This is the third and last Short Thought on the idea of how much is enough. For today I want to focus on the mutual interaction between "less" and interest rates.
I have prepared some information in a spreadsheet on purchasing a house and purchasing a car. (See Table below for assumptions).
These are in rands, but the principles apply regardless of currency, regardless of the amounts that one uses.
View of Various Expense and Payment levels
House, 20 yrs
80% House, 20 yrs
100% Car 6yrs
80% Car, 4yrs
Interest pd first month
There are no rows in this table
I have used a 20 year mortgage, and an interest rate of 9%.
Don't we always try and buy the biggest house we can afford? Why? - (Which is the subject of the previous 2 Short Thoughts on how much is too much.)
Let's instead buy a house that is 20% cheaper than what we can afford. Because, really, how much house do you give up for 20%? And bearing in mind, that MOST people live in their first house for only 5 years - come on, make that small sacrifice.
Because living in that slightly cheaper house, but paying the payment of the more expensive house, means that you will pay it off in about 13 years. Over the life of the two mortgages, you would have paid R600 000 more on the more expensive house, for a total of R2.1 million, more than double. On the cheaper house, you would have paid R1.4 million. AND, as they say, that is not all. You had R100,000 rand a year to put to your retirement savings, and have been earning interest on that.
Let's think some more on this - say you purchased your house at age 30. For the larger house, you would still be making your largest expense payment until the age of 50, simultaneously with the kids going into higher education, getting married and so on.
For the cheaper house, at age 43 you were finished with your largest monthly payment, and now able to do do some serious investing. An investment property? Buy your dream house, and rent out the original, and use that to partially pay for your dream house? Go on a really nice annual vacation?
Do you REALLY need this much house and car?
Not much space left for the car - so very shortly: I have modeled buying a more expensive car, at R250,000, and paying it off over 6 years and compared that with a slightly cheaper car at R200 000, and paying that off over 4 years. Both cars are driven for 6 years. You pay a slightly higher monthly payment for the four year loan. But that will be offset by slightly lower insurance premiums. In year 5 and 6, for the slightly cheaper car, you save the payments. Even without earning any interest on those savings, by the time you renew the car after six years, you will have more than 50% of the value of the car, so your loan is that much smaller.
When it comes to your second new car, you can pay for the car cash, and keep on saving all of the monthly payment.
Watch out for the banks - YOU are their source of profit.
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