Home' Trinidad and Tobago Guardian : December 7th 2014 Contents DECEMBER 7 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL PLANNING | SBG7
Rosemarie just turned 30 and
is considering a job opportu-
nity as a travelling officer. She
will receive a taxable travelling
allowance of $1,500 monthly
and will be able to include two
thirds of her vehicle-related expenses in her
Rosemarie is thinking about an offer from
her bank to finance 100 per cent of the purchase
price of a new vehicle costing $205,000; the
loan will run for six years at an APR of 8.0 per
cent. She has to cover the upfront bank fees,
legal costs and full-comprehensive insurance
for the period.
Apart from the financing costs, she has to
consider the cost of operating the vehicle.
• Monthly: gas: $600, parking: $500, detail-
• Quarterly: service: $1,500.
• Annually: insurance: $10,000, GPS tracking:
• Biannually: tyres $2,000.
Rosemarie was told that the car could lose
approximately 10 per cent of its market value
as soon as she drives it out of the showroom
and every year after that.
This got her thinking about the overall finan-
cial impact of this purchase and wondered if
it can be quantified for the period of the loan.
Nick's assessment & advice
This is an interesting case. It is not common
that someone would ask about the impact of
owning a new vehicle.
Most times they are filled with the euphoria
of the new car smell. The benefits are obvious
in terms of the convenience, comfort and con-
fidence but the costs are seldom ever considered.
When the car bill comes up you just pay it!
When evaluating the overall financial impact
of this investment the main variables to consider
The negative financial impact
• The upfront borrowing cost
• The interest cost
• Depreciation (10 per cent)
• The operating costs
• Monthly: gas, parking and detailing
• Quarterly: routine service
• Annually: insurance and GPS
• Biannual: tyres
The positive financial impact
• The taxable benefit
• The reduction in taxes
Once these variables are quantified and com-
bined, we can then ascertain Rosemarie s net
financial position at the end of the six-year
period; the negative financial variables will
offset the positives.
The upfront borrowing cost
Rosemarie has to put out some of her own
money from the outset even though she is
receiving 100 per cent financing on the car.
We can only estimate what some of these costs
Credit bureau fees: $100
Bank negotiation/administration Fees: $500
Group creditor s life insurance (optional): $1,000
Legal fees (mortgage bill of sale): $2,400
Full comprehensive insurance: $10,000
Total estimated upfront cost: $17,000
The interest cost
Using the principal sum of $205,000, an
interest rate of 8.0 per cent (APR) and a term
of six years, the monthly payment would be:
$3,594---multiplied by 72 months would result
in a total payback to the bank of $258,768---
this amount less the principal of $205,000
translates into a total interest cost of $53,768.
Table 3 shows how this will be spread over the
Using a "declining balance method" with an
annual rate of 10 per cent, (holding all other
variables constant), Table 2 illustrates the yearly
and then the total loss in value of the car.
The operating costs
Table 1 illustrates a projection of the running
and interest costs. The expenses are first con-
verted to an annual figure then to a six-year
total to show the trend of the reducing bank
interest and insurance premiums (10 per cent
reduction to cater for no claim discounts).
The taxable benefit
After accounting for taxes, her travelling
allowance of $1,500 becomes $1,125 monthly
or $13,500 annually or $81,000 over the six-
year period (after tax).
Tax deductible travelling expenses
Assuming that all of her operating expenses
are allowed by the Inland Revenue Division,
she can use two thirds (2/3) of it to reduce her
assessable /chargeable income before computing
her tax liability. This also assumes that she is
indeed liable to pay taxes based on her income
bracket. The tax savings will be 25% of 2/3 of
her travelling expenses. In the first year this
can be calculated as: $47,998 x 2/3 = $31,999
x 25% = $8,000 tax refund. The total tax benefit
over the six-year period will be: $236,247 x 2/3
= $157,498 x 25% = $39,375 tax refund.
End of sixth year financial position
To know where she will stand financially at
the end of the period we need to bring all of
the cash flows together (negative) and positive:
Cost of car:
Up front borrowing cost: ($17,000)
Operating cost for period
Total negative impact: ($554,302)
Total tax refund:
End of period value: $108,945
Total positive impact: $229,320
Net financial position: ($324,982)
(Details were modified to protect client s iden-
tity)Nicholas Dean (Cer-Fa) is a financial coach
and mentor who is the managing director
of the Financial Coaching Centre. He can be
contacted at: firstname.lastname@example.org
Financial impact of owning a vehicle
Links Archive December 6th 2014 December 8th 2014 Navigation Previous Page Next Page