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Fancy new car or a fabulous retirement?

Mar 22, 2021

Khwezi Jackson, investment consultant at 10X Investments, explains how buying a fancy new car could sabotage your retirement funding.

Fancy new car or a fabulous retirement?Seeing a headline, ‘Spending R10,000 per month on a new car’, got me thinking: Why would anyone spend that much money every month to pay off a car? A car is a depreciating asset that is said to lose as much as 30% of its value as it is driven out of the showroom.

According to the Automobile Association (AA), “a new car loses value as soon as you drive off the forecourt and by the end of the first year will have lost around 40% of its value.”

Cars were made to help us get from point A to point B conveniently, but over time, they have become a symbol of success. We have come to associate how wealthy an individual is with how expensive and current their car is.

Many people fall prey to peer pressure. In order to appear successful to their peers, they end up with monthly vehicle payments that make up a large proportion of their expenses.

It makes much more sense to buy a vehicle that sets you back R4 000 or R5 000 a month on car finance repayments and put the rest of the money into a long-term savings vehicle.

Immediately, you are looking at saving R50 000 – R60 000 a year ‒ and that is just on the saving on the repayment. When choosing a new car people often neglect to consider the additional costs of owning an expensive vehicle: insurance, fuel, tyres, servicing and so on. A car with a monthly repayment of R10 000 can easily end up costing R15 000 per month all-in.

The real benefit of putting this money into a long-terms savings account is that it will grow over the years into a pot of money you might not have been able to imagine saving.

The satisfaction of watching your nest egg grow rather than watching the value of your wheels depreciate as your car ages will be a lot more fulfilling than being seen driving a fancy car (that your real friends will know you can’t really afford anyway).

Tax savings

Also, if you decide to put the money you save into a retirement fund, you can expect to get some money back from the taxman, who likes to reward smart money moves.

Whatever amount you put towards a retirement annuity or a pension or provident fund comes off the annual total earnings you are taxed on. If you earn R500 000 a year and contribute R50 000 to your retirement fund, you are taxed on only R450 000. (This illustrates the principle only – in reality your tax calculation will probably include other deductions too.)

At current tax rates, in the example above, saving R50 000 for retirement in a year would mean a tax deduction or refund of R18 000. This means that your R50 000 contribution (towards your own retirement) costs you only R32 000. That means a monthly contribution of around R4 200 to your retirement fund costs you a little less than R2 700 a month.

The more you can save from an early age towards your retirement, the more you will benefit from the positive effects of compound growth. For example, an investment of R50,000 when you are 25 years old is likely to be worth more than R2.5 million by the time you reach 65.

If we keep using our hard-earned money to respond to our short-term desires rather than our long-term needs – things like owning your own home and having enough money to live a decent life when you reach retirement age – we are setting ourselves up for a life of short-lived pleasure and long-term regret.

The next time you want to buy an expensive phone contract, car, furniture, clothes, or a holiday on credit, think of the impact that this decision will have on your future self.

Every rand saved today matters and will have a huge impact on your long-term success. Don’t indulge in short-term gratification but start saving now so you can enjoy the fruits of your labour at retirement age.

This article first appeared in City Press.

2 Comments

  1. Often a 25 year old will not have that example amount to save in the RA and the escalations can be hard on a pocket as the years go by especially when people are not getting 10%plus increases and then when children are a factor the amounts also starts looking impossible to put away. Unless you have a benefit with a company that helps you with 40-50% of the amount which in today’s world is not realistic. Intact medical aid is going through the roof and is costing more than an RA as medical aid is becoming a necessity as fines are imposed if not taken on immediately after leaving home and the family’s medical aid.

    Reply
    • It is obviously just a generalization to highlight the money decisions we come across each day and how to assess those. Very good point on the cost of medical aid – it is definitely getting way above our ability to keep paying.

      Reply

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Maya Fisher-French author of Money Questions Answered

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