You are Here > Home > YouTube Channel > Video: The true cost of a fancy car

Video: The true cost of a fancy car

Apr 20, 2021

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.

3 Comments

  1. From my understanding, you’re suggesting us to buy the used or demo car instead of new one?
    Or to buy the same model car with less spec?

    Reply
    • Either really. Ideally a demo or used car as you benefit from the depreciation. But even a new car with different specs can differ in price significantly

      Reply
  2. Great advice

    Reply

Submit a Comment

Your email address will not be published. Required fields are marked *

Maya Fisher-French author of Money Questions Answered

Previous Articles

Video: Home loan tips

Buying a home is a major financial commitment. While the rate of interest on a home loan is lower than for other forms of credit, the length of time it takes to pay off the loan means you end up paying a hefty interest bill. By reducing your interest rate, you can...

Video: Being rich vs being wealthy

In his book The Psychology of Money, Morgan Housel writes about the difference between being rich and being wealthy. He defines riches as an income you earn, because that allows you to take on the debt to buy that R800 000 car or R40 000 handbag. Wealth on the other...

Video: Marriage and money

When couples marry, including Customary Marriage, they will automatically be married under community of property, unless they sign a separate antenuptial contract. This is seen as a way to protect women, especially those who stay at home to raise the family. The term...

Video: Your money behaviour

Have you ever wondered how your money behaviour compares to that of your peers? Where do they save? What do they spend their money on and how much debt do they have? On this edition of Money Matters, we chat to Akash Dowra, Head of Client Insights at Discovery Bank,...

Video: Five tax myths

Many employees don't understand the complex tax calculations made by their companies and they often question these deductions. According to tax specialist Tanya Tosen, there are five key things an employee needs to understand when it comes to their tax. Myth one:...

Struggling with car debt? Take action now!

According to the Experian Consumer Default Index, repayment of car debt has shown a marked deterioration as the extended Covid-19 lockdown puts South Africans under more financial pressure. Marc Friedman, CEO of car sale platform Weelee.co.za says that to avoid a...

Video: Money is different for women

Did you know that 80% of women will manage their own finances during their lifetime, either because they have remained single, gotten divorced, or been widowed? And the reality is that money and finances are different for women. Why? We know from South African salary...

Video: How to change your money habits

We know from studying history, that entire generations can share a similar money attitude or behaviour based on a major financial event that their generation experienced. People who grew up during the great depression of the 1930s, and those who grew up during World...

Competition will cut car ownership costs

Freedom to have your car repaired by a non-dealer will increase competition and reduce the cost of repairing and insuring your car. A couple of years ago when I was buying a second-hand car that didn’t have a service plan, I discovered what a rip-off my dealership had...

Tips for a successful used car purchase

Ernest North, co-founder of AI-driven insurtech Naked, looks at some of the steps to follow before committing to a used car purchase. Numbers from TransUnion show that South Africans financed around 79 000 used vehicles in the first three months of 2021, with lenders...

Pin It on Pinterest

Share This