Sunday, July 14, 2013

Bangernomics

I've been hearing a lot about bangernomics recently - which essentially about finding the hidden gems of automobiles, cheap, high mileage, well looked after, used cars, not necessarily all three, loving them for as little as possible and then running them into the ground without worrying about high cost repairs.

This I think comes from the idea that when people looking to change their current car, should check to see how much the current car costs in terms of how much it costs monthly to fix, vs loan repayments and then only changing it when the monthly cost increases.

I believe this is somewhat of a false economy.

First off the simple premise, you don't get anything for free.

So even the banger has to be bought from somewhere, and even though you're not spending wild amounts of money, still has a cost to it. So it is a case of minimising that cost.

Now most will buy their banger with an MOT, use it for a year, sell it on.

But, my car cost me £3000, I've had it five coming on to six years, so, it's cost me £500 a year. I've had to add the odd exhaust on here and there and fix the brakes, but it's probably no where near what might have to be spent on a banger. So Im Ok with that.

I think most bangernomic experts would certainly agree I've got my money out of it.

But Im looking to upgrade my car before it becomes a money pit.

I consider spending money on a car you intend to get rid of and has no value at all, is complete false economy. While the repairs won't add up to a great amount, to me, it is akin to throwing good money after bad.

If we consider my current car is worth £500 and over the next four years, could need several improvements, clutch, brakes, tyres, exhaust, pas pump, 8 oil and filter changes, maybe a new wheel bearing, air con recharge and tracking and the serpentine belt, well, we're talking a good chunk of money. Lets be conservative and say £1000 (this year I've spent £200 on CV joints and Exhaust fixings anyhow sooo...)

The car I've got my eye on is £8500. Loan repayments would be £215 per month over four years or £10320 in total.

With road tax and fuel savings, Im estimating £700 minimum saving per year or £2800.

So the initial cost was £10320. With economy savings, Im looking at £7520

The residual car cost should be about £4500 if I was to sell the car there and then, so we're talking more like £3020 for the cost of ownership over four years.

Now in theory, if I don't need to tinker too much with the new car, ie, we don't expect the cam belt, bearings, exhaust, or other peculiar fault occur, when we can write off the figure that we know we would spend on our current car against the remainder cost of ownership.

So we're not looking at £2020 or less.

Of course practically speaking, we would need to account for servicing of new vehicle and any other emergency, so we shouldn't get ahead of ourselves too far.

Still £3020 over four years is £755 a year.

Extend that into five years of ownership and we're down to around £600.

Still that residual value of around £4500 can then be used on trade in for a newer car, and this time only needing a £4000 over two years.

Now Ok, this depends on the following factors:

1) No major problems with new vehicle
2) Being able to afford credit/pay up front

But I think it does make sense from this humble observer to keep trying to do slightly better each time. Sell sooner so you have a greater value car and the next car can either be newer but of the same money for half the cost (because you have the resale value of the old car), or you get another loan for the same value, and get an even better car....

And so on and so forth.

Simon