36-Year-Old Couple With 8 Lakh Monthly Income and 65k EMI: Should They Buy Another Car?

Ans: Understanding Your Needs
Residing in Chennai, a hot and bustling city, presents unique challenges and opportunities for car ownership. Your family includes yourself, aged 54, your wife, aged 51, and your son, aged 18. You wish to buy a car for occasional city use, primarily for marriage functions and similar social events. You prefer a Toyota, known for its engine stability, and an automatic petrol version for convenience.

It is understandable to want a vehicle that reflects your status, especially when relying on call taxis can sometimes feel awkward. With a budget below Rs 15 lakhs, let's evaluate whether you really need a car and which model would suit your requirements best.

Assessing the Need for a Car
Considering your situation, purchasing a car could provide several benefits. It offers the convenience of transportation on your own terms, eliminating the need to wait for taxis. It also provides a level of comfort and status during social events. However, owning a car also comes with responsibilities and costs, such as maintenance, fuel, insurance, and potential depreciation.

Evaluating the Costs
Initial Purchase and Depreciation:

A car's purchase is just the beginning of its expenses. Cars depreciate over time, losing value as they age. This depreciation is something to consider, especially if you plan to sell the car in the future.

Maintenance and Fuel:

Regular maintenance is necessary to keep the car in good condition, and these costs can add up. Fuel expenses are another significant factor, particularly with petrol vehicles. Given your monthly usage of 60 km, fuel costs may be relatively low, but it's still an expense to account for.

Insurance:

Car insurance is mandatory and ensures protection against accidents and damages. The insurance premium varies based on the car model, age, and other factors. It's crucial to factor this into your budget.

Financial Planning for Car Purchase
Ready Cash vs Loan:

You have the option to purchase the car with ready cash or through a loan. Paying in cash avoids interest costs and can sometimes get you a better deal. However, using a loan might help manage your cash flow and retain liquidity for other investments or emergencies.

Avoiding Income Tax Eye:

To avoid drawing attention from the income tax department, it's essential to keep the car purchase within your financial means. If opting for a loan, ensure the EMI is affordable and doesn’t strain your monthly budget. Proper documentation and transparency in transactions will help avoid unnecessary scrutiny.

Choosing the Right Model
Given your preferences and budget, let's explore some suitable Toyota models. Toyota is renowned for its reliable engines and durability, making it a wise choice.

Toyota Glanza:

This model is an excellent choice within your budget. It offers good mileage, a comfortable ride, and the reliability Toyota is known for. The automatic version would provide ease of driving, especially in city traffic.

Toyota Yaris:

Another good option is the Toyota Yaris. It comes with a comfortable interior, advanced features, and Toyota’s trusted performance. The automatic petrol version fits well within your requirements.

Benefits of an Automatic Petrol Car
Ease of Driving:

Automatic cars are easier to drive, especially in heavy city traffic. They reduce the stress of manual gear shifting and provide a smoother driving experience.

Maintenance:

While automatic cars can sometimes have higher maintenance costs, Toyota’s reputation for reliability can mitigate this. Regular maintenance as per the manufacturer’s guidelines will ensure longevity and performance.

Conclusion
Given your situation and preferences, purchasing a car seems like a reasonable decision. It will provide the convenience and status you seek, especially for social occasions. Within your budget, Toyota Glanza or Toyota Yaris are excellent choices, offering reliability, comfort, and the convenience of an automatic transmission.

When it comes to financing the purchase, paying with ready cash might be the better option if it doesn’t strain your finances. It avoids interest costs and keeps the transaction straightforward. However, if you prefer to maintain liquidity, opting for a loan with manageable EMIs is also a viable choice.

Ensure to keep all financial transactions transparent and well-documented to avoid any issues with the income tax department.

Ultimately, owning a car can enhance your lifestyle and provide significant convenience. Make sure to choose a model that fits your budget and needs, and plan your finances carefully to enjoy the benefits of car ownership without unnecessary stress.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: First, I want to commend you on having a clear vision for your financial goals. Planning for a significant purchase like a car, while also supporting your family, requires careful consideration and strategic planning. It's great that you are proactive about managing your finances and seeking guidance.

Current Financial Snapshot
You have a monthly salary of Rs 40,000. Your expenses are Rs 20,000 per month, which leaves you with Rs 20,000 monthly for savings and investments. You invest Rs 7,500 in SIPs and LIC policies, which is a good start. You mentioned that you have no debts, which is excellent as it allows you to focus on saving for your goals.

Planning for Down Payment
When buying a car, making a substantial down payment reduces the burden of monthly EMIs. For a car worth Rs 17 lakhs, a down payment of 20-30% is advisable. This means you should aim to save between Rs 3.4 lakhs to Rs 5.1 lakhs for the down payment. This will not only lower your EMIs but also reduce the overall interest you pay on the loan.

Saving for Down Payment
To accumulate the required down payment, you need to adopt a disciplined approach to saving. Here’s a structured method to help you achieve your goal within 1 to 1.5 years:

1. Create a Dedicated Savings Account

Open a separate savings account specifically for your car down payment. This helps in keeping your savings distinct from your regular expenses and investments. Automate a transfer of Rs 10,000 per month to this account from your salary account.

2. Reevaluate Monthly Investments

Review your current SIPs and LIC policies. Since you are planning a significant purchase, it might be prudent to temporarily redirect some of your monthly investments towards the car down payment. For instance, you could reduce your SIPs and LIC contributions from Rs 7,500 to Rs 5,000. The remaining Rs 2,500 can go towards your car savings.

3. Cut Non-Essential Expenses

Analyze your monthly expenses to identify areas where you can cut back. Small savings in categories like dining out, entertainment, and shopping can add up over time. Aim to save an additional Rs 2,000 per month by cutting non-essential expenses.

4. Increase Income

If possible, look for opportunities to increase your income. This could be through freelance work, part-time jobs, or monetizing a hobby. Even an extra Rs 5,000 per month can significantly boost your savings.

5. Utilize Windfalls and Bonuses

Any bonuses, tax refunds, or monetary gifts should go directly into your car savings account. These unexpected windfalls can accelerate your savings process.

Investment Strategies for Short-Term Savings
Given the short timeframe of 1 to 1.5 years, it's important to choose safe and liquid investment options. Here are some recommendations:

1. Liquid Mutual Funds

Liquid funds are a type of debt mutual fund that invests in short-term instruments. They offer better returns than a savings account and are highly liquid. You can withdraw your money quickly when needed.

2. Recurring Deposits (RD)

Recurring deposits are a safe investment option where you deposit a fixed amount every month for a predetermined period. RDs offer higher interest rates compared to savings accounts and are a good way to save regularly.

3. Ultra Short-Term Debt Funds

These funds invest in very short-term debt instruments and offer higher returns than liquid funds. They are relatively safe and suitable for short-term goals like yours.

Loan Considerations
When it comes to financing your car, it’s important to choose the right loan product and EMI structure. Here are a few tips:

1. Compare Loan Offers

Compare car loan offers from various banks and financial institutions. Look at the interest rates, processing fees, and prepayment penalties. Choose the one that offers the best overall deal.

2. Choose the Right EMI

Your EMI should not exceed 20-30% of your monthly income. Since your in-hand salary is Rs 40,000, aim for an EMI of around Rs 8,000 to Rs 12,000. This will ensure that you don’t strain your monthly budget.

3. Opt for a Shorter Loan Tenure

While longer loan tenures reduce your EMIs, they increase the total interest paid over the life of the loan. Opt for the shortest tenure you can comfortably afford. A tenure of 3 to 5 years is generally advisable.

4. Maintain a Good Credit Score

A good credit score can help you secure a loan at a lower interest rate. Ensure that all your existing credit payments are made on time and avoid taking on new debt.

Managing Finances Post Car Purchase
After purchasing the car, it’s crucial to manage your finances effectively to ensure you don’t fall into debt. Here are some strategies:

1. Budgeting

Create a detailed monthly budget that includes your EMIs, regular expenses, and investments. Stick to this budget diligently to avoid overspending.

2. Emergency Fund

Ensure that you maintain an emergency fund equivalent to at least six months of your expenses. This will help you manage any unexpected financial setbacks without affecting your loan repayments.

3. Continue Investing

Once you have purchased the car and adjusted to the new EMI payments, gradually increase your SIP contributions. This ensures that your long-term financial goals remain on track.

4. Regular Financial Reviews

Conduct regular reviews of your financial situation. This helps in identifying any potential issues early and allows you to make necessary adjustments.

Final Insights
Saving for a significant purchase like a car while managing family responsibilities is challenging but achievable with disciplined planning. Aim to save around Rs 3.4 lakhs to Rs 5.1 lakhs for the down payment over the next 1 to 1.5 years. Utilize safe and liquid investment options to grow your savings.

Maintain a good balance between your monthly expenses, savings, and investments. After purchasing the car, focus on effective budgeting and continue to prioritize your long-term financial goals. With careful planning and regular financial reviews, you can achieve your car purchase goal without compromising your financial stability.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner,

www.holisticinvestment.in

Ans: ou have a strong financial base with liquid investments of about Rs. 13.6 crores and an excellent monthly income, so you are on a good wicket. Let's see if buying a luxury car makes sense.

Present Financial Situation
Monthly Income
You have a monthly income of Rs. 8 lakh, which shall definitely ensure a comfortable lifestyle.

Investments

Mutual Funds: Rs. 8 crore
PMS: Rs. 4 crore
Provident Fund: Rs. 1 crore
Stocks: Rs. 50 lakh
Cash: Rs. 10 lakh
Assets

Home: Rs. 1.5 crore
Car: Kia Seltos SUV
Insurance Coverage

Term life insurance of Rs. 1 crore each for all family members and parents.
Comprehensive medical insurance of Rs. 1 crore each.
Retirement Planning
Target Corpus
You aim for a corpus of Rs. 20 crore in 5 years. Given your current investments and SIP, this target is achievable.

Monthly SIP
You are investing Rs. 5 lakh monthly. This disciplined approach is excellent.

Luxury Purchase Consideration
Mercedes-Benz Purchase
You plan to buy a Mercedes Benz for Rs. 65 lakh.

Financial Impact

Depreciation: Cars are a depreciating asset. The value of the car will reduce over time.
Maintenace: Luxury cars are expensive to maintain.
Opportunity Cost: This money, if invested, will yield a substantial return over time.
Can You Afford It?
Current Assets
You have ample assets and no liabilities. Your liquid investments are as high as Rs. 13.6 crore alone.

Future Goals
You want to have Rs. 20 crore in 5 years. Your current savings and investments are on track to reach this goal.

Income Stability
Rs. 8 lakh per month gives you a great deal of financial stability. This income can sustain your current lifestyle as well as a whole host of future goals.

Analytical Insights
Gimme Some Luxury
Your sound financial position gives you the wherewithal to splurge a bit, but keep an eye on its impact on the future.

Needs vs. Wants Balance

Needs: Securing retirement and your child's future
Wants: Living life's good life without any financial insecurity
What the Expert Says
As a Certified Financial Planner, I will ask you to consider benefits against costs. You will have to consider the depreciation and maintenance expenses of the car.
Reinvest the Amount
Now, think of reinvesting Rs 65 lakh. It can generate better returns and provide additional security to your retirement corpus.
Balanced Approach
You can also look at a balanced approach. Part of the amount can be used for luxury and the rest for investments.

Final Insights
You have built up a robust financial foundation. With assets and no liabilities, you can afford to buy a luxury car. But do consider the long-term impact on your finances. The balancing act between luxury and financial security will give you a comfortable future.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Let’s first look at the assets and liabilities you currently have:

Provident Fund (PF): Rs 45 lakhs
Fixed Deposits: Rs 50 lakhs
Mutual Funds: Rs 10 lakhs
National Pension Scheme (NPS): Rs 6 lakhs
SBI Elite Scheme: Rs 10 lakhs
Axis policy: Rs 5 lakhs (paying Rs 1 lakh per year for 10 years)
SBI Mutual SIP/Insurance: Rs 6 lakhs
Plot of Land: Rs 50 lakhs
Home Loan: Rs 9 lakhs (EMI of Rs 25,000 per month)
You also mentioned that you have an additional Rs 10 lakhs which you are considering for a down payment on a new car worth Rs 27 lakhs.

This is a very good base of financial assets. Let’s assess whether buying a car right now is a wise decision based on your current financial standing and future needs.

Evaluating the Car Purchase

Buying a car is often an emotional decision, but it’s also a big financial commitment. You’re considering a down payment of Rs 10 lakhs for a car worth Rs 27 lakhs. Let’s break down the key factors:

Liquidity Impact:
You plan to use Rs 10 lakhs from your available funds for the car down payment. This amount is a significant chunk of your liquidity. Reducing your liquid cash could make it harder to cover any unexpected expenses.

EMI Commitment:
If you finance the remaining Rs 17 lakhs, your EMI could be between Rs 35,000 to Rs 40,000 per month (assuming a typical car loan tenure and interest rate). This would add to your current EMI of Rs 25,000 for the home loan, bringing your total EMI commitment to around Rs 60,000 to Rs 65,000 per month.

Total Monthly Outflow:
You may want to consider your total outflow, including living expenses, EMIs, and any other financial responsibilities. It’s crucial to ensure that your monthly cash flow can comfortably accommodate all these commitments without stretching your budget.

Asset Depreciation:
A car is a depreciating asset. Over the years, its value will decline, and it will not contribute to your wealth-building efforts. Meanwhile, your existing investments like mutual funds, PF, and NPS will continue to grow in value.

Alternative Use of Funds:
The Rs 10 lakhs down payment could alternatively be invested in a high-return investment option. Over time, this could help you achieve long-term financial goals more effectively.

Assessment of Current Loan Situation

You currently have a home loan of Rs 9 lakhs, which is manageable. The property’s value (Rs 1.2 crore) far outweighs the loan, which is positive. However, adding another loan in the form of a car EMI will increase your monthly financial burden.

At present, you are paying Rs 25,000 per month for the home loan. If you go for the car loan, the total EMI commitment will rise significantly. It’s important to ask yourself if you are comfortable with this higher commitment.

Insurance Policies: Reviewing SBI Elite Scheme and Axis Policy

Both the SBI Elite Scheme and Axis Policy require attention. These are investment-cum-insurance products, and such products often do not deliver the best returns. They also come with higher costs and offer limited flexibility in terms of withdrawals.

SBI Elite Scheme: You have Rs 10 lakhs invested here. While it may have some insurance benefits, the returns might not be competitive compared to mutual funds or other pure investment products.

Axis Policy: You are paying Rs 1 lakh annually for this policy. Over 10 years, you will have contributed Rs 10 lakhs. It’s important to check if the returns are aligned with your goals.

Consider reviewing both policies with the help of a Certified Financial Planner to assess if continuing them is beneficial. If they are underperforming, you may want to consider surrendering them and reinvesting in more flexible and higher-return instruments like mutual funds.

Asset Allocation and Diversification

You currently have a good mix of assets, including:

Fixed Deposits
Provident Fund
Mutual Funds
NPS
Real Estate
However, it’s important to ensure that your asset allocation aligns with your risk tolerance, liquidity needs, and future goals. For instance:

Fixed Deposits:
While safe, they offer lower returns compared to mutual funds or equities, especially in the long run. As inflation rises, the real returns on fixed deposits diminish.

Provident Fund and NPS:
Both these assets offer long-term growth but have limited liquidity. They are ideal for retirement planning, but you cannot rely on them for immediate needs like the car purchase.

Mutual Funds:
Your mutual fund investments of Rs 10 lakhs are valuable growth assets. However, you could review their performance and consider reallocating to more actively managed funds for better returns.

Car Purchase: Is It a Risk?

To answer your direct question: Is buying the car right now a risk? Based on the analysis, here’s what I think:

Monthly EMI Burden:
The new car EMI will significantly increase your monthly outflow. It’s essential to ensure that you can comfortably afford this without compromising your savings or future investments.

Impact on Liquidity:
The Rs 10 lakhs down payment will reduce your liquid reserves. You still have FDs, but those might be tied up for long periods or may not give the best returns if broken early.

Wealth-Building Impact:
Investing the Rs 10 lakhs in growth assets like mutual funds could help you build wealth faster. A car, being a depreciating asset, will not contribute to wealth creation.

If the car is a necessity and you have carefully assessed your cash flow, you could go ahead. But if it’s a desire that can wait, consider postponing the purchase. Instead, focus on building more liquid wealth to cover future goals like your home loan repayment or emergency needs.

Final Insights

Buying a Rs 27-lakh car is a significant financial decision. While you have a strong financial base, the added EMI burden and liquidity impact should be considered carefully.

Your existing investments are solid, but there’s room for optimization. I would recommend revisiting your insurance-cum-investment policies. A Certified Financial Planner can help review these and guide you toward better investment strategies.

Consider delaying the car purchase if it’s not urgent. Use the Rs 10 lakhs for investments that could offer better returns over time. This way, you’ll strengthen your financial position and have more flexibility for future big-ticket purchases.

In short: Evaluate your monthly cash flow and risk tolerance. If you're comfortable with the increased EMI, go ahead. But, if you feel stretched, it’s better to wait and focus on building more liquid assets.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment