[m8002?]

There is nothing like a debt free house to call your own. You are always at the mercy of the landlord in rentals. Even if its a small 2 BHK, it should suffice.
All this buy vs rent math will fly out of the window when your landlord increases the rent by some crazy amount or ask you to vacate at the most inappropriate time.

The first house I rented after marriage, the owner sold it within two months of us moving in. It was already in the market and the guy didnt want to leave the house empty even for 2-3 months. I had to fight with the broker and landlord to get the brokerage and advance in full. And it was a race against time to find another one.

In the west, there are RE players who have entire apartments or housing enclaves only for rent and there it makes a lot of sense to rent. As long as you are paying the rent, no one will ask you to vacate on some whim.

[carjack3090]

link

So I happened to go through this video and I found it unapologetically Bizarre and stupid, I expected better from Zerodha. Let me go around and answer why

The Marginal Utility concept

When we are first introduced to an Economics class, the first concept taught is concept of Marginal Utility

What does it say?

Marginal Utility refers to as the satisfaction derived from additional consumption of every unit of an object.

It essentially says that Demand for a good sustains when MU= Price of that good.

So let's say satisfaction you derive from eating chips is immense and so you are ready to pay 10X more than someone who doesn't

Which brings it back to me, I hate eating food. Food is like surviving for me, let's eat and get done with it. On the other hand I love Fashionable clothes and Shoes. So I am ready to spend 5K on a nice Jacket, where as spending 5K on a fancy restaurant gives me hiccups

This actually gets interesting when I bring the concept down to levels of Non Compulsion goods. Like you need food to eat and clothes to wear, but what about other non necessary goods. There it gets interesting, especially cars.

Spending 50% of your salary on car may seem unjustifiable and bad investment, but imagine the satisfaction levels. If someone's 50% investment of their disposable income of car makes them happier than if they save it then that investment gets justified.

Mind you this is importantly why I introduced MU concept, cause there is no finance involved behind this Qualitative concept and everything is abstract and differs from person to person

Understanding Value for money

Now this is where Financial influencers take a hit, concept of Value For money.

So for a financial influencer, a car is a car.

Although for a prospective buyer they can see the nuances.

Can Alto be compared to BE6? Probably not.

Can BE6 be compared to Ioniq 5, EQA- definitely yes

Does BE6 becomes a good buy for someone who wants a car of that level. Then you cannot possibly say to go and settle for an Alto as both are the same.

Understanding Economics of a Country

Another reason why Financial influencers need to be shrouded is their understanding of Economics of a country

A country essentially gets valued by Gross Domestic Product which is a concept both of Production and Consumption

Although because Consumption happens at a final stage versus consumption, we value consumption more than Production due to enhanced Value Addition.

Now this Value addition is important, because Value Addition is what creates job

Direct Value addition as seen process of making a Car

1. Raw material procured
2. Raw material processed
3. Raw material transported
4. Production in Factory by laborers
5. Quality checks
6. Transportation and Inventory storage
7. Delivery at service center
8. Servicing later on as and when needed

There are 8 direct steps of value addition in a car, so 8 stages where jobs are being created. Now this is only direct creation of jobs

There are indirect creation of jobs including- Housing, Servicing, Software, Maintenance etc.

When financial influencers ask you not to buy a car, they are essentially erasing the chain of value created, essentially eroding jobs and finally nullifying wealth.

So basic terms- if economics runs in a circle, if you decide not to spend, someone will decide not to spend on you.

Conclusion

1. Buy cars as per the Utility and satisfaction you get from it
2. Buy cars for their Value per money you give
3. Buy cars finally because it also provides money into your pocket as well

[SLK]

Originally Posted by m8002?

There is nothing like a debt free house to call your own. You are always at the mercy of the landlord in rentals. Even if its a small 2 BHK, it should suffice.
All this buy vs rent math will fly out of the window when your landlord increases the rent by some crazy amount or ask you to vacate at the most inappropriate time.

In all this debate, how is the factor of personalization often ignored. For most part, you can't even paint a rented house in the colour you want or put in permanent furniture that you want. Or my favorite, run internet wires through the walls so that every corner of the house has super connectivity. Or make it a smart home with a lot of automation.

Unless one has intent or expectation or possibility to be change cities, anyone who can afford should own a house, rather than fall for mutual fund advertisements!

Of course, each one to his own!

[m8002?]

Originally Posted by SLK

In all this debate, how is the factor of personalization often ignored.

Personalization doesn't often come in the discussion for rentals because the expectations are very clearly defined. You know what you are getting upfront in terms of location, amenities amd fixtures.

Look at it from owners perspective..every tenant will have specific needs about placing the stove or photos ot lughts or routers. And the owner cannot let them make changes often.
All the more.reason to move into your own home at the earliest.

[Motard_Blr]

Originally Posted by carjack3090

...

When financial influencers ask you not to buy a car, they are essentially erasing the chain of value created, essentially eroding jobs and finally nullifying wealth.

So basic terms- if economics runs in a circle, if you decide not to spend, someone will decide not to spend on you.
...

Conclusion

1. Buy cars as per the Utility and satisfaction you get from it
2. Buy cars for their Value per money you give
3. Buy cars finally because it also provides money into your pocket as well

While I agree with the spirit of your conclusions, the choice of car is absolutely influenced by an individual's sense of financial prudence or lack thereof.

The utility value of personnel transportation can be got even in the cheapest cars. So anything more than that is personal indulgence. However I find nothing wrong with indulgence so long as the one can afford it in the short term and the long term.

[srh]

Originally Posted by carjack3090

It essentially says that Demand for a good sustains when MU= Price of that good.

The reason why economists never become good decision makers They conflate theoretical analytical frameworks to hard & fast 'rules' the way they exist in applied science! This concept of marginal utility in isolation can have a lot of bogus applications and can be used to 'justify' almost anything. Its worthwhile bringing in other concepts like 'marginal cost', 'time value of money', 'opportunity cost'/ 'option pricing', and such to build out a holistic picture when making a decision.

[carjack3090]

Originally Posted by Motard_Blr

While I agree with the spirit of your conclusions, the choice of car is absolutely influenced by an individual's sense of financial prudence or lack thereof.

The utility value of personnel transportation can be got even in the cheapest cars. So anything more than that is personal indulgence. However I find nothing wrong with indulgence so long as the one can afford it in the short term and the long term.

See additionally we make critical errors where we can introduce both Hofstede's Cultural framework and Marginal Propensity to Consume to understand further

One part of Cultural framework talks of the Uncertainty avoidance, in other words charter into risk taking areas. India as a culture rewards taking as low a risk as possible so lot of advices flow in that direction. One more part of the framework is Indulgence vs Restraint, again advices in India suits the latter rather than the former

Which brings me to part two, Marginal Propensity to Consume (MPC). India's MPC is lower on average than the rest of world, thus means we are using less of the money we get into consumption, it goes into the other part that is saving.

Equating the two we have following things happening

A) Individuals with capacity to buy cars worth 40-50 lakhs settling for cars worth 20 lakhs
B) Individuals over period of time regretting not having indulged in indulgence
C) The fact they haven't tested experiencing a better car haunting their present buy

[joelstephen]

I'm not very experienced, But here's what I did - I just bought my first car 1.5 years ago. Soon after marriage, I needed a car within a few months before winter (I live in a cold place with snow). Whatever money we had saved up (~4L) couldn't buy us any new car. So went to the used market and got a Alto 800 Vxi+ 2021 with 6k km on the odo.

The car costed 4L all inclusive. Ever since we've bought the car, we've driven 23k km. That's about 15k km per year.

A ballpark figure of what it's costed -

1. Fuel - 83k (Mileage of 18kmpl and fuel cost of Rs.100 per litre - Rs.5.55 per km)
2. Every 5k km I get balancing + alignment done(Rs.700), change engine oil(Rs.1500), oil filter(Rs.100) & air filter(Rs.250). (Total Costs - Rs.2550 + Labour for oil change = Rs.2800).
3. Every 10k km I get it serviced from at the ASC. They do the same stuff as the 5k service (I get alignment, balancing done from outside) + a few more things and charge a lot more as labour. Quite pointless but might just help with resale + warranty claims (the previous owner bought a 5 year extended warranty.) I end up spending Rs.4.5-5k on the 10k km service.
4. When minor things fail - Door Handle broke, Seatbelt was giving issues, speaker failed - I just the part onine and replace it - 1.5k.
5. I changed tyres once - Costed 12k - 2k (for old tyres) = Rs.10k
6. 4k in tolls every year
7. If we do a wash every two months - Rs. 2.5k
8. Wipers Rs 500 per year
9. Insurance - Rs. 10k

Overall I do two 5k km services and one 10k km service a year. That's about 8.5k for service. Add up all the rest too (I'll add only 5k for tyres because I'll be spending only about 5k on such disposables - tyres, brakes, clutch, etc) and the total comes upto 1.17L/year ~ 10.5K per month.

This for me isn't a small amount to spend every month. Had I bought a larger car on an EMI I would have struggled to pay EMI + extra fuel cost due to low mileage + extra service costs due to a larger car. Because of which I'd have used the car much less as there fuel cost would've been a pinch and that makes no sense to me - to buy a large car but hardly drive it.

Hopefully I can run this for the next 6-8 years by which it would've run around 1.2-1.5L km totally. Then depending on the rules at that time and the need at that time - I can take a call on whether to sell it, keep it. By then I'd have spent 8L on it - that's double the price I paid for the car. If it's running fine might try to push it to 2.5L km

PS - I know I do a little extra service - that's because I live in Kashmir and travel to Ladakh every now and then and I feel due to the harsh conditions I drive in that extra care will pay off in the long run.

[Bombastic]

Originally Posted by joelstephen

Whatever money we had saved up (~4L) couldn't buy us any new car. So went to the used market and got a Alto 800 Vxi+ 2021 with 6k km on the odo.

You have done well, my friend. It isn't easy to resist peer pressure or even self-imposed ego. Other than the actual cash you have saved by not buying a new, bigger, car, you now also have peace of mind that you made the right decision looking at the bills. Right now, a car is just a means of commute for you, so it makes sense to make it economical. And when it's time to upgrade, depending on your situation then, I'm sure you'll make the right call

[autoliebe]

Basic Thumb Rule:

"You buy a car worth quarter of your annual gross salary - and you will always be happy financially"

Also,

1. Try to save and then buy the car rather than buying on loan and EMIs. Pay for the car, not for the finance.
2. It's difficult to not show-off in India but if you can, put the additional money to more meaningful places like investment, buying a home, a holiday, kids education etc.

[kedar3223]

Originally Posted by autoliebe

Basic Thumb Rule:

"You buy a car worth quarter of your annual gross salary - and you will always be happy financially"

Also,

1. Try to save and then buy the car rather than buying on loan and EMIs. Pay for the car, not for the finance.
2. It's difficult to not show-off in India but if you can, put the additional money to more meaningful places like investment, buying a home, a holiday, kids education etc.

What car does one get going by this thumb rule with an average corporate salary? Is the initial savings worth the headache and uncertainty of owning and maintaining a used vehicle within the price constraint or should one stretch to say 60-75% of their income taking the inital hit but ensuring a greater peace of mind. Is it cheaper to own a new car by paying higher amount upfront or is it better to buy cheap and keep on changing the vehicle?

[autoliebe]

Originally Posted by kedar3223

What car does one get going by this thumb rule with an average corporate salary? Is the initial savings worth the headache and uncertainty of owning and maintaining a used vehicle within the price constraint or should one stretch to say 60-75% of their income taking the inital hit but ensuring a greater peace of mind. Is it cheaper to own a new car by paying higher amount upfront or is it better to buy cheap and keep on changing the vehicle?

Point no.2 of the post answers your query well.

Cheers,

[kedar3223]

Originally Posted by autoliebe

Point no.2 of the post answers your query well.

Cheers,

How exactly? The thread assumes that a person is looking to buy a car. Point 2 implies that if you cant buy a car within a hard set 25% of your income, then tough luck, try investing in other instruments ( which obviously does not solve the mobility needs) or gamble on a not so reliable vehicle.

Contrary to what seems prevalent on social media, most people are looking to buy a reliable car for long term use and get their money worth. They do not intend on risking their limited resources on unreliable vehicles. They may not have the money outright, but they do have a steady growing source of income. They stretch their finances to achieve this rather than for showing off. How does the thumb rule and the sub points help this person buy a reliable car thats vfm in the long run?

All these aggressive thumb rules are great for a stronger economy where there's higher earning and a larger inventory of cars resulting in greater depreciation. These are just not practical in a country like ours. 25% limit of an average middle class salary towards a 4 wheel purchase is a joke. It may apply as a great financial thumb rule to the population earning 24+L annually. 6L does get you a great used as well as basic new car.

Heck a person buying a 2-3.5L used car and changing it frequently over 2-3 years would be considered a bigger show off than a person holding onto their car for atleast 7-8 years. The issue arises when people turn over their new cars within 4-5 years. That would be a greater financial blunder than not following some of these ridiculous thumb rules.

[TorqueLord]

Originally Posted by autoliebe

[*]Try to save and then buy the car rather than buying on loan and EMIs. Pay for the car, not for the finance.

Actually I will make the case that it's better to go for loan/EMIs instead of paying outright. This starts making sense especially as the ticket sizes go up. Let's take an illustrative example. Say you're buying a car with 50L ex-showroom price, add say 10% as RTO and 2 lacs of insurance for an on road price of 57L. I think spending 57L outright on a car doesn't make sense (unless it's a miniscule percentage of your net worth or purchased for business where you get depreciation benefits), and it's better to go for a loan, instead of losing liquidity. Car loans can finance upto 100% of ex-showroom price and the rates are around the 9.2-9.5% mark, and I am sure there are many investment avenues where one can earn far more on a post-tax basis. Therefore buying expensive cars outright doesn't make for a sound financial decision in my view.

[AJ56]

There’s no set formula, all depends on one’s additional liabilities in life, if you’re completely debt free, own your own home, are not married or are married but with no dependents, have healthy investments that generate a constant positive cash flow, there is no reason to not exceed the golden one year annual earnings = car value rule.

For eg. if you make say 84L after taxes every year and you buy a car worth the same amount, you can easily pay off 1.5L every month out of the 7L that you make. Add in depreciation and benefits and it further sweetens the deal.

Also applies to lower earning levels, my employee recently got a raise and now makes 6L per year, and he bought a base i10 for which he pays around 10k/month out of his 50k pay check. He owns his home and his wife also works, further reducing the impact of the EMI.

Personally if my assets can generate enough cash flow to fund the lease/loan amount of the car every month, I say it’s affordable. Second rule I’ll use is, can I afford it cash down, without taking debt?

Ideally 1.5 times the car value on road. If yes, then again I can easily exceed my annual earnings in car value with zero impact to my life financially.

You should infact earn a little bit from the debt you’re taking. Stick your principal amount (equal to the cars on road cost) in you preferred investment and take out as much debt as you can (near 100% finance), bank will give it to you at 8.5% (car loan or against your securities). You’ll easily earn 15-16% even on a bad day and more on good days from your investment.

The EMI payments show up as a cost in your books, and your collateral remains safely invested, growing without incurring capital gains tax.

We live to drive, not live to save. As you get older you realise, a few million in the bank account by the time you’re 60-70 is no good as there’s no guarantee of your health and ability to actually enjoy your hard earned money in old age.