For many Indians, owning a car is one of life’s big milestones, but many of them hit roadblocks trying to make it happen. They often struggle to save or invest for a car because they lack financial knowledge and a well-defined financial plan. Some see cars as social statements, and end up aiming for big, fancy cars that cost way more than they can actually afford. Another big mistake people make is that they simply save a large amount of money in a savings account, without realising that their money will lose value due to inflation. Investing will not only help you beat inflation but also help you amass the funds you need much more quickly. In this blog, let’s chat about how you can steer clear of such common slip-ups when buying a car and look at the steps in investment planning to make getting your dream car easier.
Section 1: Setting Financial Goals
Clear and realistic Financial Goals form the foundation of any solid financial plan, and the case is no different when your goal is to buy a car. You likely already have a preferred model and company in mind, but just aiming to save for it is not enough. There are also different ways to buy a car. You can take a loan or buy it outright. You might want to go for a used car over a new one. Each option demands a different approach. First, assess your current financial situation by reviewing your income, expenses, savings, and debts. A thorough examination will let you know exactly how much you can afford to spend. Now set a specific goal – Define how you’re going to buy a car and whether or not it will be a new purchase. Set a time limit within which you want to own the car, and that should give you a monthly savings target.
For example, let’s say a guy wants to buy a Tata Punch priced at Rs. 6 lakh in twelve months. If he saves Rs. 15,000 each month, he will be able to afford a 30% down payment of Rs. 1,80,000. How much one can save each month depends on their unique situation, so it’s important to not compare yourself to others. It’s also easy to get carried away by dreams of buying an expensive car or buried under the pressure of societal expectations, but staying realistic about your targets is how you achieve your dreams. People jump in and forget about how hard loans can be to pay off, and how that’s not the only expense your car will demand. It will need regular maintenance, petrol, insurance, and taxes. These expenses will add up so it’s important to factor them in as well.
Section 2: Creating a Budget
Your financial goal will give you a savings target, but whether or not you achieve it consistently depends on how good your budget planning is. Divide all your expenses into three categories – Essential expenses, non-essential expenses, and savings. The general guideline is to spend 50% of your income after taxes on essential expenses such as food and rent, 30% on non-essential expenses such as entertainment, and the remaining 20% should be saved. You have already calculated how much you need to save each month, but beware, if it takes up a high portion of your income, say 35%-40%, that could spell trouble. It likely means your savings goal was unrealistic.
A high savings allocation also means you will have to make serious changes to your lifestyle, and that is not a sustainable way to save money. For sure, the non-essential category will help you identify areas where you can make some cutbacks to save some extra cash, but make too many cuts and you’ll find it very hard to stick to your budget. Creating a budget is one thing, and sticking to it is another. Again, your savings target along with your budget should be realistic and attainable.
Section 3: Exploring Investment Options
Alright, so now that you are consistently saving a set amount of money each month, it’s time to put it to work for you. Based on your time horizon, there are two ways you can look at investing to buy a car – as a short-term goal and as a medium-term goal. Let’s take a look at the best investment options for each type –
Short-term investment options to buy a car:
For whatever reason, you might want to buy a car as quickly as you can, so in the short term, you will have to invest large amounts of money each month. The best course of action in such a situation is to invest in debt financial products, such as debt mutual funds. In the short term, if you suffer any losses, you won’t have too much time to recover, so it’s best to invest in reliable debt vehicles. While they don’t offer very high returns, they ensure a level of stability. Debt mutual funds can give you a stable rate of return, with very low risk. Debt mutual funds invest in securities such as bonds and one can invest in them through an SIP investment or by lump sum. They also have a lower expense ratio, so they can provide investors with a higher return than bank FDs.
Another option is to invest in multicap equity mutual funds, but not too heavily. These funds offer high returns, but also carry high risk, so one can allocate a portion of their savings here for capital appreciation. All in all a mix of debt and equity works well in the short term, with a much larger portion dedicated to debt vehicles.
Medium-term investment options to buy a car:
In the medium to long term, however, you get to take advantage of the power of compounding, since time is on your side. The best option in such cases is equity products, as they offer high rewards but are high risk too. One more benefit is that if you do suffer early losses, you will have time to make them back, which you don’t get in the short term. Direct equity can be very profitable, but those who do not possess significant knowledge and expertise will find it very hard to make a meaningful profit from it and will waste their precious time. Mutual funds that invest in equity however are an amazing option, as well as easy to invest in. One can start investing through SIPs or lump sum digitally and can make use of tools such as a SIP calculator to determine if the monthly SIP is suited to the time horizon.
Section 4: Diversification Strategies
A big advantage you get with mutual funds is that not only are they managed by expert fund managers, but also that they invest in a variety of stocks. This means that fund managers do not put all their eggs in one basket and diversify. Diversification is the process of identifying and investing in different stocks so that even if some stocks fail, you get a net positive. It minimises risk and saves the investor’s money. If you don’t go for a mutual fund and decide that you want to participate directly in equity, remember to spread your investments across different stocks and assets.
Section 5: Time Horizons and Risk Tolerance
Time horizon means the length of time you expect to hold an investment before needing to sell it or liquidate it. Risk tolerance, on the other hand, refers to the level of danger or fluctuation in returns that an investor is willing to take. These concepts are related and they are vital for developing an investment plan that aligns with your financial goals and circumstances. As we discussed debt and equity above, we mentioned that debt is less risky and equity carries higher risk. It’s very important for you to assess how much risk you are willing to take before making any decisions. A moderate strategy would be to invest in hybrid mutual funds, which also combine debt and equity aspects to give a more balanced option. The more time you have, the more returns you’ll earn as your investment strategy can be really aggressive. Start investing to buy your new car as soon as you can.
Section 6: Monitoring and Adjusting Investments
In life and the world of finance, things are always changing. Remember, investment planning is a continuous job. You have to regularly monitor your investment progress. Keep making adjustments based on changes in your financial situation or market conditions. Keep an eye on economic trends and financial news and stay informed. Consult with an investment planner who can help you pick the most suitable options that align with your financial goals, risk appetite, and time horizon. An investment planner can also enable you to make informed decisions and optimise your overall investment strategy.
Section 7: Additional Saving Tips
Here are some tips that can help you save better and quicker:
- Make savings a priority. Don’t save after you spend, but rather spend after you save.
- Try to minimise your non-essential expenses in a way they don’t affect your lifestyle too much. Buying a car is a big deal for most people in our country, so of course some sacrifices will have to be made. However, too many sacrifices can cause stress and demotivation.
- Saving money is a habit. If you are not in the habit of saving money, know that it might take some time to build it. Don’t be discouraged by slow progress. Keep saving and you’ll get there eventually.
- At the same time if you have any bad and costly habits such as impulsive spending, work on improving them.
- If you don’t have an emergency fund, consider building one because it offers many advantages. An emergency fund is a reserve of cash that you build separately with at least three to six months’ living expenses. This ensures that in times of emergency such as an unexpected medical bill or a loss of job, you can land on a financial safety net. It will prevent you from taking debts, and prematurely liquidating your investments. It will also enable you to contribute to your SIP without problems.
- If you receive any bonuses from work, you can add them to your savings.
- You can also look into ways of generating additional income through freelance or part-time work in order to save more.
Investing to buy a car can seem daunting, but if you set realistic financial goals, create and stick to a budget, find the most suitable investment options, and regularly monitor your progress, you can buy the car of your dreams and more. Don’t hesitate to seek advice from investment planners, who can not only help you invest for a car but also help you realise your other financial goals. They can tailor your plan to your unique circumstances and goals, and help you optimise your overall investment strategy. The important thing to remember here is that the most powerful ally investing has is time. The sooner you start the sooner you will begin to reap the benefits of compound growth, build wealth, and secure a more financially stable future. Happy Investing!