Why a car is more expensive than a house.

Yesterday, I shared with you a study estimating the cost of car ownership at 198,000 pesos a year.

I also mentioned that I keep telling people that a car is more expensive than a house. Here's my explanation:

Let's compare the cost of owning a car and the cost of a house.

Given:

1. The car's purchase price is 900,000 where a down payment of 20% is given up front, the remaining amount is loaned and with an estimated 198,000 cost per year (based on the previous study).

2. The house's purchase price is 2 millions with a 20% down payment and the remaining amount is loaned for 15 years with a 13,000 per month amortization. I give an allowance of 24,000 a year for repairs.

Here's a comparison table:

To be able to compare, let's say we sell the house and the car after the 6th year. I estimate the car selling price at 480,000 pesos (I think it might even be less than that) and the house's selling price at 2,000,000 pesos (I think it might even be more than that). 

What we see is the CAR costs you two times MORE than the house. You have spent 660,000 pesos to enjoy your car while you only spent 270,000 to enjoy your house. We can conclude that the house is LESS expensive than your car.

This is why I keep saying a car costs more than a house.

Some of you will tell me. BUT I need the car. I can't go to work without it.

Yes, I agree with you. I don't want to commute with the very very VERY poor public transport of the Philippines neither.

The purpose of this article is to make you realize that a car purchase is a very major purchase. As important as a house! I want you to realize how expensive a car is before you rush to a dealership and buy your "dream" car. 

In my next post, I'll tell you what I do to minimize the cost of owning a car.

If you have any question, please email me at pinoyfinancialcoach@gmail.com

How much does a car really cost you?

I have always been telling my friends that a car costs as much as a house. They always thought it was a joke but it's not.

I came across a study published on imoney.ph. The study shows that an average sedan costs 198,000 pesos a year!

The 3 first expenses are:

1. Depreciation: 84,000 a year.
2. Finances charge: 42,000 a year.
3. Fuel: 39,000 a year.

This doesn't even includes the purchase price of the car. Only the depreciation and the finance charges (cost of taking a loan).

You might find that the depreciation is a bit over estimated but I don't think so. A common rule of thumb says that a car loses 12% of its value every year. If your sedan costs 800,000 brand new, after one year, it will lose 86,000 pesos.

The study shows that maintenance cost is only 5,000. I don't agree with it and I would estimate it between 10,000 to 15,000 a year since the car is CASA maintained.

This is a very important study so people will realize how big is the cost of owning a car.

On my next post, I'd like to compare it with owning a house.

Here's the link to the full article:

http://www.imoney.ph/articles/annual-cost-owning-car-philippines-infographic/?utm_source=facebook&utm_medium=paid-content&utm_campaign=annual-cost-owning-car-philippines-infographic

When buying real estate, don't get yourself sales talked

I have been listening to a few real estate agents and you need to be careful before you sign anything.

They will always show you a low monthly amortization but don't get fooled because here's why:

photo credit: Colourful Viewpoint via photopin (license)

1. The low monthly only covers the downpayment.

Let's take an example: you are being seduced in buying a 3 millions condo. They say your monthly amortization is only 17,000 pesos a month. Wow, what a deal! But here's the truth. The 17,000 pesos are used to fund the 20% downpayment. For 3 years, you'll pay the 17,000 to cover the 600,000 downpayment. After those 3 years, you'll need to find a way to fund the 2.4 millions left to pay. They'll only give you the keys of your condo when you'll show them the big amount.

Most likely, you'll need to go to a bank and get a loan to cover the 2.4M. If no bank is willing to lend you that amount, sorry to you...

The loan financing will cost you 26,000 pesos a month for 10 years so be ready to get a salary increase to pay for your condo.

2. The low monthly will be spread in a very long period.

Let's take the example of a in house financing where you can buy a house for 5,000 a month. Wow, 5,000 only, I can afford it. Are you sure?

What they don't tell you is that as soon as you sign, you'll commit yourself to pay for 20 years. 5,000 a month x 12 = 60,000 a year x 20 years = 1.2 millions.

But the house is only worth 500,000 pesos!

So, you committed to pay a 500,000 pesos house for 1.2 millions! Was it a "wise" investment?

Also, pay attention to the different fees they are going to charge you. Those fees are big and not very clear.

Just be really careful when a real estate agent tries to sell you something because they don't care about you. They only care about their commission...

Middle class vs rich people

I was thinking about what would be the difference between rich people and people from the middle class.

Both of them are educated and some very rich people are coming from a middle class or even poor families. So what would be the difference?

photo credit: Richard Branson thumbs Shankbone 2010 NYC via photopin (license)

The first one I see is rich people have their own business. They usually started their own small business and grew it up to a very lucrative one.

The second factor I see is they collect ASSETS. Meaning that with their extra money, they bought other businesses, real estate.

The best example is Warren Buffet who is one of the richest man in the world by buying stocks.

Let's focus on this. Even if your means are smaller compared to them, you still can "collect" assets.

Rich people buy other businesses but you can too! Just buy one small part of that company. This is called... STOCKS! Buy as much as stocks you can. It's the easiest way to own one part of a big company. Have you ever dreamed owning BPI, Ayala Corp or Jollibee? Just buy their stocks and you'll own a part of these successful companies.

You can also own REAL ESTATE. Buy your own house or condo. Even better, take a loan and buy a condo you rent out to someone else. That's the beginning of a real estate business.

You don't have 3 millions to buy a condo in Makati. That's ok, buy a farm land in the province and rent it out to a farmer or start a farm yourself.

As you see, you can also "collect" assets. It's not only for the rich but you must be resourceful in order to make it big.

Rich people are not defined rich because of their salaries. They are defined rich because of their ASSETS!

Real Estate vs Stock Market

Buying a piece of real estate is everyone's most sought after goal. It was a very important step for me too.

Nevertheless, there are so many misunderstood concepts about real estate and stock market.

At a PURE investment aspect, real estate always underperforms compared to the stock market. Even if you choose the most valuable piece of property in the most booming area of the country, the stock market will make you richer compared to a house or condo.

Let me illustrate this by this example.

In 1992, Mr. and Ms Santos have 2 millions to spend in a condo unit in Manila. At that time, Makati was not yet fully developed but showed potential. I'm sure we all agree that Makati area is the best real estate investment area in the Philippines for the past 3 decades.

Nowaday, Mr. and Ms Santos 100 sqm condo unit in the center of Makati Business district (2 minutes walking to Ayala Ave.) is worth 8 millions. Wow, Mr and Ms Santos have made a good investment that made a 6 millions appreciation. 

Let's take an other couple: Mr and Ms Sy. They have no interest of showing off with a brand new condo. They also have 2 millions to invest and they chose the stock market.

In 1992, the Philippine Stock Exchange Index (PSEi index that represents the biggest stocks in the country) was roughly at 1600. With 2 millions pesos, the Sy family bought the equivalent of 1250 shares.

As of today, the PSEi is at 7,881. Mr. and Ms. Sy still have their 1250 shares x 7,881= 9,851,000.

How to get started with stocks - part 2

Now that you have opened your COL Financial account, it's time to buy stocks.

The difficult part is to choose what you will buy.

I advise that you diversify your portfolio into 5 stocks that belongs to 5 different industry.

Here are some industry examples:

- Banking
- Food
- Real Estate
- Utilities
- Technology
- Mining
- Retail
- etc...

Here are the guidelines on how to choose a good stock:

1. The company has to sell something that we need. Bank, food, housing, water, fuel, etc...

How to get started in stocks

For you to start buying stocks, you'll need a broker. In the past, you had to hire a broker and call him to buy or sell stocks.

Since he's a middle man, the fees he charged were big and he would not pay attention to you if you are a small investor. This is why people think that only the wealthy can afford buying stocks. The money you'll need to spend on a broker makes it hard for lower and middle class to afford the stock market.

Fortunately, everything changed since the internet. Nowadays, your broker will simply be a website where you'll place your order.

The advantage are the following:

- lower fees
- no holding fees
- buy and sell from your computer any time you want
- no need to have a middle man who will place your order
- the websites are very complete with lot of information that will help you decide which stocks to buy

Please be aware that each time you buy and sell stocks, the broker will get a transaction order fee. This can cost from 20 pesos to 1000 pesos depending of your broker and the amount you're buying. On top of that, the broker will charge you taxes for each transaction.

The one that I use is COL Financial (www.colfinancial.com). I like it because there are a lot of information that helps me decide which stocks to buy and the fees are minimal. Moreover, I pay only 20 pesos on average when I buy stocks for an amount of more or less 5,000 pesos.

They also conduct seminars that are really useful for people getting started in the stock market.

To start your account, you'll need to fill some application forms and provide some documents. Once you get your COL Financial account, you need to wire money on that account for you to start trading. Here's the complete process: https://www.colfinancial.com/ape/Final2/home/open_an_account.asp

I would advice you to attend one of their seminar and open an account while you're there.

Have fun starting building your wealth!

Why do we need to invest in stocks?

People think about stocks as a mean for the rich to "win" money.

It's not true.

First of all, if you are interested in stocks to win money like if it was a casino or a horse race, you will lose most of the time. Even if you study finance like I did, you'll still lose money, most of the time. It's not because you're stupid but it's because you have the wrong mindset. If you have a gambler's mindset, you'll get some wins but also lot of loss. It's just plain probabilities and mathematics.

Now, if you have an investor mindset, you'll see that the stock market is not a casino but a way to speed up your savings as long as you use strategies that make sense.

And yes, the only purpose for the stock market is to invest your savings in order to make it grow.

Why is it the best?

1. In the long run, the stock market gives the highest returns. It even beats real estate.

2. It's liquid meaning you can buy and sell instantly. Compared to real estate, it takes more time (months) to sell a property while it takes seconds to sell a stock.

3. It beats inflation. People tend to forget that a savings account in a bank returns lower than inflation. It means that each year, your money in your bank loses its value.

Just for those three reasons, the stock market is the best tool to "park" your saved money in order to make it grow.

And no, you don't need to be rich to invest in the stock market. Nowadays, thanks to the internet, you can open a brokerage account online with a minimal operation costs. Anyone can do it :)