STRATEGY SHEET
July 2001
Car Buying Strategy
Worth $365,000
© Talbot Stevens
I've often said that the first and forgotten half of personal finance is how to be a better consumer. A trip to any bookstore will reveal that over 90% of the financial planning section focuses on investing.
Since everyone spends money, everyone can benefit from learning how to be a better consumer, regardless of their income or age.
One of the most powerful consumer strategies is to buy slightly used instead of new. Let's see how this simple approach implemented once can be worth $365,000.
Ted was looking at buying a $26,000 vehicle, which would have cost about $30,000 after taxes. Instead, he chose to buy a "previously owned" vehicle that still looks like new, but cost a total of $20,000.
For those who would miss the "new-car" smell, you can buy it for about $5 - every few months if you like.
Note that Ted saved more than $10,000. He also saved GST, PST, and interest costs on the $10,000 difference. Adding in the lower insurance costs, Ted's one decision to buy slightly used produced a short-term savings of about $15,000.
Here's where the link to the popular half of financial planning comes in. The 35-year-old has 30 years until the traditional retirement age of 65. If the $15,000 saved is invested in an RRSP that averages 10% returns, it is worth $260,000 thirty years later.
Middle-income Canadians contributing $15,000 would get a 40% tax refund of $6,000. Since this refund came purely as a result of using the RRSP investment strategy, the $6,000 refund could be reinvested in the RRSP without any sacrifice to increase the contribution to $21,000.
Middle-income Canadians contributing $15,000 would get a 40% tax refund of $6,000. Since this refund came purely as a result of using the RRSP investment strategy, the $6,000 refund could be reinvested in the RRSP without any sacrifice to increase the contribution to $21,000. Reinvesting the 40% refund would increase your retirement fund 30 years later by $365,000. Not bad for acting on one consumer strategy once.
If you're lucky enough to earn the historical average for global equities of 12%, the $21,000 RRSP contribution becomes $630,000 thirty years later.
More valuable than this illustration of the potential savings is why most people who buy used vehicles their entire lives won't retire as millionaires, and what you must do personally to realize this benefit.
Since most people finance their vehicle purchase, you, like Ted, probably don't have an extra $10,000 or $15,000 sitting around. To profit from this strategy, instead of financing a $30,000 purchase, borrow enough to buy a used vehicle and borrow an extra $15,000 for your RRSP. The total cost over a four-year period will be the same, but by committing to the forced savings plan, your retirement fund could be hundreds of thousands of dollars larger.
Do this once, especially when you are young, and you can enjoy new vehicles the rest of your life knowing that a negligible difference in the newness of one vehicle can make a huge difference to your financial security during retirement.