What is the average South African’s biggest expense?

Jeeves bring me my cat foodYes that’s the question folks. What does the average (middle class) South African spend the most money on?

Their house? No but it’s a good guess. Houses are expensive, but this expense can cost you more than your house.

Beer? Boerewors? Biltong? No it’s not one of the 3 B’s either.

The wife? Hopefully not…

Cars? Well done, you’re so smart you could be a traditional governance minister! It is our cars. We spend great big juicy globs of money on cars. As big and juicy as the latest new heavily GMO’d grapefruit sized plums Woolworths recently invented (they’re delicious BTW, go science!).

I’d previously written about how choosing something like an Audi A5 over a Toyota Corolla could end up costing you a million dollars. It seemed to strike a chord, and has been my most read and liked article ever, but now I want to show you how you could be losing out on even more than that with a bad choice in car.

Let’s assume you are an average middle class gainfully employed professional who just bought an entry level manual BMW 318i, and managed to put down a 20% deposit of R100 000, you’d still be left with a monthly payment of around R8573 a month. Now that on it’s own is enough to pay the bond for an R850 000 apartment or small house, but it’s far from the total we can expect to pay for an entry level German car.

In addition to the monthly payment, we also pay for petrol, servicing, tyres, insurance, licensing fees and traffic fines, but there’s one other thing that takes more money than all of those, depreciation.

Thankfully, the AA calculator takes all of that into account. It puts the total cost per kilometer for that embarrassingly small engined 1500cc 3 cylinder German sedan at R7.25 a kilometer. Now if you like most people in South Africa drive around 20 000 kilometers a year, you’ll be spending an additional R12083 a month on your car.

That’s a total of R20656 a month. TWENTY THOUSANDS SIX HUNDRED AND FIFTY AND THREE RAND! Even supposedly intelligent people do this for the majority of their adult life. Are they completely out of our minds? I’ve also never met a person who downgraded their car. For most people every successive car has to be bigger, faster and more expensive, so those numbers would go up.

Imagine what could be done with all that money. It’s enough on it’s own to pay for a R2 million house, and if someone invested that for the last 30 years of your working career, they’d end up with a R33 million rand investment account, in today’s money. They could be rich, but instead they’d rather have some new car smell.

Now I’m guessing you’re going to say that your expensive car doesn’t cost you nearly as much, and that you know much better than the AA on what it costs to make payments, run, service and insure, and that it’s nowhere near that amount even though it has twice as many cylinders and a much more prestigious badge on it’s rump. But what you’re forgetting is that you haven’t paid for your depreciation yet. At the moment it’s just an IOU. A heavy bulging anchor of an IOU that is dragged around and added to wherever you drive and will be collected on one day when you sell.

Marriage - The most expensive way for the average man to get his laundry doneThat’s the beauty of depreciation. Even though It’s not something you can see and feel or a service you actually get, it’s still there, an invisible force burning through money as if it was that last forgotten lamb chop on the braai. And we voluntarily do it all the time. Even worse, we do it using debt. We go to a bank and borrow money at stupid interest rates to buy something that doesn’t exist and keeps us poor.

So what are we supposed to do? How can we avoid or at least minimise our costs of getting around?

Ideally, you can go car free and walk and bike everywhere. Even if it means spending more on rent or buying a more expensive house, you’re still likely to have change left over from the R20k you would be spending on your beemer.

You can also go car free for un-bikable trips by switching to an Uber. The total cost per km for most Uber trips is in the R8 to R10 per km range, so at an average or R9 a km the R20k you were spending on your own car will give you over 2200 Uber kilometers a month. That’s likely even further than you drive. If you only used Uber as much as the average the in the BMW example above, you’d still save over R5000 a month, and have time to get things done while you’re a passenger.

You can also consider a small motorbike or scooter. R20 000 buys you a decent small bike, and a scooter costs even less. And that’s it, you’ve capped your depreciation to under one months costs for your piece of Bavarian engineering. Plus you’re likely get back a large portion of the purchase price when you sell one day. While in use, they’ll take very little petrol, cost next to nothing to insure, save you a monstrous amount of time in traffic, and you can easily service them yourself.

There’s really very little downside, apart from death as my wife keeps telling me. I always reply that the reduction in traffic stress more than cancels out any accident risk factors through a reduced risk of a heart attack or stroke. Science backs me up with this too. Fortunately she seems okay with me riding my 85km/h electric bicycle!

But what if none of those options work for you, what if the only way you can survive and keep your job is to own a car. Is there some way to minimise the damage they inflict on our wealth?

Fortunately there is. The main culprits in the ludicrous costs are loan repayments and depreciation, both of which you have some control over.

The first issue is really easy to deal with. Buy a car cash. If you’re not buying your first car because there’s no way to get to your first job then you have no excuse. If you don’t have the money you can’t have that car. The end.

Then on to the depreciation problem. If you google, you’ll find loads of articles and charts showing pretty much the same thing. Cars lose the most value in their first year, the next most in their second and then a little more for all the rest of the years. Here’s one example of a chart like that from a website called businessfleet:

Typical depreciationThis graph from consumer reports shows pretty much the same thing, but they’ve also charted the maintenance costs on it:

Costs for running a carYes as expected, maintenance costs do increase over time, but fortunately their increase is at a far slower rate than your car loses value from depreciation. If you add all of the costs together, as consumer reports did, you find the last chart containing the overall costs per year of owning a vehicle:

Car owner costsWhat this confirms for us is that consumer reports makes the most boring charts on the planet, but it also shows that the first two years of owning a car are the most expensive. After that the costs decrease every year, and would continue to do so over the life of the vehicle. In a modern car this is expected to be 15 years or 300 000 kilometers, whichever comes first. So this can give you a strategy for buying, as I’ll show you with the steps I used for the last car I bought.

Step 1 Identify the car type you want
I wanted 5 seats, 4 doors and a separate boot. Of course, like most people should, I also wanted low fuel consumption, low running costs and the best reliability around. Out of that, I only considered a Toyota Corolla or a Nissan Almera. Yes I know they’re pretty boring Jap brands but I know their parts are cheaper. I eventually settled on the Almera mostly because my dad owned a Nissan dealership at the time so I thought I’d get a discount on parts and servicing. Of course he sold it a year after I bought the car, so it was regular dealerships for me.

Step 2 Predict how much driving you’ll be doing
Considering I don’t drive very much, maybe 12000km a year, getting a low mileage car wouldn’t be good value for money. If I bought a car with just 25000km on the clock, it would only have 180000km at 15 years old, well short of it’s 300 000km lifespan, so mileage wise it would be fresh, but it would be old in years.

That would mean I would be carrying extra driving inventory I couldn’t use. Because of that, I could buy a high mileage car. Mine had 67000km on the clock, which is very high for a 2 year old car, but after 12 years it’s now on 205000km. When it’s 15 years old it will be on about 240000km, so it will be closer to the right amount of use. I could have gone for an even higher mileage car.

Step 3 Shop
Because the car I chose had such high mileage for a 2 year old, it was much cheaper than the rest, and considering it had a full service history, and not even the slightest issue, I had a good feeling that it would be reliable. It has been, very reliable, I’d get in today and drive to Cape Town without a second thought.

Step 4 Maintain your car well and drive it for as long as possible

The little car that could - another bonus of driving an older cheaper car, you're not too worried to take it to interesting places, in this case, the mountains of Lesotho.

Another bonus of driving an older cheaper car is that you’re not too worried to take it to interesting places. In this case, the mountains of Lesotho.

I service my car as per the schedule. I also take it to the dealership, as they should know best how to handle it. There are many benefits to driving your car longer. As the value of your car drops, the insurance should drop too. My car costs me R260 a month to insure comprehensively. Depreciation also eventually levels out. My car has been valued in the low R40k region for the last few years, and seems to be staying there. And one final benefit to driving a cheap boring car… You know when people say someone is compensating for something with their fancy sports car? With my car they know I clearly don’t have that need!

So to summarise, and in order of importance:
1) Don’t drive, or drive far less
2) Buy a 2 year old car and drive it forever
3) Make sure what you buy is reliable and cheap to run
4) Invest any savings you have, not doing that would be idiotic

Now if you can’t figure out why you’re not getting ahead, you should probably go look in your garage.

*Just so I’m not accused of picking on BMW drivers, South Africa’s most popular car, which like the trump voting clowns in the USA is actually not a car but a bakkie, the Hilux specifically will cost you R9.11 a kilometer for the petrol double cab. That means all those drivers could be spending R23 500 a month on driving..

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  • Hey Patrick,
    I definitely agree with the point of the article – that buying and financing cars (ESPECIALLY new ones) are a massive financial drain. I also agree that over a lifetime this can run into the millions of rands and could well be a persons biggest expense.
    However I think it must be said that your value of R20656 per month is only for the first year where the depreciation is the greatest. Since depreciation is a usually a % of the cars value, and the value of the car decreases every year, the depreciation expense gets less and less each month (insurance could well decrease too). What is more suicidal is buying a new car every time the current car is paid off. If the same BMW is paid off and then driven for another 10 years (i.e. 15 year life) you will be far better off than buying and financing a new corolla every 5 years.

  • MoneyChief

    Totally agree, I watched as my father wasted tons of money on the latest beemers and mercs over the years. Today he has very little saved up for retirement. Still working in his 60s. I decided to do the opposite, for the first 8 years of my career I walked and cycled to work, then “upgraded” to a 5 year old Toyota RunX which I bought with cash. An extra benefit of cycling to work is that you can eat whatever you want and not get fat.

  • You’re totally right of course, otherwise there would be no point to buying a 2+ year old car as the depreciation would still be the same. Fortunately depreciation also compounds, but in the opposite direction of investments, so we get to buy pre-depreciated cars from all those suckers who sell them at the worst possible times!

  • I think people of our parents time were at a huge disadvantage.It was really difficult to get good honest financial advice back then and there wasn’t an easy way to share information like we have today.

    Your story reminds me about a joke where a guy taking a smoke break with his non-smoking colleague:

    “How long have you been smoking for?” the colleague asks.

    “Thirty years,” says the smoker.

    “Thirty years!” marvels the co-worker. “That costs so much money. At a pack a day, you’re spending $1,900 a year. Had you instead invested that money at an 8% return for the last 30 years, you’d have $250,000 in the bank today. That’s enough to buy a Ferrari.”

    The smoker looked puzzled.

    “Do you smoke?” he asked his co-worker.

    “No.”

    “So where is your Ferrari?”

    The only thing is the joke is unfinished. The non-smoker should have answered “It’s in the bank!”, which is where I imagine yours is too after all those years keeping your car costs down!

  • MoneyChief

    Lol, yes in the “bank” (ABSA stockbrokers), working hard so I don’t have to.

  • ThatFrugalGuy

    Hey Patrick,

    Thanks for a great article that hits the nail on the head!

    Just so you have an outlier in your data (and to humble brag if only just a little). My wife and I have spent, since varsity, a grand total of R97500 on acquiring cars. But we also sold cars for a total of R53000. We even rented the one car for a year while we travelled (instead of paying storage) for R14k. So nett acquisition costs are: R30500. We’ve had five cars in a combined 28 years of driving (14 years a piece). I had my one car so long I “made” money on it in nominal terms.

    We only drive second hand cars, mostly Japanese if we can help it, and we now never service at dealers. We only recently got proper insurance and then downgraded that to third party liability again recently. We hate insurance. Especially medical aid. We have enough savings to replace our super cheap cars anyway. In terms of maintenance, we’ve tried to find private mechanics who have Service Book stamps 😉 But now we have a super reasonable guy that sometimes doesn’t charge us if it’s minor. He bought our last car (at a higher price than we were thinking – by asking him what he thought it was worth first) so technically we made money off him 😀

    I now work at a place 2.5 kms away and I’m either gonna run to work or cycle there. There are so many ways to avoid wasting money on cars. My eldest brother has written off at least 5 cars, sometimes not his fault; but still that’s a lot of money to crumple up in a ball and throw away. I think he only recently cleared the debt of a brand new Audi A3, that he got T-boned in. The financial ghost of that car haunted him for years. My brother-in-law has had over 19 cars! Swapping, buying, selling, and crashing one almost every year!!

    I think people in SA are car mad. In truth we could do with better public transport. It’s coming though, MyCity Bus in CT is awesome and so is the Gautrain in JHB. I would honestly give up my car tomorrow if I could. Full Disclosure: I would buy a Tesla Model 3 brand new in a heartbeat. 🙂

    Keep up the great posts!

  • Haha yeah well done you’re definitely an outlier! Your family sounds like a nightmare in terms of car ownership though… Hopefully they’ll get their acts together one day and you won’t be left to bail them out when they’re old and in debt.

    I’m curious, do you have medical aid or do you self insure and use state hospitals? I’m covered by work for now, but there are a lot of very reasonable medical insurance schemes that cover travellers all over the world. I’ve often wondered if that would work out cheaper than our local ripoff medical aid schemes.

  • ThatFrugalGuy

    Thankfully they’ve all gotten a lot better lately. I think its a male phase some people go through… Hey there’s a reason First For Women exists right?

    We tend to minimally insure as much as possible. We have structural but no household. We’re minimalists so any house breakers would have to look around to find stuff. I could care less if they take my TV. We have a hospital plan only, no Multiply / Vitality. I max out what I can get for free by being active. Blam! We have Medical Savings without giving more money.

    I’ve used travel insurance before, which for some reason is very reasonable for what they cover – I mean how can Mountain Rescue by helicopter in Europe be packaged more cheaply than a dental check up here? My wife swears like a trooper when the topic comes up. I absolutely hate the misleading marketing message of “We cover 100%*”

    *Of our own made up rate which we never justify to you nor do we supply how it remotely relates to real world costs. We fully acknowledge that no one actually charges R94** for a consult.

    ** Honest medical refund we received on a reduced consult for a midwife (R480 instead of a gynie for R1800), when they promised to cover such consultations!!

    It’s very interesting idea – I honestly didn’t know it was possible to use travel insurance for that – perhaps a post is in order good sir?

    I’m personally interested in peer-to-peer based insurance. I worked at a major medical insurer, they are bloated with overly relaxed staff. That is why they are expensive. Smart tech answers to these problems make more sense to me. https://www.quora.com/How-does-Lemonade-P2P-Insurance-work

  • MoneyChief

    What car would you recommend for a mid life crisis car on a budget? Getting a brand new Porsche is obviously not a wise choice.

  • Сергій

    I’m reading your blog for some time. I started to invest because of you and will probably not sell my Almera never after this article. But could you explain what happens when you retire? You will have your shares which you invested in during so many years. But they are not money, you cannot buy food and pay your bills with shares. What are your actions then? Could you write “what would be your plan”?

    P.S. I had my friend who invited me to SA. He is now dead and he used to pay the toppest Discovery option (about 8 or 9k), it did not help him in his 42.

  • Color me purple

  • Hi Сергій. Most research point towards having 300 x monthly expenses or 25 x yearly expenses as having enough to retire. Once you reach that point, you can consume 4% of your investments every year, and due to their continued growth, you will never run out of money. What will actually happen is you’ll end up being significantly more wealthy over time.

    My plan, like most retirees who follow the 4% rule, is to use my dividends which make up 2% per year, and sell another 2% of my shares every year. I might write more about this sometime with some calculations, but a simple excel can show that if your investments grow at 5%, and you sell 4% every year you will never run out.

    Sorry to hear about your friend. Stories like that motivate me more to take care of the things you find important as early as possible.

  • Charlie

    Another big money waster that should make the list is cellphones… I always find it shocking how people cannot wait for the newest iphone to be released so they can take out a contract of R700/800+ just to have the latest technology. Personally i am quite happy with my iphone 5s and don’t see the need to have anything better or newer. Even if you just wait 6months to a year that same contract would already be much cheaper…

  • Erwin Kuschke

    Does anybody know if AA rates includes the specific maintenance for that car in case of breakdowns?

    i doubt that it does go to that level of detail, but is extremely important in this comparison.

    Main reason for me buying a 4 year old Hyundai i10 plus corolla was because they both keep their value well, and are relatively cheap to maintain. The same cant be said for a 6 year old Audi / Alfa / Uno for example

  • Bokkeman

    Great article. But, just like with houses, sometimes one can strike it lucky!
    I was fortunate enough to be in a position to buy a new car, cash, just before it was due to be replaced by a whole new model/range. Yes, it was that “most popular car which is a double cab” and they were selling at 20% discounts to clear inventory for the new model stock. As it turns out, there was an intractable problem with the clutch which the dealer tried – and failed – twice to repair, at which point I insisted on a new one. But by then they’d sold out of the old model and were forced to give me the brand new model.
    I’m now in the fortunate position, a year later, where I can comfortably sell it 2nd hand with its given mileage (higher than your annual usage at 24,000km) at about a 10% nominal profit over the original purchase price…
    Probably an experience never to be repeated and of course it could have turned out a lot worse financially for me – if everything was 100% fine with the car I’d have had to suck up the depreciation.
    Plus the windfall which enabled this purchase was also a bit of a once-off, so all in all a fluke and a serious outlier…

    Generally I totally subscribe to your strategy of buying 2-year-olds.
    It’s worth pointing out, in case anybody is tempted, that one should avoid even older, once luxury cars. The upkeep on these can seriously bite you in the ass as the years count by – yes, looking at you, Audi allroad…

  • Lupa

    Patrick be aware that most travel medical insurance specifically states that they don’t cover you in your home country (found this out when living in the UK – the policy we bought there wouldn’t cover us on a trip to SA because we are South African). They cover super expensive things quite cheaply because the risk of you actually needing to use it during your 2-week vacation is quite low.

    Super important in SA is also that medical aids and insurance products (including travel health insurance) are two different beasts. This is crucial because most (if not all) private hospitals will not accept the latter – you will have to pay cash upfront before your admission and claim it back from your insurer after. Be aware that if there is any possibility that you might need high-care or ICU the up-front deposit will be enormous (around 250k at the moment).

    Apart from the hospital you have to consider the doctor. The way it works here is that the doc is a private business, not a hospital employee, and he/she can refuse to take you on as a patient (emergencies are a different, but in that case you’d usually be transferred to a state hospital after stabilisation, and never actually admitted to the pvt hospital).
    What I have seen happen is that people assume they don’t need medical aid because they have cash in the bank, or one of those awful hospital cash back plans (which they think equates to medical aid) and are surprised to find that no specialist is willing to take them on as a cash patient when they need an urgent admission. Many specialists won’t accept cash patients because the medico-legal risks are higher (they are more likely to sue) and also because people simply do not understand how the costs can spiral and that by promising to pay cash they could end up losing their house (at which point they try to sue the doc to recoup costs, even though the bulk of the bill went to the hospital group).

    TL/DR: You need medical aid, even if you you have loads of dosh in the bank.

    Hospital plans probably offer the best value for money, as long as you realise you are going to cover your out of hospital costs yourself (don’t try make the casualty doc admit you for minor things so the plan will pay). Just read the fine print carefully, especially on the low cost plans, most especially on those offered by a certain very popular, very large company. They cover much, much less than many people realise, some of them only cover you for state hospitals.

    Of course all of this is moot if you are happy to go to a state hospital (although the bill there is means tested and might be quite high if you are earning well). Personally, I think the risks of relying on state are too high, if you can’t get an ICU bed/ventilator when you need one, or cancer treatment within a reasonably short time the consequences may be dire.