The decision on how much to spend when purchasing your car is possibly one of your most important financial decisions.
In fact, banks say that the main reason they turn down home loan applications is due to affordability, and the main culprit is usually car finance. Potential homeowners are spending far too much of their disposable income on paying off their cars.
Let’s take a scenario where you have the option to buy the top-of-the-range model for R350 000, or you can buy the same car but with lower specs for R250 000.
Over five years, with a finance interest rate of 10%, you will pay back R7 500 a month for the more expensive car, or R5 500 a month for the less expensive model.
If you decided to buy the less expensive model, you could invest the R2 000 a month difference. Within five years your car would be paid off and even if you earned just 4% a year interest in a bank savings account, you would have R130 000 to put down as a deposit on a home.
The power of compounding and long-term investing makes this calculation even more powerful.
Imagine if over the next 15 years, whenever you bought a car, you opted for the more affordable option and kept investing that R2 000 a month into a tax-free savings account.
If you earned an average return of five percentage points above inflation, within 15 years you would have accumulated R530 000 in today’s value.
Alternatively, you could use the R2 000 a month to boost your retirement by contributing to a retirement annuity. Over 20 years that would give you a retirement nest egg of R820 000 in today’s value and all those contributions would have been tax deductible.
Whether your goal is to save for your child’s education, a dream home or a comfortable retirement, it often starts with the choice of car you drive.