To Buy a Car or not to Buy a Car?

Haven’t you been curious why car down payments are becoming considerably low and financing approval becoming faster than ever? Hmm. Well of course all the banks would love to stash some cash away from all of us. How? Through the interest that we pay when we take some loans.

Few months ago we should have bought a car through bank financing. I already gave the reservation fee to the dealer and determined to get the car soon. But I did some research and compared financing schemes so I came up to a conclusion of not buying a brand new car today. I got the reservation fee and went away. ;)

I’d like to illustrate my point by taking a closer look at payment schemes presented by the sellers.

The 60 months pay scheme

The difference of the loan amount from that of the total payment is the total interest paid by the buyer. It is obvious from the illustration that the higher the down payment, the lower the interest paid in the long run. And if for instance I would take out the car by taking an 85% loan, I would have easily burnt almost 250000Php in interest alone.

The variable number of months pay scheme

From the illustration above, we can sum up that the faster you pay for the loan the lesser the amount of interest paid. But of course, a person paying 52000Php in amortization should have more than a hundred thousand salary per month to get in the deal. (Not me.)

How about we take a look at it on the other side?

Assuming that the car price is your final goal and you have initial savings equal to the desired down payment. Question is, how long should you invest the money (monthly amortization) at 12% interest rate so that you can come up with the amount needed to complete your final goal?

From the illustration above, it would only take you 3 years and 2 months (38 months) to complete the goal. This time interest becomes your best friend and it will work for you day and night.

Let us take a look at the other example. For instance you have 30% of the final goal already, how long do you need to save to achieve your final goal? 

It is noted from the example above that when you increase your monthly investment by a few thousands, you can achieve your final goal the sooner.

Where did I get 12% interest?
The 12% interest was derived from the average performance of Mutual Funds and other legit investment facilities in the Philippines. Click here for reference.

In conclusion
People who can wait and know where to put their money can have a very good advantage over the interest charges. Diligently saving and investing your hard earned money can be your ladder to achieve your dreams faster. It is also important to weigh your preferences. As the saying goes, "Patience is a virtue."

*Credits to Paul for helping out on the computation.

Please note that this post is based from our experience and how we deal with money matters. =)

It is really not a matter of how much you earn

It really makes me sad when I encounter somebody who earns a lot (more than what I earn means 'a lot' for me) but who just saves in a bank and who thinks banks are the greatest investment facilities. I have nothing against banks. It's just that I don't recommend it as an investment facility. Mind you, banks are not investment vehicles. They are just there to cater for our emergency funds.

Let me ask you, how much is the salary of a manager? 50 thousand? 80 thousand? 100 thousand? Or even higher. No doubt their salary is way way bigger than mine. But let me tell you, the sad part when you earn more is you intend to increase your lifestyle to suit your status. The mindset goes like this, "Oh, I didn't have a good time when I was an 'ordinary employee'. Now that I'm a manager I should enjoy a lot. Anyway the company is there to feed me." And there goes the spending.

On the other hand, if the manager is a saver but is afraid of other types of investments like mutual funds and stock market then there is still a problem. Let me show you a computation so that you will understand. For example, the manager can save 50 thousand pesos per month but puts his/her money in a bank earning one percent (1%) per annum. The employee, on the other hand, can save 10 thousand pesos but puts his/her money in an investment facility which earns twelve percent (12%) per annum. Let us assume that the manager's age is 40 while the employee is 25. The manager has 20 years more to save while the employee has 35 years more before retirement. (Note: I am assuming that they will both retire at age 60.)

From the table above, it is clear that the 'regular employee' who saves lesser than the manager has a whopping 58 million pesos worth of retirement fund while the manager who saves in a bank has a retirement fund of 13 million pesos.

It only shows that, it is not important whether you have big money or small money. The thing is, you regularly save and invest in the right vehicle. Thirteen million is not bad. But if the manager knows the right facility then he could have accumulated more.

~till then