By Khwezi Jackson
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.
“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,” according to the Automobile Association (AA).
Cars were made to help us get from point A to point B speedily 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 the car they drive is. Many people fall prey to peer pressure and their monthly vehicle payments make up a large proportion of their expenses just so that they can appear successful to their peers.
Surely, it would make 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, or maybe 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 a vehicle: insurance, fuel, tyres, servicing and so on. Often a car with a monthly premium of R10,000 can 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 see 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).
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 one is 25 years old is likely to be worth more than R2.5 million by the time one reaches 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 one’s home and having enough money to live a decent life when one reaches 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 your future self. Every rand saved today matters and will have a huge impact on one’s 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.
Khwezi Jackson is an investment consultant at 10X Investments
PERSONAL FINANCE