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21 Nov 2014

CAR FUND IDEA

Welcome to new readers of this humble blog. I hope you enjoy it and learn a trick or two. Do ask questions if you so wish. Those who have been with us for the past few years may recall that I am fond of those various savings pockets. I am a true fan of the envelope system without the actual envelopes... story for another day.

I shared my car fund idea here about two years ago. I know, I also mentioned how a car is not an investment  earlier in the same year. But really, I cant change the fact that most of us love being behind shiny wheels with sheer comfort. Whilst I thought and still think its a bad idea to pay a car installment, a colleague shared how she finances her cars with me the other day. I was totally WOWED by it, and because I can never keep such secrets, I'm sharing that with you today.

She gave me a lift in her A Class Mercedes Benz for two days. I probably never mentioned how much I love a Merc. Yeah, I do! So after a small irritating chit-chat about work and its politics I managed to gather strength to pry on her personal finance issues. Have you noticed just how nosy I am? I am a curious soul and generally interested in people's lives. BUT... and a big BUT I do it out of love. This is why my colleague was open to giving me this tiny detail of her finances.

Car Fund Idea : Real life Story
Firstly, my colleague is approaching her retirement (above 55). She changes her cars every 4 to 6 years. She is definitely not like me. My car is seven years old going for 8 in the new year. I still smell the dealership in it...JOKING. My colleague doesn't like an old car, which is not a bad idea, given her amazing strategy.

She uses a very high deposit for each car buy. Her installments are therefore negligible. I love that. But it does not end there. She pays until she owes nothing on her car, like her current Mercedes Benz. She then drives it for another two years after the last payment, and continues paying the same amount into a separate savings or investment account. For interest sake, lets say her car installment is R5000 per month, though I suspect its way less. This is where I make a practical example for us to unpack her strategy.

Car Fund Idea Example 1
Monthly Deposit R5000
Interest 9.5%
Number of Years 2

In two years my colleague will be having more than R131,500 in her money market account. Let us go crazy and assume my colleague used Satrix Indi to save this amount for the past two years. The performance has been 32.72% over the past three years. This is getting exciting.

Car Fund Idea Example 2
Monthly Deposit R5000
Interest 32.72%
Number of Years 2
See how this ETF would have given my colleague more than R166,300 in the two years from the R120,000 she slowly invested over 24 months. How is that for a new car deposit??? Before you forget, she is also trading her old car in for some R100,000. That makes R266.000 deposit. Lets now go into a calculation of how much my colleague ends up paying monthly for her Mercedes Benz.

Cost of the car R400,000
Deposit plus Trade in value R266,000
Total finance required R135,140
Interest rate 9.25% (current prime rate 2014 November)
Term of loan 4 years
Initiation fee (Once off) R1140
Monthly service fee R57
Monthly installment R3450

Phew!!! I know what you are thinking. There it is fellow South Africans. I love playing around with these figures. Hope you do too. There is absolutely no reason for you to pay more for a car of your dreams. Just remember that you can do even better by investing the R5000 every month, just for retirement's sake.

How do you finance your own luxuries?
Blessed weekend!

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