When inflation is our constant companion people often say that there is no point in keeping money. Rather spend it because whatever you buy will cost more next year whereas money in the bank is constantly eroded. There can be some sense in this reasoning. Indeed it would be valid if it were applied only to the stockpiling of essentials or the purchase of items to be resold later at a profit. Unfortunately the argument is generally used as a Justification for almost any kind of expenditure, usually of the entirely non-essential type.

Funds Investing

Irrespective of how poor the return on investments may be, it is necessary to save and invest. A cash nest egg must be maintained and something has to be put away towards retirement.

To illustrate the effects of spending and saving let’s consider an example.

There are 30 years to go to retirement. Our subject considers a $150 000 car or one costing $250 000. He can afford either and leans towards the $250 000 job because it would carry more status among the people who don’t really matter anyway. What would that bit of one-upmanship cost?

The loan to purchase is at an interest rate of 15% per annum and repayable over four years. Ignoring insurance the monthly payment would be about $4 123 on the $150 000 car and $6 872 on the other. If he bought the tower priced one he would be able to invest $2 749 per month for four years. Let’s say that the investment earns a return of 12% per annum after tax.

At the end of four years the investment would be worth $167 731 and by retirement would grow to $3 193 610. After allowing for inflation at 9% per annum that would represent $241 000 in today’s money.

By applying our rule of thumb this would give him an extra $1 205 per month pension in real terms. So, going for the cheaper car buys a significant increase in pension.

Think about it.

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