Though it seems obvious that one should be objective about money matters but more often than not, we are not! We bring in our prejudices and biases to colour our decision making.
And it becomes all the more important to remain objective when you are planning to retire by 45. You need to save every single penny (and invest it wisely) which is not contributing to your happiness. You need to plug in the leakages.
But how do you remain objective? How do you make sure that the financial decision you are taking is sound? Simple – Build a mathematical model around it and let the numbers tell the entire story; let the numbers decide for you.
I have been practicing this mindset for around 9 months now and the biggest and the most difficult decision I have taken so far is Selling of my new car. I sold my new Ertiga in December 2016. The car had been driven only around 18000 km and was in pristine condition. I had bought it as a birthday gift for myself therefore it held emotional value as well.
So how did I decide to sell it off? Simple I built a mathematical model around the Cost of Car Ownership vs Cost of Travelling by other transport means. And the model screamed through the numbers to sell the car.
Before I get into the numbers, here are few important notes –
- My wife was using the car to commute to office. There was practically no other purpose of the car besides occasional road trips. We have another car therefore road trips have not taken a setback. 🙂
- Her office was walking distance from a metro station but nearest metro station from home was 3 kms away.
So without further ado, here is the mathematical model I built to determine whether to sell the car or not.
Here are points worth noting from the model.
- My monthly fuel consumption cost makes only around 59% of the total cost. Rest is made up by insurance and car servicing. I totally hate these 2 but can’t help it. Actually according to Indian laws only third party insurance is compulsory which comes very cheap but unfortunately it is very hard to buy only third party insurance.
- I have factored in tyre replacement at 40000 KM. Generally we Indians go way past that number and don’t change car tyres until and unless they die a natural death. Ideally this shouldn’t happen. We must take utmost precautions. Anyways I have factored that cost in.
- I am lucky to have good good connectivity of metro from home to wife’s office. If it wasn’t there then probably model would have changed entirely.
Here is the snapshot of the model.
As is visible from the model, my total monthly car expenses amounted to Rs. 4879 whereas from other mode of transport (Metro+Auto-Rick), cost came out to be Rs. 3168 resulting in cool Rs. 1711 savings.
And guess what? Besides monetary savings, my wife also saved on commute time. She saved around 30 mins a day and was more mentally relaxed as she didn’t have to be behind the wheels. People who know how is Delhi’s traffic would know what I am talking about here.
Though Rs. 1711 might look small to some but invested over a period of 12 years through SIP in good mutual fund will leave me richer by Rs. 6Lacs. I have used this SIP returns calculator to come to Rs. 6Lacs figure. Expected annual returns was taken to be 13% which is pretty normal in equity for 10 yrs+ duration. Remember what I wrote in Living the Early Retirement Mindset post earlier that I have started living the habit of Long Term Thinking rather than Short Term when it comes to money. This is exactly what I meant!
Since embarking on the path to financial independence and Early Retirement, this has been my most difficult financial decision so far but I am happy that I let the numbers decide for me. I just wish that I maintain the same objective view throughout next 12 years.