As you progress in life, making big financial decisions with a limited income becomes a challenging road. Making choices that require pulling out savings or taking on debt is based on one’s ability to weigh short-term desires against long-term goals. An interaction between two users on social media platform X, Sourav Dutta (@Dutta_Souravd) and Dr SareeDon Pingubai (@DrPyaricetamol), reignited this quandary.
Dutta highlighted the financial trade-off between purchasing a car versus investing the equivalent sum in the stock market and sided with the latter. Dr Pingubai on the other hand argued on the importance of owning a car at the time of emergency.
This exchange raises a significant question: How can you strike a balance between immediate, sometimes tangible needs like owning a car when compared to long-term financial goals that can be met with investments or savings?
Investments v/s Depreciating Assets: The Raging Debate!
Sourav Dutta’s post sparks the common financial question: taking a loan to buy a car versus investing the same amount. In his example, a monthly EMI of Rs 20,000 for five years to purchase a car with Rs 10 lakh could leave the buyer, Ravi, with a vehicle that depreciation in value to Rs 4 Lakh by 2030. On the other hand, he argues, investing the same EMI equivalent amount into a Nifty ETF could potentially grow Ravi's wealth to Rs 17 lakh over the same period.
If you were to look at this from a purely financial perspective, investing will look like the smart choice - giving you better returns than buying a depreciating asset like a car. Dutta’s argument? Vehicles typically lose value over time, whereas equity investments, though considered risky, can appreciate your wealth if done keeping a long-term approach in mind.
The scenario created by Dutta illustrates how the differences in returns can become stark when comparing a fixed asset like a car to a market-linked investment.
Which one to choose? We’ll find out.
Needs, Emergency v/s Investments: What Matters Most?
Dr Pingubai’s response, however, offers a much more critical counterpoint: your financial decisions aren’t always about numbers - they are also about context and necessity. Ravi’s car, though not an ideal financial asset (if returns are taken into account) would play a crucial role during a medical emergency, saving his parent’s life when an ambulance was not readily available. In such a situation, the value of having immediate access to transportation far outweighs the returns from an investment.
Therefore, owning a car can be helpful in areas with limited access to public transport or in case of emergencies that demand quick mobility. For some cars would provide a sense of security, convenience, comfort, and often independence of mobility that an investment portfolio can’t offer.
So does that debate end here? No.
The decision to buy a car is more than just a financial calculation. It’s mostly about lifestyle, convenience, and sometimes necessity. Sumit Duseja, a Sebi RIA, CFA, founder of Truemind Capital, a fee-only private wealth management organisation, emphasises that before making such a decision, one should evaluate their broader financial goals. “One should first evaluate the investments needed for retirement corpus and children's education,” he advises.
He adds, “The value of the car should be decided in a way that it doesn't disturb these other goals drastically. Ideally, one should buy a car as per the need since it's a depreciating asset.”
When Does Taking A Debt Make Sense?
While many financial advisors caution against taking loans for a depreciating asset, there are times when taking a car loan can be justified. Duseja says that the debt can be considered for buying a car when one is reasonably certain of making better returns on investments than the interest cost over the period of the loan. For instance, if Ravi can secure a car loan at an interest rate of 10 per cent but is also confident of generating a 12 per cent annual return from his equity investments, the decision could make financial sense.
However, will this approach work every time and in all cases? The answer is not that simple. Those planning to take up this approach should understand that while the numbers may align favourably, there’s always the uncertainty of market returns, making this a strategy well-suited for those who can tolerate market-linked risks. The key for Ravi here is to carefully assess his comfort with market risks, invest according to his risk appetite, and ensure he has a backup plan.
The backup often comes in the form of emergency savings. The prudent approach, as pointed out by many experts, is to keep a 6-month worth of income amount as your emergency fund for uncertain times.
Caging The Debate: Financial Prudence Not At The Stake Of Personal Needs
The choice between investing, saving, or purchasing a car is all about finding a balance that aligns with your priorities and circumstances. If Ravi lives in an area with poor public transportation or has regular needs that demand quick mobility, owning a car would be a practical choice. But if his circumstances allow for a more modest approach such as the feasibility of using public transport or buying a second-hand car - he could focus more on growing his investment.
Ultimately, the narrative reminds us that financial decisions are rarely black and white but require thoughtful assessment of both tangible returns and intangible benefits. As Duseja puts it, “An expensive car can impact the retirement time or retirement corpus and therefore could impact lifestyle in the future. Buying a car should only be on the need basis at least when one is beginning their investment journey.”
5 Key Questions To Ponder:
1. What are your long-term and short-term goals? Are you looking for wealth creation or do you prioritise comfort and convenience in life?
2. Evaluate your monthly cash flow (from income, business, or freelance work), existing liabilities, and current savings.
3. Consider the non-financial benefits of the car such as time saved in commuting, necessity, etc., and then compare this with potential investment returns. Which one do you value more?
4. Carefully analyse the interest rate on a car loan (if you’re taking one) and the expected returns on equity investments (you are making currently).
5. Evaluate additional costs associated with owning a car such as insurance, maintenance, and fuel. You can account these when comparing the long-term cost of car ownership v/s potential investment returns.
