The most common dilemma of many millennials, especially if you work in the Klang Valley but is originally from out-of-town. Ideally, we should strive for both but most of us can only afford to choose one or the other. This article will help you weigh out the pros and cons to better decide which is the right choice for you.
So you have graduated and have now entered the working world. Congratulations! And now you must be thinking to yourself, should I buy a house or a car?
Perhaps you might think that buying a house is a wiser choice due to its investment potential and appreciation in value. Plus – it also offers you a home of your own when you eventually move out of your parents’ home (or college dorm!) But how about that shiny new car…. that gives you freedom to roam about with your friends? You then remember how a car’s value depreciates the minute it leaves the showroom, or the long-complicated process of owning a home with its initial down payment. Decisions, decisions!
Fret not; let us help you with that decision with these tips:
Access the net cost
Before you jump the gun, it’s important to take a look at not just the price of the car or house you would like to buy but all the additional costs as well. For a house, these expenses include stuff like insurance, maintenance fees, lawyer fees, and upkeep. Some houses require renovation and assessment costs as well.
Meanwhile, when it comes to a car, you should keep in mind the maintenance cost like how much it would cost to service it or change the spare parts. For second hand cars, some repairs or repainting might be needed. So with all these extra expenditure factored into the total costs, ask yourself now if you can actually afford this purchase?
Consider your savings and income
Now that you have looked at your upfront or initial cost, you also need to assess your monthly commitments. Aside from the loan you are taking from the bank (with its interest), you need to factor in maintenance costs like servicing, tolls and petrol for cars while owning a house will likely incur monthly internet, electric and water bills.
Taking into account your monthly savings and income, can you fully take on this long-term commitment? The rule of thumb when it comes to personal finance is that up to 50 percent of your net income should be used for monthly commitments like housing loans, car loans, insurance and bills. Another 30 percent is for food and other recreational activities while at least 10 to 20 percent is saved for retirement and emergencies.
So lets have some fun with numbers and imagine that your gross income is RM4,000. After taxes and EPF deductions, you are left with about RM3, 500. Considering the above advice, here’s a nice little pie chart to illustrate your monthly savings:
Figures are in Ringgit
RM1, 100 are for food and hobbies and RM700 are for savings and retirement while the remaining RM1, 700 are for your monthly commitments. So if you have a monthly PTPTN payment of RM200, health insurance of RM200 and bills up to RM400, you are left with about RM900 to put in for a car or either a house.
Based on these numbers, you should get a good gauge on whether you can afford a house or a car.
Check on your credit rating
Before committing to any long-term purchases, you will also need to look at your current debts and credit rating. For example, if you have monthly payments for student and personal loans to foot, maybe you need to consider if taking on more debt is the right move for you now. Apply the rule of thumb for personal finance and see if it amounts to more than 50 percent of your monthly commitments.
There’s a saying that goes, “not all debt is bad”. And while this doesn’t mean you should go and max out your credit card, it is important to have some form of commitment so the bank has a way to access if you are a good debtor or not. This is because the rate in which you pay back your loans and your purchasing habits (as recorded in your credit card if you have one) will affect your credit rating and that in turn helps the bank to set the appropriate interests charge on the loan they’ll be giving you for your car or house.
Value and need
Generally, a house is seen as a worthwhile investment compared to a car, which is often seen as a liability. The value of a house might stagnate or decrease slightly in the short term but in the longer term (especially five to ten years’ time), the value increases. The value of a car on the other hand continues to depreciate with time. So for the long run, buying a house makes sense.
However, you also need to consider your current needs. If you live far away from your workplace, you might need a car to commute especially to destinations where there isn’t any public transportation. This situation then turns you want for a car to a need for a car instead.
So what will it be? A car or a house? Ultimately there is no right or wrong answer. An investment into a property might be encouraged but the current economic conditions and rising cost of living might put young adults off from taking long term and costly commitments. At the end of the day, the most important thing is to access your current financial standing and properly plan ahead. Slowly but surely, everything will fall into place.