Today, I’m in my mid-30s.
As I look back, where I am financially today was shaped by what I did in my 20s. So, if you are reading this and are in your 20s, fantastic. I want you to know that how you handle money today could significantly impact your wealth in your 30s and beyond. Hence, what you do in your 20s is crucial.
Typically, the key issue that one who is in his 20s faces today is:
‘Which of the two should I purchase first: a house or a car?’.
So, to address this, let’s work on a case study.
Assuming today, I’m 25 years old, earning RM 4k a month from my employment as an executive in the Klang Valley. I’m renting a room in a condominium unit at RM 500 a month as I’m from another state in Peninsula Malaysia. My living cost is around RM 2,000 a month (excluding rent cost). So, in this situation, what are my options when it comes to these “big ticket items”?
#1: Understand the Concept of DSR
Debt-Service Ratio (DSR) is a powerful financial concept.
But, it is possible that many are not aware of its existence and thus, could make financial decisions without understanding its implications. This could be the key difference maker between the “financially rich” and the “financially poor”. So, if you are in your 20s and know about DSR, this would be very helpful.
Simply put, DSR is a measure of how much loan instalments you are servicing in a month as compared to your level of monthly income. So, if you are paying RM 400 a month in loan instalments, your DSR is 10%.
DSR
= Monthly Loan Instalments / Monthly Income x 100%
= RM 400 / RM 4,000 x 100%
= 10%
Let’s assume, in general, local banks limit one’s borrowings up to 60% in DSR. In my case, I could service up to RM 2,400 in monthly loan instalments as I earn as much as RM 4k in monthly income. Based on the Rule of 200, I could borrow up to RM 480,000 in home mortgage.
Maximum Home Mortgage
= Maximum Monthly Loan Instalments x 200
= RM 2,400 x 200
= RM 480,000
In essence, my RM 4k in monthly income is worth RM 480k in home mortgage.
Of course, this is only a case if I have zero loan commitments. Next, we look at:
#2: How Does a Car Loan Impact Your Home Loan Eligibility?
Let’s assume I have saved up RM 20k in my savings account.
First, I could buy a nice car worth around RM 95k, where I would:
- Pay RM 9.5k in deposit for the car.
- Finance RM 81k with a 9-year car loan.
Hence, my car loan instalment is RM 1k a month. My DSR is lifted up to 25%. As for the maximum home mortgage amount that I’m eligible for, it shall reduce to RM 280,000. It is a significant slash from RM 480,000.
DSR
= Monthly Loan Instalments / Monthly Income x 100%
= RM 1,000 / RM 4,000 x 100%
= 25%
Maximum Home Mortgage
= Maximum Monthly Loan Instalments x 200
= (RM 2,400 – RM 1,000) x 200
= RM 1,400 x 200
= RM 280,000
What kind of properties could I buy in the Klang Valley, if I could only borrow up to RM 280k in maximum home mortgage?
Answers: flats, low-cost apartments and medium-cost apartments.
#3: What if I Buy a Low-Priced Car?
Alternatively, I can buy a second-hand car for RM 25k, where I could:
- Pay RM 2.5k in deposit for the car.
- Finance RM 22.5k with a 9-year car loan.
My car loan instalment is RM 350 a month. My DSR is lifted to 8.75%. In regards to my maximum home loan amount that I’m eligible for, it would be reduced to RM 410,000 from RM 480,000. Such reduction is not as bad as the one above.
DSR
= Monthly Loan Instalments / Monthly Income x 100%
= RM 350 / RM 4,000 x 100%
= 8.75%
Maximum Home Mortgage
= Maximum Monthly Loan Instalments x 200
= (RM 2,400 – RM 350) x 200
= RM 2,050 x 200
= RM 410,000
Obviously, there are more property options that I can choose from as I still have a maximum home loan eligibility of RM 410,000.
So, based on DSR and the Rule of 200, it is better to buy a lower-priced car. But, there is one more consideration as to why buying a lower-priced car would help one to afford a higher-priced property much faster.
This leads us to:
#4: Monthly Cash Flows + Future Cash Raised
Back to my financial situation where:
- I’m earning RM 4k a month.
- My living costs + rent = RM 2k a month
If I buy a RM 95k car, my instalment is RM 1k per month. So, if I include some of the main car-related expenses: petrol, parking, toll, repairs, maintenance … etc, it is possible that I could only save around RM 500 or less a month. At best, that would equate to RM 6,000 in annual savings.
If I maintain my annual savings at RM 6,000 over the next 5 years, I could amass around RM 30k in savings. Such an amount is still “not substantial” if I intend to buy myself a property. This may explain why many are:
- Less hopeful about their financial future.
- Attracted to “no-or-little money down” property deals.
- Depend on parental support when they want to buy a property.
But, if I buy a RM 25k car, my instalment is RM 350 a month. Let’s assume that I can keep my car-related expenses at RM 250 per month. So, my monthly cost in relation to the car is RM 600 a month. This would allow me to save RM 1.4k per month or as much as RM 16,800 a year.
Similarly, if I can maintain my annual savings at RM 16,800 a year, I could amass as much as RM 84k in savings. This amount is now “pretty decent” and it allows me to shop for a decent property in the Klang Valley confidently.
Conclusion:
So between a car and a house, my preference is to buy a house first. But if a car is a necessity, the next best option is to buy a lower-priced car first. Such will be helpful in boosting our monthly savings and hence, allowing us to raise funds to be used as a down payment, transaction and renovation costs for a property.
But, the question is: ‘Are there cars for sale at under RM 30k?’.
Well, all you need to do is to check the following websites:
So, what are your thoughts on this subject?
Please leave a comment below:
