Funding your Dream Car

Financial Goals

In this article you will learn about

  • Set a target date for your car
  • Investing towards a car
  • Buying car without debts

Each one of us has a desire to own a dream car; a car in which you would like to go for a spin with the family, friends or just on your own. Thanks to the numerous car loan schemes available, you can walk into any car showroom and drive out with your choice of car as long as you have a good credit score. A car loan is convenient and instantly allows you to realise your financial goal; but it comes at a cost – the EMI (equated monthly instalment).

Any loan comes at a cost. In case of a car loan, this is a double whammy. Firstly, a car is asset depleting because the moment you drive it out of the showroom, its value starts depreciating. Second, when you borrow for a period of time, there is a cost of borrowing – the interest rate at which the money is loaned to you. When making the purchase decision in case of a car take into account the cost of loan as well as the cost of the car and its utility in your life.

Unless there is an emergency or the ownership of a car plays a role in your profession; you could plan to buy a car over time. For instance people in certain type of sales jobs may find the presence of car to aid in their work and complement their income. You could actually set a plan to fund your dream car. Start by fixing a year and month in which you need the car and settle for a car model at a price that meets your needs. When buying a car consider its running cost (fuel efficiency), maintenance costs (repairs and service) and any other cost such as insurance.

Having decided to own a car few years down the line, zero down on the approximate price band in which your dream car falls. Zero down on a target sum in which you could buy the car. Equipped with these two factors – the goal sum and the goal year, you could use any of the online goal calculators to know how much you need to save each month to build the necessary corpus. These monthly savings would be based on the anticipated returns from the investments you make out of these monthly contributions.

The monthly savings into a mutual fund earmarked towards your goal for the car purchase is nothing but a systematic investment plan (SIP). You could assume the SIP to be like the EMI you would be paying had you taken a loan; the difference being with the SIP you will be working towards self-financing your car in the goal year. By deferring your goal to purchase by a few years, you will avoid borrowing to purchase the car. And, by saving and investing towards the car purchase, you will be able to buy a car of your choice with your own savings.

Once you know the monthly savings needed for the goal; you could build a portfolio of a few funds which help you grow your savings wit1hin risk grade you are comfortable with. If the car purchase is beyond three years, you could look for a dynamic asset allocation type hybrid fund. If the goal is earlier than that a combination of debt funds suitable for such a time frame like an FMPs, medium duration debt fund or medium to long duration debt fund or corporate bond fund will be suitable. (Link to article on debt funds)

Having planned the car purchase and funding it on your own, you do not have to worry about the burden of servicing a loan. The chance of a good bargain is also possible at the time of actual purchase when you are paying in full for the car.

Next steps

  1. Use a car goal calculator to arrive at monthly savings
  2. Select a suitable portfolio of funds towards the goal
  3. Track the performance of your investments

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