My $15,000 Car is Still Going and I Haven’t Spent a Cent on it

Just for a brief moment, we’d like you to imagine driving around in your car – the sun on your face, the wind in your hair. On the passenger seat next to you there is a sizable paper bag filled with wads of crisp, freshly-printed $100 notes. You didn’t rob a bank or commit a crime. So how did you end up with all this cash?

In one of our first ever podcasts (Drive a $15,000 Car to Draw an Extra $717,000 in Retirement) we discuss how much money someone could save if they bought a second-hand car rather than taking out a loan to buy a brand new one. If they put that cash into their super instead, a lot of savings could be made. 

When we see clients with car loans, on average they are paying back $15,000 a year. They are probably driving around in their new car living the dream, but what could that money be doing instead? Well, first, we’ll tell you that if you put that money into super instead over 15 years, you would be able to draw an extra $717,000 when you retire. 

Yes, an extra $717,000.

In that early podcast, Michael talked about his car – a beautiful two-door Holden Monaro coupe – a car he loved, but one that just wasn’t practical for his growing family. In 2017, he sold it and bought a second-hand 2010 Ford Falcon G6 for $15,000 instead. 

On that day four years ago, he made a conscious decision not to buy a brand new car and take on another loan. 

On that day four years ago, he started putting that money into super, instead. Over four years, that $15,000 became $60,000. Money going into super is taxed at 15%, so taking off the $9,000 leaves Michael with $51,000. He has claimed the $60,000 as a tax deduction at a rate of 34.5%, which means he has received an extra tax benefit of $20,700 in the form of a tax return. Over the four years Michael’s money grew to $71,700 in accumulated benefit. On top of that he would also get a return on the money, which we haven’t gone into for simplicity’s sake.

That four years has flown by and Michael hasn’t driven around thinking ‘I wish I had a brand new car instead’ every time he hopped into the Falcon.

The decision Michael made on that day is a decision faced by people every day: I can either buy a brand new car today, or in four years’ time I can have all this extra cash. Seeing these figures on paper or in the bank doesn’t always feel real. This is why we want you to imagine it in a paper bag sitting next to you on a passenger seat. Imagine that paper bag is stuffed with notes to the value of $71,700. Which option would you choose?

As always, Financial Advisers aren’t here to tell you what to do – they won’t tell you not to buy your dream car. But will help you look at different scenarios and all the ‘what if’s’. For example, imagine how many holidays you could take later on in life if you had that extra cash. This is what is called opportunity cost, and it’s what Financial Advisers help clients to imagine.

Many justify buying a new car by saying that it will cost them less in repairs. Michael has not experienced that at all, and even if he did have some major repairs, the money it would cost him still wouldn’t compare to the savings he has made overall. 

Besides, Michael’s Falcon is a great car – he certainly hasn’t compromised on comfort, practicality or looks – he has simply bought a more affordable car. 

Let’s say, though, that you bought a lemon, and every two years you had to push the car to the mechanic and be told the car needs repairs of $600. Imagine taking out six $100 notes from the paper bag and handing them to the mechanic. On your drive home, you would still have over $70,000 in that paper bag sitting beside you. 

Even if it’s a major cost – like a broken radiator – and the mechanic charges you $1,500, you’ll still have more than $70,000 left. 

Taking it one step further, even if you decided to upgrade the Falcon using the money in that brown paper bag, you would still have money left over and be able to buy a decent car. In fact, even if you bought four complete lemons over the next 15 years you would still be better off.

Another thing we often hear is people dreaming of flying business class on their holiday. But let’s say you travel in economy for those 13 hours instead, and as you get off, the flight attendant gives you a paper bag full of crisp new notes worth $4,000. You can spend that as you wish on your holiday now. Would you do it?

Again, this is your opportunity cost. Financial Advisers are not here to make your decisions. They are here to make you see the paper bag.