We get it, buying a car in Singapore is expensive. Not just normal expensive, but stupid expensive as evidenced by these articles:
- (2018 Edition) Cost Of Owning A Car In Singapore Over 10 Years
- Cost of Getting A Car In Singapore 2019: What Contributes To The High Car Price?
- Buying A Car? You Need To Be Earning At Least S$7,500 First
- Why Owning A Simple Family Car In Singapore Can Cost You SGD 234,621 Over 10 Years
You get the idea. It sounds like you’ve got to be pretty darn wealthy and willing to part with a ton of cash over 10 years to be able to afford a car in Singapore. Then at the end, you are forced to sell it for scrap or put more money in to get another COE.
As a result, I can never understand why anybody would buy a car here. However it seems that some people still feel that it’s totally worth it (evident by the number of cars on the road, some even driven by pretty young professionals!)
I guess they justify it like this:
“I’m buying convenience and freedom to go around anywhere whenever I want!”
Who’s to say that’s not worth SGS 200,000 over 10 years right? It’s only SGD 20,000 a year! Totally worth it!
Well, I’m here to tell you that that’s not the end of the “cost” of buying a car.
You’re also saying “No thanks” to a passive income of SGD 1,000
Why do I say that?
Well, as a FIRE-path walker, we should all be familiar with the Safe Withdrawal Rate. It is essentially the rate which we can withdraw from our investment without running out of money. We can follow that formula to figure out how much we’d be able to withdraw from our portfolios had we invested the money instead of buying a car.
In order to make this calculation, I’ll be borrowing the numbers from this excellent Seedly article titled “Buying A Car? You Need To Be Earning At Least S$7,500 First”. Then I will be assuming that instead of using whatever money that you’d have spent on the car, we would instead be investing it.
Here’s the breakdown.
Upfront fees & downpayment
Based on the above article, we will be purchasing a Perodua Bezza 1.3 Premium X (Automatic Transmission), the cheapest possible car you can buy today.
The total price of the car (including the COE) is SGD 57,800. The breakdown between how much you can borrow and how much you will have to put as a downpayment is as per below:
|Total Price||SGD 57,800|
|Loan Amount (70%)||SGD 40,460|
|Downpayment (30%)||SGD 17,340|
So, right at the beginning, we are seeding our investment portfolio with SGD 17,340 up front.
Since the rest of the car is actually going to be financed, let’s assume we will take out the maximum tenure at the quoted 2.78% interest rate. That will mean we will be paying SGD 575 per month on this loan for 84 months.
This is just for the car itself. In order to drive the car, there are a bunch of other things you will be paying on a monthly basis to make use of it on Singapore roads.
The rest of the monthly costs for the life of the car
Here are the list of the rest of the items to account for (for details and assumptions on how the numbers are arrived at, I suggest you check the linked article above.):
|Line Item||Monthly Cost|
|Road Tax||SGD 48.67|
|Car Insurance Premium||SGD 204.17|
|Servicing & Repair||SGD 100.00|
So let’s assume a round number of SGD 1,505 per month for the life of the car which is 10 years or 120 months.
So now we have the rough total of money you’ll be investing for the next 10 years if you did not buy a car.
Here’s the of the investment setup
|Initial Capital||SGD 17,340||one-time|
|Monthly Loan Instalment||SGD 575||84 months|
|Monthly Operating Cost||SGD 1,505||120 months|
We will be investing all of this money with a conservative rate of return of 5% p.a. (You should be able to beat the CPF rate with your own investments by following this portfolio setup. Even the STI ETF can beat that!)
The length of the total investment will be until the end of 120 months, and we will assess how much you would have made.
Portfolio value after 10 years
So at 10 years, your COE will need to be renewed in order to continue using the car or the car must be deregistered. At this point, it’s a good time to take stock of what we would have had. Want to take a guess? Here’s the number:
That’s SGD 330,000 in investments at the end of 10 years!
“Hang on, hang on” I hear you say. “If I don’t buy a car, I’ve gotta take public transport! Not having a car isn’t free!
Let’s account for public transportation
Fine, so let’s assume you take out SGD 6 per day – that’s SGD 180 per month – from your investment to account for your transportation. That sounds reasonable right? If you take public transport most days and maybe cab once a week, certainly doable with a little planning.
This is a big benefit for living in Singapore. The country is quite small and the public transportation options are much better than a lot of other countries. You can get to a lot of places by just buses and trains within an hour or so. For those times you really need a car, you can take a taxi, Grab or Go Jek at pretty reasonable prices compared to other developed countries.
Here’s what you’d have had left in the portfolio even if you take some money out for other forms of transportation:
Public transportation took out almost SGD 30,000 over 10 years (the magic of compound interest at work – against us in this case.) Plus, I must remind you that this is only at a very conservative 5% interest per year.
If you had purchased a car, this money is POOF! GONE! Sayonara! No getting it back.
Of course, as I mentioned in the beginning, that’s not all the cost. If invested, this money could be left in the portfolio to continue making money. You can also withdraw the money bit by bit to generate passive income forever. That will be gone too.
So how much passive income are we talking about?
Passive income calculation
Now to the fun part. In order to calculate the passive income we can withdraw from the portfolio, we can look to our Safe Withdrawal Rate (SWR). The assumption we’ll use is the standard 4% SWR of our portfolio value.
By multiplying our portfolio’s total value with 4% we will get the amount of money that we can withdraw from the portfolio each year without running out.
With SGD 301,312.31 in our portfolio, our yearly safe withdrawal amount at 4% is:
SGD 12,052.49 per year
SGD 1,004.37 per month
That’s a pretty nice amount to be getting for free each month, without having to lift a finger or wake up early to go to work no?
There you have it, SGD 1,000 per month in passive income. Forever.
What would you do with an extra SGD 1,000 per month today without having to do any extra work? Would you trade that and get a car?
For a car, not only are you giving up the money now to purchase it, maintain it and utilize it today. Since a car is a depreciating asset that goes to almost $0 at the end of 10 years, you are also giving up on any future income that the money could have made if you had invested your money instead.
If you really take all the cost into account, a total of potentially SGD 300,000 in investment dollars you could have and a passive income of SGD 1,000 per month over the next 30 years, you’re actually throwing away nearer to SGD 360,000 of your income over your lifetime by deciding to purchase it instead of deciding to invest this money – even for the cheapest possible car you can buy today.
If after 10 years, you stopped putting anymore money into this portfolio and let it grow for another 20 years at 5% p.a., you would actually end up at around SGD $817,351.90, which equates to around SGD 2,700(!) in passive income per month. Frankly, enough to retire with.
So, what do you think? Does it ever make sense to spend this kind of money for a car? Let me know by commenting below or tweet me @firepathlion! Thank you for reading.
Until next time.
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