MONEY CLINIC | I pay R3 600 a month for my car. How can I save more?

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Consumers who reduce their savings due to the impact of the 1 percentage point VAT increase will lose out on compound interest, notes an expert.
Consumers who reduce their savings due to the impact of the 1 percentage point VAT increase will lose out on compound interest, notes an expert.

A Fin24 reader looking to save more money considers reducing her monthly car repayment. She turns to an expert to help steer her in the right direction.

She writes:

I own a vehicle for which I'm paying R3 600 a month. I have two more years until it's paid off. I'm looking to save more money each month by reducing my car payment. This would mean selling my vehicle for a cheaper one or refinancing my car. I'm not sure what to do.

David Bester, Director at responds: 

On average, a car depreciates between 15%-20% per year. So in other words - your money will be worth 15%-20% less at the end of the year than it was at the end of last year.

If you take the R3 600, on the other hand, and invest it monthly with a 7% return for 10 years, then your investment will be worth R626 583.64 at the end of the term.

Now, if that investment returns an average of 10%, then your investment will be worth R735 127.79.

The reason for this is because of compound interest working for you instead of against you.

If you use the R3 600 to pay for a car, on the other hand, then it will have the exact opposite effect because compound interest will be working against you since your car depreciates between 15%-20%.

Now I know that I have compared a 10-year investment with a car that will be paid off in two years. The point I am trying to make is that the money that you put to work for you today has a massive payout in the future if you invest the money in assets instead of liabilities (car).

So if your end goal is to save money, then this example above shows you that the most logical decision is to scale down, get a cheaper car and invest the money into assets working for you. 

Questions may be edited for brevity and clarity.

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Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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