A Canadian's random thoughts on personal finance

Mar 31, 2008

Saving up for a car

I've figured out a way you can save thousands of dollars on your next car. I call it saving up for it. It's pretty radical, but if you bear with me, I'll explain how it works.

Say it's 2004, you live in Ontario, and you'd like to buy yourself a 2004 Honda Civic. It will cost you about $16,100, plus $2093 tax, plus $2049 interest if you finance it at 6% over 4 years. Total cost: $20,242.

Now, let's suppose instead that you just pretend to buy the car, but actually you decide you'll get by with your current rust bucket, and pay yourself the $378 car payment every month into a a bank account, and -- get this -- the bank pays you 3% interest! After 4 years, you can buy yourself the same car for $12,600. You save $3500 off the sticker price, and $455 in tax. Best of all, instead of paying $2049 in interest, you actually earn $1024 instead (though that income is taxable). Net cost: $13,600.

You save yourself almost $7000, and you end up with the same car. Even if your existing car costs you an extra $2000 in maintenance compared with the new one, you're still $5000 ahead. If you invest that, and it doubles every decade for three decades, you have an additional $40,000 in retirement, which is more than your final two RRSP contributions put together.

And that's why I'm still driving my family of four around in a 13-year-old coupe.

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