can keep status / driving to work. I drive a beater car that I will be running into the ground. It’s got 60k on the clock and someone dinged the side but didn’t leave insurance but nope I won’t be getting it fixed either. It’s just cosmetic. Of course my work colleagues love to take the mick but I don’t care. Yes, of course the kids live the SUV to drive to school & back but jeeez. Anyway, great post – I am up here north of the wall in Edinburgh so not convinced you need a SUV but I sure do see a lot of them.

    Liked by 1 person

    • Thanks so much for reading. Nice to have such a positive response.

      60k is nothing!
      our cars have done 90k and 140k respectively – the one with 90k is the “new”car.
      Personally, the car PCP / rentals where you can only do 8,000 miles a year doesn’t make a lot of sense to me – why have a car if you can’t drive it?
      Than again, the new job involves a 133 mile round trip everyday – and we like to explore Scotland at the weekend – so our mileage is higher than your average family.

      Like

  2. Our car is getting towards 200,000 miles. We hope it’ll be good for another 5 years or so though more would be welcome.

    If I wanted a replacement I’d look at Japanese or Korean manufacturers – German cars are lousy value, judging by the reliability tables. Just not put together well enough. Presumably they devoted their energies to software for fiddling their emission tests rather than on engineering.

    Liked by 1 person

  3. I’ve probably spent more than I should have on cars over the years – I was on a cycle of leasing cars but then paying off the balloon, owning the car outright for a while before moving onto a new one, rinse and repeat. My current car is the only one I didn’t go into debt to pay off, has less than 42k miles and I only do around 3k a year these days. I’m hoping to keep it until prices of electric cars become affordable!

    Like

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