Two friends Mr Saver and Mr. Borrower just started working both earning $100 a month. Their dream was to own a car which was worth $500. Mr. Saver opened a super saver account with 8% interest per annum compounded monthly. He saved $25 from his salary every month for 11 months.
Mr. Borrower made a down payment of $25 took a loan of $475 at 8% per annum for 5years.
Mr. Saver made a down payment of $311 after saving for 11 months he actually saved $300 rest $11 was interest earned and took a loan of $189 at 8% per annum for 2years.
Now let’s do some maths.
For Mr. Borrower the car of $500 will actually cost
$577.8 (total amount that he has to return on the $475 loan) + $25 = $603
When he makes monthly payment of $9.633 for 5 years
For Mr Saver the car of $500 will cost
$300+ $205(total amount that he has to return on the $189 loan) = $505
When he makes monthly payment of $8.55 for 2 years
The car for Mr. Saver costs $98 less he finishes his loan in 2years paying less amount per month in installments than Mr. Borrower. Also since car is a losing investment i.e. its value will always go down with time. So if you pay more you end up loosing more.
Alas for all the saving talk I still can’t save a penny. If only we could practice what we preach life would be lot better :).
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