Sometimes you have to spend money to save money

Paying for something that improves your life in the future is okay! (credit)

I forgot to check my blog’s email until recently and was very surprised to see that a couple of people had contacted me – thank you readers! This post is dedicated to one of them asking a pretty good question regarding the electric moped article’s conclusion.

“Instead of reducing your friend’s outgoings by switching to the moped instead of his car, haven’t you actually massively increased his outgoings for the next 3 years?”

Anonymous reader

I should point out that a couple of assumptions have been made here by our anonymous reader. Presumably we are assuming that my friend did not outright buy the moped with cash and has financed it or otherwise gotten a loan to pay for it. Also in the original post I think we determined the payback was roughly 2 years as well, but in fairness I hadn’t factored in him taking the CBT, getting a helmet and adequate riding clothing so maybe that would be nearer the mark.

So I thought it would be interesting to explore how my friend could potentially buy said moped with a couple of different options and then we’ll get into the meat of what this blog post is about – yes, sometimes you do indeed need to spend money to save money – as paradoxical as that sounds!

Moped financing options

Scenario #1: Person has enough cash on hand to buy moped outright.

In this instance the person gets immediate benefit from the new shiny electric moped and their monthly running costs are immediately reduced. Here they are looking just at what amount of time it would take for the moped to pay for itself (fuel costs vs price of moped and electricity costs) which was covered in the original article.

Scenario #2: Person finances on a 0% spending credit card and pays minimum.

The person applies for a 0% spending credit card, slaps the moped on that and then just pays the minimum balance (assumed to be 2.25% a month of the outstanding balance).

Scenario #3: Person finances on a 0% spending credit card and pays off in equal chunks.

The person applies for a 0% spending credit card, slaps the moped on that and then pays the amount off in equal chunks spread over the 0% months offered. I will assume 24 months based on a similar credit card I own.

Scenario #4: Person has poor credit and finances at 9.9% APR from seller over 2 years.

Perhaps your credit score is not good enough for one of those 0% cards and you don’t have the money on hand to buy it outright. Then in the worst case, a loan from the seller of the moped may be available, usually at a fairly high rate. Based on one of the sites where you can actually buy this moped, they offer a 9.9% APR loan so we’ll use that.

Let’s chart out these options and compare in how my friend has several options that could leave him better off or worse in the near term but better in the long term.

Graphing out the scenarios

ScenarioDescription
Scenario #1Bought outright with cash.
Scenario #2aBought on 0% card, paid minimum
Scenario #2bBought on 0% card, paid minimum + fuel savings
Scenario #3aBought on 0% card, paid 1/24th back
Scenario #3bBought on 0% card, paid 1/24th back + fuel savings
Scenario #4aBought on 9.9% APR loan over 2 years
Scenario #4bBought on 9.9% APR loan over 2 years + fuel savings
A table summarising the scenarios outlined in the graph below
Chart comparing the scenarios (click to enlarge)

Taking the same scenario from the original article, my friend would be doing roughly 660 miles a month commuting to his office and back. We worked out his monthly savings from not driving his car would be about £110.52. He could either keep those savings to himself every month or he could put it towards the debt he took out to buy the moped (assuming he didn’t just use cash to buy it). Below is how much extra money he would have each month with each option (or less) at the beginning.

ScenarioOutcome
Scenario #1+ £110.52 a month (but bought moped with existing savings)
Scenario #2a+ £54.48 a month on average (but still has £1,851 to pay off)
Scenario #2b– £34.64 a month on average (but owns moped at the end of ~2 years)
Scenario #3a– £22.65 a month (but owns moped at the end of 2 years)
Scenario #3b– £169.65 a month (but owns moped after ~1 year)
Scenario #4a– £36.77 a month (but owns moped at the end of 2 years)
Scenario #4b– £147.29 a month (but owns moped after ~14 months)
A table showing the savings per month for each scenario

The wonderful thing about money is there’s generally several options to how to buy something. If you happen to have the savings upfront, you are basically getting a £1,326 return on your money every year as you immediately get to enjoy the fuel savings, equal to roughly a 41% return on investment.

If you’re stuck for cash but have a good credit score, you could borrow the ‘free’ money and stretch the payments out and you could still enjoy savings of over £50 a month in Scenario #2a! You of course do need to find the additional £1851 to pay off your 0% loan after the 2 years are up but I’d hope that’s not a struggle if you’re being smart with your money (you should have at least £1,300 from your fuel savings over 2 years *ahem*).

Where the debt is 0% I would try to stretch out the repayments to the maximum length of that period and no more so that I’m maximising the loan, thus Scenario #3a makes the most sense to me personally. Paying £22.65 a month for 2 years seems pretty reasonable. That’s less than one restaurant meal a month! And at the end of the 2 year period the moped would be owned by me and immediately I can ratchet up to saving £110.52 a month.

Whereas if the loan had a high APR I would be killing it ASAP, putting all my fuel savings into killing the debt such as in Scenario #4b. Yes, the moped is actually costing you an extra £150 a month, but the short term pain would mean that the moped would be owned by you faster and you’re paying that horrible interest rate for the minimum period possible. From month 15 onwards you can start enjoying those sweet sweet fuel savings properly though.

Of course these options exist for many aspects of life

This kind of thinking can apply to multiple areas of life. I mean there’s a reason people buy season tickets for trains – they work out cheaper over the longer term. I know I was never particularly happy about having to buy a season ticket into London in my old job but financially it made sense and my work offered 0% loans specifically for this so I took advantage of the scheme.

Bulk buying in supermarkets is another common example. A 10 kg bag of rice when compared to 10x 1 kg bags of rice is likely to be substantially cheaper (if a pain to get home without a car). Of course a 1 kg bag is much cheaper than a 10 kg bag on it’s own, but if you get through enough rice in a year it can make obvious sense.

Trading in your low MPG car for a higher MPG one? Same thinking.

Moving closer to your work place so the commute is shorter and less costly? Same thinking.

Higher upfront cost but lower ongoing expenses. Just make sure what you’re buying will actually be used as much as you expect, else it could have been cheaper to keep paying the ‘non-discount’ price. A good example is my wife and the local swimming pool. She likes to go once a week and they offered her a year membership (paid monthly). However, it worked out cheaper for her to just pay as you go once a week than bother with the hassle of the yearly payment. If she moved up to twice a week I think it would be marginally cheaper to take the membership but I imagine she’d still avoid it as some gym memberships are just an absolute pain to cancel (speaking from personal experience).

Have you made any purchases or decisions with a higher upfront cost that leads to lower ongoing costs? Let me know in the comments below!


6 thoughts on “Sometimes you have to spend money to save money

  1. I’m not sure I get this guy’s problem. I cycled 7 miles each way on a standard pushbike in my fifties, presumably this fellow is younger, and he’s likely to be fitter too. He’s travelling twice as far. Would not an electric bike/ebike mod fix this problem for him at a darn sight less than three grand?

    Liked by 1 person

    • Knowing the guy personally, he’s wary of cycling along an A-road which forms the majority of his route (are bikes allowed on A-roads…?). I’m not sure he’s convinced of the electric moped argument anyway – he simply asked me about them one day and then I wrote a post about them cos I found it to be personally fascinating doing a deep-dive into the technology. I didn’t know proper electric mopeds existed before!

      This post was answering the finance question I touched on in that previous post regarding payback times and such. Someone was adamant he’d be in a worse off position for a long time if he took that approach – this post was showing that’s not necessarily the case 🙂 I love a good tangent…

      Like

      • > bikes allowed on A-roads…

        They are, but it’s miserable. While a twenty-something Ermine thought nothing of cycling up the A40 Westway and going round the Hanger Lane gyratory system I wouldn’t do it now, because the road noise on A roads are deafening. However, it’s worth looking for alternatives. https://www.cyclestreets.net/ is a place to start.

        I must admit I didn’t know electric mopeds existed either. I’m not sure I can see what an electric moped offers you over an electric bike, however, unless it’s the chance to push past the 15mph limitation on ebikes, which a little bit of research can fix 😉 For a distance of 15 miles there’s not that much in it, plus you can save the old tax/MOT issue presumably mopeds have.

        The most extreme example IMO of your illustration of paying more upfront to save in the long run is buying a house with a mortgage 😉

        Like

        • Jesus Christ, I go up and down the A40 somewhat regularly (and around the Hanger Lane roundabout) – I hate doing that in a car never mind a bicycle! Bunch of nutters swapping lanes and merging without looking…

          I would say they offer the ability to keep up with traffic, rather than people swerving to get around you and much better range. I’ve actually been tempted to go do my CBT again and have a go on that NIU moped just for the fun of it. My wife has started her own business and needs to get around to the surrounding towns to visit clients and she actually seems interested in one as well (we’re a one car family). She’s slowly becoming more pro-green, e.g. she likes that our car doesn’t choke her with fumes 🙂 If we were in the countryside I’d probably bike places more but 40 mph speed limits around here do scare me off a bit. Walking > other transport where feasible.

          Like

  2. Utterly love the electric motorbikes/scooters that are coming out now. Pricing is really competitive and like you have said, the running costs are nearly nothing. I guess the only thing to really consider is that insurance is still pretty high for a new learner/biker- I was getting quotes of about £700 on a £3k electric scooter. Guessing either the data just isn’t there yet to get the risks correct- or they really do get stolen/crashed that much! Also need to consider the pain/hassle of a CBT every 2 years as well- £150 + a day of work (or weekend day lost). Course, you can do your full test, but that’s about 4 days training + 3 exams (and the CBT too !) Electric push bikes on the other hand…..

    Liked by 1 person

    • I never rode anything beyond a 50cc petrol scooter when I was younger, but holy hell there are some nice electric bikes out there! Case in point, if I had all the money in the world and a motorbike license: https://www.zeromotorcycles.com/en-gb/model/zero-srs

      £700 insurance on a scooter?! I think times have changed since I rode one… Then again it was about £2,000 for car insurance when I was 19… I actually enjoyed the CBT course but I guess it was my first time. 1 day every 2 years isn’t that bad… I dread to think how many days I spent getting my car license (I didn’t pass first time ;)). At least there’s zero road tax (no emissions) and the MOT should be less than the £20 a year I was spending – what the hell do you check on an electric moped? No oil to change, no leaks on it, motors are built to last decades. Check the tyre pressure and does it move when I twist the handle I guess?

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s