Last Updated on July 24, 2022 by The MediFi Guy
The most important reason not to buy a new car is the opportunity cost of not investing the money spent on the car. Best illustrated using an example:
You have R300 000. You can either buy a R300 000 car or a R50 000 car.
You buy the R300 000 car. That’s it. R300 000 gone. But is that really all you’ve spent? The cost of R300 000?
What if you buy the R50 000 car and instead invest the remaining R250 000 in a stock market index fund and leave it there for 40 years (your working career). Let’s assume that the market returns on average a real return of 8%.
How much would you have after 40 years? R 5.4 million. That’s a return of roughly R 5.18 million in pure interest on investment alone.
That R 5.18 million represents what we call the opportunity cost of the car – the unseen cost of missing the opportunity to use that R300 000 you spent on the car in an alternative way (by investing it instead).
The above example can shed some light on why many people who buy several brand new cars throughout their lives find that they struggle to accumulate any significant savings during their working careers, let alone enough in savings to retire. All of the money that could have gone towards investing in assets that would grow in value is instead spent on financing liabilities that not only lose value over time but come with ongoing expenses.
Do not simply look at the price of something when deciding whether to buy it, consider the opportunity cost as well.
Legal Disclaimer: The information on this website including research, opinions or other content is not intended to and does not constitute financial, accounting, tax, legal, investment, consulting or other professional advice or services. The author of this blog does not act or purport to act in any way as a financial advisor or in a fiduciary capacity. Prior to making any decision or taking any action, which might affect your personal finances or business, you should take appropriate advice from a suitably qualified professional or financial adviser.
