Are you driving yourself to financial stress?
By Jason Appel, Financial Planning Specialist at Chartered Wealth Solutions
We South Africans love our cars – whether it’s a sleek new model, a massive off-roader or a customised, souped-up machine. Globally, cars are seen as status symbols, and many of us feel pressured to keep up with the trends, often diving headfirst into purchasing one.
But how much do our immediate lifestyle decisions – like buying that dream car – impact our long-term financial health? Let’s take a closer look, using cars as an example, because they’re a highly emotional (and very expensive) purchase.
The dream car dilemma
Let’s say my dream car is a VW Tiguan. I went online to build my ideal version, and here’s what I found: the base price of a brand new VW Tiguan 2.0 TSI is R861 600. But of course, I wanted some extras – upgraded paint, rims, a better sound system, a sunroof and safety features. Throw in a sports package and my dream car now costs a staggering R987 850 (including VAT).
I have two choices:
1. Pay nearly R1 million upfront (which, let’s be honest, most of us don’t have).
2. Finance the car with a vehicle loan.
If I choose financing, my monthly payment would be around R19 500 for six years (based on a 12.25% interest rate). By the end of that period, I’ll have paid about R1.4 million in total. Suppose I’m denied finance; I could opt for a “more affordable” balloon payment option. It will then cost me R17 000 per month over six years, with R258 480 outstanding and immediately payable at the end of the contract.
But what if, in a parallel universe, a more practical version of me exists? He sits down with a financial planner and runs the numbers. Instead of buying the car, he invests R17 000 per month for six years, earning 10% per year. By the end of those six years, he could have a potential investment portfolio of R1.58 million (around R1.1 million in today's terms.)
The real cost of a car
Let’s see what happens if I stick with my dream car. After six years, it’s estimated to be worth around R438 000 as a trade-in (assuming 15% depreciation each year). Adjusted for inflation, that’s only about R300 000 in today’s buying power. Meanwhile, I’ll have spent over a million on financing and will be left with very little to show for it. In fact, I’d have lost nearly R800 000 in the process.
Sure, I could cover the balloon payment by trading in the car, but I’d be left with almost nothing to put towards my next vehicle.
The bigger picture: Freedom vs debt
What would an extra R1.58 million mean for my future? In a world focused on instant gratification, it’s easy to forget that retirement – and financial freedom – are real things we need to plan for. Investing this extra money at age 44 could mean reaching financial independence sooner. The funds could continue to grow, potentially providing a passive income or giving me the freedom to pursue new goals and live life on my terms.
We haven’t even explored other options, like adding additional funds to your home loan, investing in income-generating assets or starting a business. All of these are alternatives worth considering.
Flexible alternatives to buying new cars
I used an expensive car as an example, but the principle applies to most new vehicles. Luckily, more affordable brands in South Africa offer similar value without the hefty price tag. Plus, there’s always the second-hand car market, where you might find a vehicle that holds its value better.
In recent years, leasing a car has become a popular option for those who prefer to avoid the long-term financial commitment of buying a new vehicle. However, leasing can still significantly impact your budget, so it’s important to carefully consider this option and ensure you can comfortably manage the monthly payments before committing.
The trade-off
Every financial decision is a trade-off between today’s wants and tomorrow’s needs. Many of us live by the “you only live once” (YOLO) mentality, but that mindset can be short-sighted when it comes to our finances. A better mantra might be: “You only live once, but for longer than you think” (YOLOBFLTYT) – you need to plan to live to 100!
Do I still want the dream car? Of course. But not if it means sacrificing my future financial freedom. That’s why it’s so important to talk to an independent financial planner before making big decisions like this – because your choices today will shape the lifestyle you’ll enjoy tomorrow.