Take a close look at the figures - the opportunity cost of a fancy set of wheels is staggering
BMW Buyer versus Public Transport Fan Take a close look at the figures - the opportunity cost of a fancy set of wheels is staggering -- PHOTO : BT ILLUSTRATION, LUDWIG ILIO

NOBODY likes to hear the words: "No, you can't." Two weeks ago, many aspiring car owners were told precisely that.

A double whammy came from the Monetary Authority of Singapore (MAS): restrictive car loans and a new tiered tax. Buyers need to put down a downpayment of 40 per cent for a new vehicle, up from zero before. And the maximum tenure of a car loan will be limited to five years, down from 10 years.

In a flash, yearnings of car ownership - one of the "Cs" in the Singapore dream - came to an abrupt halt.

People simply couldn't cough up the newly required downpayment, which ranged from $30,000 to over $100,000.

Many examples of shattered dreams were quoted in newspapers, with accompanying titbits on how much the individual is earning and what he (invariably a he) planned to buy.

A popular car is the BMW. Two people - a 30-year-old earning $3,200 a month and a 31-year-old earning $6,000 a month - were quoted as saying they wanted the BMW 320i. This model arrived in Singapore last year.

An entry-level make currently costs around $220,000. Instalment payments over a 10-year loan period would have cost $2,000 a month.

Sounds affordab . . . wait, what?!

If you haven't done a double take, you should. Think about the numbers involved, and what you could have done with the money.

The problem with debt-fuelled car purchases is that most people see only the short-term rewards; they don't think about what it all adds up to.

Take a 30-year-old who decides to buy a spanking new BMW, compared to another 30-year-old who takes a look at the sheer costs of car ownership and says: "No, thanks - I'll take public transport instead."

Let's call this comparison BMW Buyer versus Public Transport Fan (PTF).

When BMW Buyer is 40, he will likely scrap his car for a few thousand dollars, and his existing Certificate of Entitlement (COE) would have expired, leaving him to contemplate his next big car purchase - assuming he had not done it already.

Meanwhile, his $2,000 a month payments for 10 years would have added up to $240,000, excluding bank interest. In between, he would have paid a lot more for insurance, Electronic Road Pricing fees, road taxes, service and repair fees, parking fees and fuel.

Assuming insurance, road tax and servicing costs of $1,200 a year, parking and ERP fees of up to $200 a month and fuel costs of $300-400 a month, the costs of owning a car can easily add up to $100,000 over 10 years.

When he is 40 and perhaps in the throes of a mid-life crisis, BMW Buyer will look at a $340,000 hole in his bank account and wonder what might have been.

What about his alter-ego, Public Transport Fan?

Let's assume the worst-case scenario: he lives in Joo Koon in western Singapore and works in Pasir Ris in the east. He travels 42.6km each way a day, and pays almost $4 on train fare. He travels during weekends, too. He also takes extra shopping and leisure trips to and from town half the time - we'll assume this costs $2 each way. Every month, he spends $180 on public transport - a very generous estimate. His total cost is around $22,000 for 10 years.

A car can be shared by family members, but a public transport ride cannot. Let's assume similar costs for PTF's wife, and add in their two children who travel at a concessionary rate of about 60 cents per journey.

Together, the family will spend $57,200 over 10 years. Let's round it up to $60,000.

There is no contest in transport costs. BMW Buyer is down at least $340,000, while PTF is down just $60,000. There's a huge price to pay for convenience.

Now, suppose PTF has a further brainwave. As he has the time on the train to read financial literacy articles during his long commutes while BMW Owner is resisting road rage impulses, PTF decides to start investing.

He is such a great fan of public transport that he puts his money in public transport stocks. After all, he has an extra $2,000 a month that he does not need to spend on a BMW loan payment.

Coincidentally, ComfortDelGro (CD) shares cost around $1,900 per lot, and SMRT shares cost about $1,600 a lot. He can buy a lot a month with some spare cash left over. (Disclosure: writer is long CD.)

Let's assume he buys six CD and six SMRT lots every year - one a month on average. After the first year he is invested, PTF will collect $384 in CD dividends and $432 in SMRT dividends.

Let's also assume that these companies don't grow further and their dividend payouts don't change. In the second year, PTF will collect $768 in CD dividends and $864 in SMRT dividends, having doubled his stake.

After the 10th year, he will be collecting $3,840 in CD dividends and $4,320 in SMRT dividends.

This would more than cover his family's $6,000 in annual public transport expenses.

In total, PTF would have collected about $45,000 worth of dividends - recouping three-quarters of what his family had spent on public transport over the 10 years. In addition, he would have 60,000 shares of CD and 60,000 shares of SMRT. Again, assuming their values don't change, this would be worth $210,000.

Of course, SMRT shares have trebled in price in the last 10 years and ComfortDelGro stock has doubled in price. If PTF had pursued his strategy 10 years ago and reinvested his dividends, he would be staring at a portfolio of well over $500,000, with a possible profit on his investments.

More importantly, he would be getting a steady dividend income stream that effectively funds his family's public transport expenses. He would even have a few thousand dollars a year spare for those occasional cab rides.

So what's the final score?

BMW Buyer ends up with a $340,000 hole in his bank account that he dug himself by making a purchase that was arguably unnecessary and that depreciated fast in value every year.

PTF, on the other hand, not only almost recoups his transport spending, but has an extra $210,000 in stocks and a steady stream of dividend income that pays for the transport expenses for his entire family.

In fact, if PTF invests $2,000 a month from age 30, he would be a millionaire when he is 55, assuming a conservative 4 per cent yield a year on investments and reinvested dividends.

The year-end portfolio after 25 years would be $999,502. Not too shabby by any means.

PTF can buy a suburban condominium and live off the rental. He can pay for his kids' education overseas. He can live on an inflation-adjusted dividend income of $2,000 a month in today's terms, which is after assuming prices go up 2 per cent a year in 25 years.

He can even, heaven forbid, spend half of that amount on a new Porsche. Or buy two new Porsches. Paying cash.

All of these doors would be open to PTF because he made the decision in his youth to forgo that incredibly costly car purchase.

Of course, some families have valid reasons for needing cars. If they can't afford one, they can try leasing or car-sharing.

But for most people, the desire to enhance their lifestyle often gets in the way of financial sense.

Many now can't even cough up the $40,000 downpayment to buy a second-hand BMW or an average new car.

But after being told that they can't afford it, there is a good chance that they will be set on the path towards financial independence.

The journey of a thousand cans might begin with a single cannot.