Buy a car or pay off the bond?
“I am 29-years-old and I have managed to save R100 000 with which I was planning to buy a new car. However I realised that the car I am using is still in a good condition and is paid up and I can use it for two more years. I have a home loan but I do not intend to stay in the property for 20 years [period of payment] because I still see myself growing in terms of career therefore moving to new places. Is it a good move to put the R100 000 into the home loan though I intend selling in case I find a better job somewhere,” writes Julian.
Maya replies: If you have a car that is paid off and in good condition it would really be a waste of money to buy a new one. A new car depreciates on average by 25% as you drive it out the show room so you effectively throw R25 000 away.
So I agree with your decision. I know money guru Suze Orman holds onto her cars for 10 years. Personally I believe that the whole “sell your car once the car plan runs out” argument is a complete marketing scam. Most cars will service you very well for 10 years and the maintenance costs are nowhere as high as the interest payments or devaluation on a new car.
If you are planning on selling your home, putting R100 000 into it now will save you on interest payments and you will have a bigger deposit to put down on your new place—so that should not stop you.
The question is whether you have any other savings over and above this R100 000. You need to have a balance between paying off your home and building up an asset base through other investments.
If for example you invest this money for 10 years in a portfolio that provides a return after inflation of 7%, then you would have R200 000 in today’s value—basically doubling your money. If you take inflation into account the amount is around R330 000. This requires a 12% return which is realistic in the current market conditions.
Create a plan
Now is an excellent time to sit down and draw up a financial plan for the next 10 years. Write down your objectives, including buying a new home and make sure you have provisions for retirement. Do you have a goal to take a sabbatical at the age of 50 or to start your own business? Your goals may change, like they already have, but by having the money put aside you have flexibility to make life choices. Setting down a specific goal gives you the discipline to stick to the plan. (Read the article on how to save R150 000 in seven years)
Paying off debt and growing an asset base
A good strategy would be to invest the R100 000 in growing your asset base. If your goal is to buy another house, increase your bond repayments each month so that you learn to live on less and build up a deposit for that home while paying off your debt quickly.
When you do decide to buy another property stick to a price range that makes sure that the length of the loan sees you debt free by the age of 50. So if you are 35-years-old, the bond should only be 15 years. This will give you economic freedom for a time when you may want to make some serious life changes.