How much to spend on a car?

The rule of thumb usually quoted in websites on how much to pay on a car is the 20/4/10 rule. That is 20% down-payment, 4 years loan, and monthly instalment of 10% of salary.

It is not applicable to Malaysia since we have high excise duties on our cars. Using this rule, we won’t be able to buy anything!

We are paying more on cars. For example, while an American or Australian would be paying 4 to 6 month wages on cars, it is about 10 to 15 months of our gross salaries on cars.

Say, the gross salary is $5,000/month or $60,000/year. (Yes, I can use the dollar symbol. Don’t forget that our currency is in dollars and cents.)

The budget on a car for an American is $20,000 to $30,000 (4 to 6 months). For us, it is $50,000 to $75,000 (10 to 15 months).

The rule of thumb on a first car would then be appropriately revised to 20/5-6/15-20. That is 20% down-payment, 5 to 6 years loan, and instalment of 15% to20% of salary.

If the lower range 20/5/15 is used, the budget is $48,000. (Perodua Myvi ??)
Salary = $5,000.
15% of salary = $750.
20% down-payment = $9,600.
Instalment on 3.2% interest, 5 years and $38,400 = $742.

If the upper range 20/6/20 is used, the budget is $75,000. (Honda City ??)
Salary = $5,000.
20% of salary = $1,000.
20% down-payment = $15,000.
Instalment on 3.2% interest, 6 years and $60,000 = $993.

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Above is for a first car. I think for a 2nd car with trade-in value on the 1st car, the loan period should be down back to 4 years. If a longer loan period is needed to lower the instalment, then maybe a rethink is needed whether you really need to spend so much of your hard-earned income on a car.

This post has been edited by j.passing.by: Sep 21 2018, 05:35 PM

First of all, wishing everyone in this forum a Happy New Year!

With regards to above post on emergency fund and having access to it during holidays and weekends, let’s clarify what is an emergency fund.

Referring to Investopedia, an emergency fund is for unexpected events such as losing one’s job or an unexpected huge financial expense as in medical expenses. It is not for everyday and minor events, though unexpected and unfortunate, such as losing your wallet when on vacation or fracturing your arm due to an accident.

Though the latter events may also be deemed an emergency to you, they don’t warrant such a high savings to last 6 months or about 18k. It is not necessary to have access to the whole 18k at anytime.

But in an event such as losing work, being jobless and without income, and yet having to pay the monthly instalments on a house and car, and other bills and living expenses on yourself and family, having enough emergency fund till you can be gainfully employed again is crucial. Otherwise, you may lose the house and car…

While it is not necessary to have immediate access to the emergency fund, it is equally important not to tie it to any investments (such as unit trust or mutual funds or equities) that have a high investment risk even if the investment allows you to withdraw at anytime and you will receive back the money within a week or two.

Remember that the emergency fund is in reserved for an unexpected event such as losing your job. You will want to put it into a safe and sound financial vehicle to have peace of mind and not worry about investment risk and risk losing any part of it.

Lastly, regarding equally sound and safe investments comparable to FD…

First, look at the picture of the total money involved. 18k is not that ‘a large amount of money’. FD rate is currently at about 4%. A 4% annual return on 18k is $720 or $60 a month.

Let’s say the other financial investment tool gives 7% return. This means an extra 3% above FD’s 4%. 3% of 18k is $540 or $45/month.

So the big picture is this… put the emergency fund into a bank’s FD to gain an extra $60 a month, and hope there will not be a bank run anytime soon… put it into a mutual fund to chase a further $45 and hope that the fund is run transparently without any scandal that will cause a ‘bank run’ on the fund.

Do note that in event of a ‘bank run’, the withdrawal policy can be suddenly changed and the withdrawal amount can be limited at each withdrawal. During the Greece financial crisis in 2015, the ATM withdrawal was up to 60 euro only. It will take 300 days or 10 months to withdraw 18k.

Once again, Happy New Year. Don’t worry too much. Live and let live.

A bank run is a possibility but don’t let it worried you. If you get freaked out on every mere possibilities, how to survive another year?

Thank you for the above responses to my previous post. I think some of you were in agreement that not every dollar we saved needs to “work hard” and generate a return higher than FD.

That post was not about how likely or how possible was a bank run. Nor how risky a mutual fund could be.

If the reader could read between the lines on “hope the fund is run transparently without scandal”, he would see that I was not referring to the usual mutual fund, since I would not be comparing the usual mutual fund to a fixed deposit for a “peace of mind” vehicle to hold the large sum of money in reserved for the rainy days in case a large amount of money is needed for medical purpose or in case of being retrenched.

There is a fine line between seeking higher returns on our savings and whether we could face and handle the associated risk in seeking the higher returns.

A financial tool that can be considered as safe and sound to one person, it might not be the same to another.

The financial tool might have a good or great track record, but is it timely to put your money into it currently?

Quite often in this forum, there were queries on what to do with a large sum of money, how to invest it, which is the better option.

Before considering which option to take, I think it is worthwhile to take a step back and consider how the large sum of money comes about.

How long does it take to save it? How many years and months of savings does it take?

If it took me years and months to save this X amount of money, slowly saving it each month in a savings account, and slowly switching some of it from the savings account into fixed deposit, wouldn’t it be riskless of me to put caution aside and switch this X amount of money into whatever investment?

IMHO, the smarter way of managing our personal finances is getting to know about the financial tools that are available in the market and the differences between them.

Get to know about FD, their board rates and their promotion rates, and the minimal amount to open the FD.

Same with mutual funds… what type of funds are available in the market, how much it cost to purchase them, the minimal amount to open an account, etc. etc. etc.

For example, 10k is the minimal deposit to get the promotional FD rate and 1k is needed to open an account to purchase a mutual fund and the next and subsequent purchase can be as low as RM100…

If I knew these facts, it could be option to diversify my savings much earlier instead of building up my savings in an savings account before transferring the bulk of it to FD just to get the promotion rate.

Instead of simply building up the savings and targeting a X amount to have (in reserved as emergency fund), I could also put part of the monthly savings into a mutual fund.

This way, I have also lessen any market risk since my purchases in the mutual fund is spread over a long time, little by little over many years.

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PS. In one of the mutual funds online platform, in a purchase plan, the minimal amount to open an account is RM100 instead of the usual 1k.

Over the years, my ‘emergency fund’ varies…

When I first started work, and with very little savings, Socso was my fallback... till I managed to buy a short term life insurance.

The short term life insurance was very cheap but it was important to have since my job required me to travel out of office. Road accidents seemed to be very high those days. The insurance would take care of any funeral costs.

Latter, the amount to target was a few months rent – just in case I found a new job in another town and need to move… 3-4 month rent as deposits and in advance.

Nowadays, and much later in life, with savings and money here and there, which money is the reserved for ‘emergency’ is very blur.

The 2 main reasons to hold an emergency fund was also getting weak…

Being retrenched and jobless… can consider early retirement if there are ample savings in bank and EPF.

Medical emergency… well, how much do one needs to set aside. Millions or hundreds of thousands as would be suggested by insurance companies?

Or it could also be any amount that you happen to have. So whatever savings you have is just fine… and you will make do with it. So it is not really necessary to target X amount in reserved for medical needs.

Whatever little or much you are holding in reserved for medical emergency… if it is unused, it can be converted to funeral expenses… however little or much you were holding.

Again I don’t see it, the funeral expenses, as a X amount you must target to have. You make do with however little or much you have.

Come to think about it, so are weddings. You can make do with whatever little or much you have.

So are many other things in life.

Achieving financial freedom can be as easy as you want it to be.

One thing one cannot make do without – savings.

I have yet to do any credit card transfer or taken any personal loans, so the following is not from hands-on experience but from common sense assumptions.

An interest free or 0% credit card transfer should be same as buying things in an instalment plan that is interest free or 0%.
For example, if buying a TV that cost RM2,400 under 0% interest, and 24 month instalment plan, the monthly instalment is RM100. RM100 will be charged into your credit card every month for 24 months.

Similarly, the transfer from one card to another card, the monthly amount will be charged to your 2nd card every month for the agreed period to pay back.

In personal loans, the interest calculation and instalment amount should be same as in a car loan – that is a flat rate interest calculation.

For example, if the loan amount is RM10,000, interest is 5% and loan period is 2 years, the monthly amount to pay is:
10,000 x 5% x 2 = 1,000
(RM10,000 + RM1,000) / 24 months = RM458.33 monthly instalment.

In several previous posts, the difference between a flat rate loan (as in a car loan) and balance interest rate loan (as in a housing loan) was explained.

Also explained was the lump sum to pay if we want to terminate the loan with a lump sum settlement. In a flat rate loan, the lump sum to pay will follow the “rule of 78” calculation.

There were people who don’t understand the “rule of 78” and yet tried to outsmart the banks by “cleverly” taking a bigger loan than necessary and taking a longer repayment period than necessary, and thinking that they can save some interest cost by doing a lump sum settlement as early as possible. Say taking a 7-year car loan, and then want to do a lump sum settlement the next year.

No, don’t try to outsmart the banks which are run by financial professionals.

Whether or not there were any upfront handling or administrative fees, the operational costs are usually included in the interest rate. For example, the interest rate for an 18 months car loan will be slightly higher than the interest rate for a 7 years car loan.

I am afraid I have some doubts whether to answer your questions in a straightforward manner without cautioning you on what you are about to do. It seems to me, you are in a bit of financial trouble and maybe heading deeper into more troubles.

Credit Limits...

Why are you concern of credit limits? If you are touching the credit limit which is the max amount you can have on credit, this is a red flag and a warning sign that you are spending beyond your means/financial ability/salary.

Maybe you are looking at credit cards as having a Personal Lender on standby. But I view credit cards as a mode of cashless payment and always pay the monthly statement in FULL.

I have been using credit cards for years, and I have never ever paid any interest charges since I paid in full on due date.

Balance Transfer...
When you do a balance transfer from one card to another, you are clearing the first card. In other words, you will have back the max credit limit in this card. See… I think I can see light bulbs flashing around you… you will then have a clean card with the max credit limit at your disposal.

If you balance transfer from 3 cards, you will have 3 clean cards.

In the card you balance transfer into, the monthly statement will not show the whole transferred amount. The instalment amount will be billed monthly. So, depending on what plan you selected and how many months to pay back, the monthly instalment amount will not affect or touch your max credit limit in this card.

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To answer this query on credit card transfer, I have looked into Maybank webpage on Balance Transfer. To know the full details, looked into the Terms and Conditions pdf and the Product Disclosure Sheet.

There are several “plans” available and each with different repayment period from 6 months to 36 months. Each of them with slightly different terms and conditions. Some with reducing balance interest, and some with flat rate or straightline interest method. And there are various upfront charges and fees in each plan.

So, how to choose which plan to take? Which has the best and lowest interest and fees?

No, you should keep it simple and simple reasoning.

Forget about lowest interest option… since you are already incurring cost of interest in whatever plan you choose to have. Think of this cost of interest as necessary expenses and don’t over think on saving costs.

The best plan is the one with the instalment amount that you can pay WITHOUT FAIL every month. So, you need to think carefully how much you want to pay every month and how much you can pay.

You can use online calculators to estimate the instalment amount.

Though this instalment amount is billed into the monthly credit card statement, it MUST be paid in full. If it is not paid in full, its remaining balance will incurred the highest credit card interest at 18% p.a. untill it is paid in full.

So, not only the one-time upfront fee and charges were paid, another cost is added onto the late payment.

(Note: in certain plans with shorter payment period, instead billing into the credit card statement, a separate account will be opened for payment purposes.)

Happy New Year and Gong Xi Fa Cai.

Continuing from previous post… some may wonder why I don’t suggest a lump sum settlement on a personal loan or a credit card balance transfer when there is extra money to do so but carry on paying the monthly instalment till completion.

There are 2 reasons.

The first reason is due to the rule of 78 in calculating the outstanding balance. Though there would be some cost savings, the savings is not that significant because the cost of interest is already built into the loan when using rule of 78.

The other reason is that it would be better to hold onto the money and increase the amount of cash we have in hand as an emergency fund.

The need to have a personal loan or outstanding balance on a credit card is due to insufficient emergency fund to meet unexpected expenditures.

If the money is used to do a lump sum settlement on a personal loan or credit card transfer, and if there is inadequate savings, then we would need to resort back to taking another personal loan or using a credit card to meet any unexpected expenditure.

This could lead to an endless cycle of being in debt of a personal loan or credit card debt.

As in the above scenario of doing a credit card transfer from 1 or 2 cards, it would be better to carry on with the instalment plan, whether it is 24 or 36 months till completion. Whatever extra money there is, it should be used to pay the credit card(s) outstanding balance.

1) Do not just pay the minimal amount but try to pay as much as possible to reduce the cost of credit card interest.
2) Reduce transactions on the card and keep a tight budget on the monthly amount to charge on the card.
3) Continue (1) and (2) till the outstanding balance can be paid in full every month.
4) Slowly built up savings and emergency fund after achieving (3).

Hopefully, with adequate savings, there will be no more need to have a personal loan or be in credit card debt to meet any unfortunate and unexpected expenditure.

Hopefully, in the New Year, there are only good fortunes and no unwanted events, and our wallets grow fatter, not thinner!

Gong Xi Fa Xai.

Buying a house is a major decision, so is marriage. Would suggest not to rush the decision, and do things one step at a time... get married first before becoming co-house owners with gf.

There is no secret formula... only plain common sense.

And a bit of critical thinking when reading and be selective in filtering what is suitable and appropriate to listen.

One needs to be independent in thoughts and not follow blindly what is popular among peers.

If you are employed and contributing to epf, the contributions are for long term and retirement. So, if you are starting out and in your 20s, just save for the near future for the next 5 years... holidays, marriage, car, house down payment.

Don't over think too much on investments in trying to get fantastic high returns on you small savings. Be more concerned with your job and career, the higher earnings are normally made in the 30s and 40s.

Emergency savings is for the unfortunate event of being lay off. This savings should cover your expenses and loan instalments till you are gainfully employed again. Thus make a quick calculation on how much you should set aside. It depends on how fast you think you're able to land another job.

Make full use of epf in the longer-term financial plan. If possible, don't touch or withdraw only the minimal amount out of account 2.

Also, make arrangement such that your employer makes a higher contribution above the usual percentage. It can be up to 18 or 19%. (Can't recall the actual figure.)

Employer's contribution is non-taxable income.

C. Pay the minimal (which is 5%) on the card with the lower interest and the remaining amount on the card with the higher interest charge.

Fully clear the card with the higher interest charge first.

If both cards have the same interest charge, select either one and clear it first; one at a time.

There should be one card for normal regular usage, and it's outstanding balance is always paid in full on due date.

When the card is fully paid on due date, there is no interest incurred on any new transaction on the card.

If the card is not fully paid on due date, every new transaction on the card will incur daily interest... from the day the transaction was done till the due amount is fully paid on due date.

So if you have only these 2 cards, fully clear one for normal usage. And stop making any transaction on the other card.

Usually the high outstanding balance incurred on a card is from an extraordinary and unexpected expenditure. As in your above post, it will take about 10 months or maybe longer to slowly pay back the borrowings.

If the high outstanding balance is due to monthly accumulation and growing bigger every month, then the card is for making ends meet... I would wish the card holder good luck that he comes into good fortune and able to clear his debts soon.

No matter how the borrowed money is utilised, it is still the same – it is borrowed money.

The 1st mantra in personal finance is: Don’t borrow to invest.

Some may not agrees with this and loved to use the term “leverage” and practises the concept of money makes more money.

Well, this is personal finance… not business finance.

In opening and running a business, there are lots of risks undertaken. You would not want to run your personal life like running a business. When businesses are not successful, you closed them.

If your personal finance is in trouble, you closed your life? Sell your house and live under the bridge?

For sure we can give lots of suggestions and advices on financial matters. There are many options in life and everyone would have his own opinions.

As for me, I would rather refrain from giving any order advices other than being prudent with our money, and living within our own means. At the very least, this conservative advice do not leads one to financial ruins.

If you were to put aside savings for retirement, like self contributions into epf, your net income is about 9k per month.

193 - 30k = 163k
163k x 30% = 48.3k
163 - 48.9 = 114.1k, or 9.5k/month

You should keep tighter track of your expenses to better know your own finances. Put some thoughts on big expenditures on special occasions in the next several years... you will need to plan for them too.