You’re in the money
Want to save a million dollars, or pay off your mortgage 13 years early? Incredibly, those are realistic savings from swapping a car for a bike, find Jon Miller and Stephen Huntley.
The fact that using a bike for getting around can save you a few dollars is well established, but what those savings add up to is rarely thoroughly investigated. The problem is that everyone’s circumstances are different, which can lead to major differences in savings.
We decided to look at a reasonably typical situation, and our astounding findings may motivate you to take a closer look at what you can save.
We are basing these calculations on the reasonable presumption that many people could do without a second car through using a bike to get to work, and for some trips around the local area. If that is you, then you’re in luck; you are in for considerable savings. If ditching a car doesn’t seem a reasonable option, read on; you may be motivated to find a way.
According to data published by the RACV, if you buy a new medium-sized car, and you do around 15,000km a year in it, the annual cost is about $10,660 a year, when you factor in things like petrol, servicing, insurance, interest payments, maintenance, registration, tax and lost resale value (depreciation). A large SUV comes in at an eye-watering $19,240 a year.
These figures assume the purchase of a new car. The Royal Automobile Club of Britain includes the running costs of used cars in their annual Cost of Motoring Report. While it’s difficult to perform direct comparisons between British and Australian figures, the RAC estimates that driving a used car only saves about 24% over that of a new car. Assuming similar percentages apply here, running a medium-sized second-hand car could still cost about $8,100 annually.
If you commute by car, you may also factor in parking costs and toll-road charges. Parking in Australia’s biggest cities is getting very expensive. Over $40 a day is not uncommon, leaving a weekly bill of $200, and over the course of an average working year (226 days) a whopping bill of $9,040. Even at the more modest rate of $12 per day, which you can find in some cities, you’re looking at an annual bill of $2,712.
Using the second-hand car model and low parking fees, annual costs for many medium-sized car commuters could easily be about $11,000 a year. If we work out the average cost of running a bike at about $1,000 per year (see below), there are annual savings of at least $10,000 ($833 a month) to be had for those drivers if they took up the two-wheel option instead.
What to do with those savings? Let’s look at some options. Assuming an annual salary of $60,000, investing $833 a month from age 45 in a deposit account paying 6% per annum calculated monthly would lead to a $358,000 after-tax windfall by retirement age (67). A diligent young saver who began at 25 would end up as a millionaire, with a massive payout of $1,047,000.
What if the money was put towards paying off a mortgage instead? On a $250,000 mortgage paid off over 25 years, at 7% interest, with the extra $833 a month you would pay off the mortgage in an amazing 11 years and nine months (13 years three months early) while saving $154,000 in interest payments.
If your salary is $60,000, you have to earn $14,300 to get $10,000 take home, after-tax pay. That $14,300 could be salary sacrificed straight into your super fund (and only taxed at 15%).
CareSuper calculated that by doing this, a 45-year old could end up with an extra $677,490 in superannuation on retirement at age 67. A 25-year old could have an astounding $3,583,000 extra in their fund by the same age. The assumptions used in CareSuper’s calculation are detailed at the end of this article.
The savings can be great if a company supplies a car and/or car parking as part of a salary package and you are able to convert this into salary instead. For example, a fully-maintained $40,000 car doing between 25,000 and 40,000 kilometres a year will have a taxable annual amount calculated by the statutory tax formula at just over $9,000, and the fringe benefit tax (46.5%) at $4,200; potentially $13,200 a year that could go to your super fund instead, and that doesn’t include any parking fringe benefit costs, which can often be many thousands of dollars.
Bikes vary widely in price, but for our purposes we’ll take a very likely scenario of a bike for commuting costing $1,000. There is no reason that a well-maintained bike can’t last for at least 10 years, which equates to a yearly cost of $100. You will also need accessories; at the very minimum a helmet ($80), lock ($100), pump ($40) and lights ($100). Assuming these last two years only, yearly cost goes up to $260.
Bikes need regular maintenance, and parts will eventually need replacing. Assuming replacement costs for tyres every two years, chain and cluster every year, chain rings every two years, miscellaneous items at about $100 a year, and labour costs of about $150, a fair estimate is about $430 a year to keep your bike running well.
It is also reasonable to add an annual cost for clothing you might otherwise not have needed (light rain jacket, gloves, trainers/bike shoes, shorts, etc.), at an annual cost of $200.
Add in the cost of joining your Bicycle Association, and you’ve got a total annual cost of about $1,000.
Other realistic savings to be made by using a bike instead of a car include lower medical bills for you, and a lower bill for the country. A fit and healthy workforce is also more productive, more alert and takes less sick days. Greenhouse gas emissions will be reduced, there is less wear and tear on roads, and bike infrastructure costs a fraction of car infrastructure. And what price do you put on being healthier, having more energy, and feeling happier?
Giving up a second car is an option for some, but having no car is often considered completely impractical. It can be done successfully, however, as more and more people are finding out. Using bikes, public transport when necessary, and sometimes hiring a car (Flexicar rates vary from $15 to $10 an hour, and $89 to $65 a day, including petrol), giving up the car can prove incredibly economical, and practical.
Case Study: Jon Miller’s personal experience.
I took up riding in 1989 when I moved to St Kilda and had a job in South Melbourne – a 5km commute. While both of these inner-Melbourne suburbs are well serviced by public transport, getting from one to the other was difficult. So I borrowed a bike and started riding to work. The bike was old and heavy but it did the job.
In 1992, I changed jobs. This one involved a 15km commute each way. My old car was falling apart. I could either spend about $1500 on a replacement engine or about the same money on a decent bike. I chose the bike, and have been banking the savings ever since.
In 1998, I took out a mortgage and bought a house. In 2000, I went car free. Not running a car helped me to pay off the house by 2007. No mortgage and no car meant I could go into semi-retirement in 2009. I’m now doing what I want to do rather than what I have to do, and have a lot more time to ride my bike and have fun.
You could also consider sharing a car.
CareSuper figures based on a straight mathematical calculation on a starting salary of $60,000 non-indexed, 9% SG contributions and $14,300 p.a salary sacrifice. Calculated after tax and fees and using a constant annual return of 7.5% p.a.
The calculations are an illustration only and should not be relied upon; actual outcomes will differ with returns and fees. The information provided by CareSuper is general advice only and has been prepared without taking into account your situation. Please consider your own objectives or seek the assistance of a financial advisor. Always read the PDS before making a financial decision.
- View the RACV report into the costs of running a car here: http://bit.ly/qxYLzW
- View the RAC report on car costs, including second-hand cars, here: http://bit.ly/n6WZDn
- To help work out the long-term value of making cash deposits into a bank account, use the handy calculator here: www.savingscalculator.net
- To help work out early mortgage repayment options, use the calculator here: http://bit.ly/bmoQgw
- To help work out your future superannuation benefits, you can use the ASICS calculator here: http://bit.ly/hAHacH NOTE: make sure you click on the How it Works tool (top right) once you start the calculator and adjust the amounts as appropriate. It will give you results based on current spending value (ie it will take into account possible future inflation/cost of living rates, and reduce your returns accordingly) unless you set these values to zero.
Share your feedback about this article and your thoughts about saving money through riding a bike by commenting below.