F. Financial Literacy · Financial Decisions: Interest, Borrowing, Appreciation, Depreciation and Budgets

Putting It All Together: Should Sam Buy a Car?

F1.1 F1.2 F1.3 F1.4 A1 A2About 75 minutes

Learning goals

I can use the decision cycle to analyze a real-life financial decision from start to finish.
I can combine borrowing costs, depreciation and budgeting in one analysis.
I can modify a budget to test whether an option is affordable, and explain the trade-offs.
I can write a recommendation that uses math and context and says what would change my mind.

Words to know

total cost of ownership
Everything an item costs while you own it (purchase or loan payments, insurance, fuel, maintenance) minus what you can sell it for at the end.

net cost
Total money spent minus any money you get back, such as a resale value.

recommendation
A decision you suggest, supported by evidence and reasons.

sensitivity
How much a decision would change if one number (like the gas price or interest rate) changed.

The situation

Sam is 20 and lives in a mid-sized Ontario city. Sam's take-home pay is $2 800 a month. Sam just got a job across town with early shifts. The bus does not run early enough for those shifts, so Sam now pays for rides on about 8 mornings a month.

Sam is considering three options (all numbers are examples):

A. Keep transit + rides: monthly pass $120 + 8 rides × $18 = $264 a month.
B. Buy a used car for $12 000 (tax included): $2 000 down, $10 000 loan at 8.9% for 48 months. Insurance about $300 a month (insurance for young drivers in Ontario is often expensive), gas about $160, maintenance about $75. The car is expected to lose about 15% of its value per year.
C. Buy an e-bike for $2 000 cash, plus about $100 a year for maintenance and charging. In the 4 snowiest months, use transit + rides ($264 a month). Follow Ontario's e-bike rules: as of 2026, riders must be at least 16 and wear a bicycle or motorcycle helmet (check ontario.ca, because the rules are being updated).

This lesson uses every expectation in the unit. Work through each step with Sam.

Step 1: Learn from past situations (F1.1)

Sam asks a family member for advice. They remember that in 2022 gas in parts of Ontario cost more than $2 a litre for a while, and that interest rates rose quickly in 2022 and 2023 (Lesson 1). Lessons from that: costs like gas can jump, and a fixed-rate loan protects you from rate increases. Sam's loan in option B has a fixed rate.

Worked example

Example 1: The cost of borrowing (F1.3)

Option B: find the monthly payment, total payments and total interest for $10 000 at 8.9% for 48 months. Then find the monthly cost of owning the car.

i = 0.089 ÷ 12 ≈ 0.0074167 and n = 48. Payment ≈ $248.38 (formula, spreadsheet PMT or online calculator).
Total payments: 248.38 × 48 = $11 922.24. Interest: 11 922.24 − 10 000 = $1 922.24.
Monthly cost of owning: 248.38 + 300 + 160 + 75 = $783.38.
That is 783.38 − 264 = $519.38 a month more than option A.

Payment $248.38, interest $1 922.24 over 4 years, and the car costs about $783.38 a month to own.

Worked example

Example 2: Depreciation (F1.2)

The $12 000 car loses about 15% a year. Find its value after 4 years. Use the graph below to check whether Sam would ever owe more than the car is worth.

V = 12 000(0.85)ᵗ. After 4 years: 12 000 × 0.85⁴ ≈ 12 000 × 0.522006 ≈ $6 264.07.
It loses 12 000 − 6 264.07 = $5 735.93, about 47.8% of its value.
Compare the loan balance with the value each year: year 1, $7 822.02 owed and $10 200 value; year 2, $5 442.08 and $8 670. The value stays above the balance.

After 4 years the car is worth about $6 264. Thanks to the $2 000 down payment and the 4-year term, Sam never has negative equity.

Option B: the car's value (dashed) stays above the loan balance (solid) every year, because Sam made a down payment and chose a fairly short term.

Worked example

Example 3: Total cost over 4 years

Find the net cost of each option over 4 years (48 months), subtracting what the car or e-bike could be sold for at the end (car about $6 264.07, e-bike about $800).

A: 264 × 48 = $12 672.
B: down payment 2 000 + loan payments 11 922.24 + running costs 535 × 48 = 25 680, minus resale 6 264.07: 2 000 + 11 922.24 + 25 680 − 6 264.07 = $33 338.17.
C: 2 000 + 4 × 100 + (4 winter months × 4 years) × 264 − 800 = 2 000 + 400 + 4 224 − 800 = $5 824.

Over 4 years: A ≈ $12 672, B ≈ $33 338, C ≈ $5 824.

Net cost over 4 years. The car costs far more than the other options, mostly because of insurance, gas and maintenance, not just the loan.

Worked example

Example 4: Can the budget handle the car? (F1.4)

Sam's budget is below. Could Sam afford option B by modifying it? Show one balanced modification and judge it.

Transportation would rise from $264 to $783.38, an increase of $519.38.
One balanced plan: savings −$180 (to $100), personal and fun −$186 (to $200), clothing and other −$100 (to $150), food −$53.38 (to $346.62). Total cut: 180 + 186 + 100 + 53.38 = $519.38. ✓
Savings would drop to 100 ÷ 2 800 ≈ 3.6% of income, and there would be almost no room for surprises (a repair or a rise in gas prices).

It can be balanced on paper, but it leaves Sam with very little savings and no cushion. That is a warning sign.

Category	Now (option A)	With the car (option B)
Rent & utilities	$1 000.00	$1 000.00
Food	$400.00	$346.62
Transportation	$264.00	$783.38
Phone	$70.00	$70.00
Savings	$280.00	$100.00
Student loan	$150.00	$150.00
Personal & fun	$386.00	$200.00
Clothing & other	$250.00	$150.00
Total	$2 800.00	$2 800.00

Sam's monthly budget now, and a balanced modification that would make room for the car.

Step 5: Context and recommendation

Math is only half the decision (Lesson 2). Sam also thinks about:

Safety and weather: early-morning winter rides on an e-bike are not safe, which is why option C uses transit in winter.
Flexibility: a car makes it easier to visit family, carry groceries or take a second job.
Values: an e-bike creates less pollution.
Risk: a gas price spike (like in 2022) or a big repair would break the car budget.

A strong recommendation might say: "I recommend option C for now. It costs about $5 824 over 4 years, compared with about $12 672 for transit and rides and about $33 338 for the car. It keeps my savings at $280 a month so I can build an emergency fund. I would reconsider a car if my income rises enough that the total car cost is below about 15% of my take-home pay, or if I need to drive for work."

What would change your mind?

A good decision says which numbers matter most. Here, the car decision is sensitive to insurance, which is the biggest monthly cost. If insurance were $150 instead of $300, the car's monthly cost would drop to about $633, which is still more than double option A.

Hands-on activity

Your own big decision

You need: a grown-up, websites or flyers for real prices in your community, a calculator or spreadsheet.

Choose one decision a young adult in your community might face: buy a car or not; rent alone or with a roommate; take a college program now or work for a year first; buy a new phone on a plan or a used phone outright.

F1.1: Ask a grown-up about a past situation related to it. What did they learn?
F1.3: If borrowing is involved, find the payment and total interest for two rates or terms.
F1.2: Decide whether anything involved appreciates or depreciates, and estimate its value later.
F1.4: Modify a sample budget to see if the option fits, and write a rationale.
Write a recommendation of 4 to 6 sentences with at least three numbers and two context reasons, and say what would change your mind.

Model answer (short): "Renting alone would cost $1 500 instead of $900 with a roommate. Over a year that is $7 200 more, about 21% of my take-home pay. My budget would balance only if I stopped saving, so I recommend a roommate for 2 more years while I build a $5 000 emergency fund. I would reconsider if I got a raise of at least $500 a month."

Just for fun

Sam asked the car salesperson if the car came with a warranty. "Of course," they said. "It's guaranteed to depreciate."

Your turn

Find the total payments and the total interest on Sam's $10 000 loan (payment $248.38, 48 months).

What is the monthly cost of owning the car (payment + $300 insurance + $160 gas + $75 maintenance)?

Find the car's value after 4 years at 15% depreciation per year, and the percent of value lost.

Sam budgets $160 a month for gas at $1.50/L. How many litres is that? What would the same litres cost at $2.00/L?

By how much would Sam's budget need to change to afford the car?

Which option is cheapest over 4 years? Give one context reason someone might still choose the car.

If Sam could get 6.9% instead of 8.9% (payment $239.00), how much interest would Sam save over 48 months?

More practice: warm-up

Find 8 rides × $18 each.

What is the loan amount for a $12 000 car with $2 000 down?

Find 12 000 × 0.85 (the car's value after 1 year).

$264 a month for 48 months is how much?

Is a car more likely to appreciate or depreciate?

More practice: on your own

Sam's savings of $280 a month are what percent of $2 800? After the car plan, savings are $100. What percent is that?

Use the graph data: how much equity (value − balance) does Sam have after 2 years?

If insurance were $150 instead of $300, what would the car cost per month? How does that compare with option A?

Sam puts $5 000 down instead of $2 000 (loan $7 000, payment $173.86). Find the new monthly cost of owning and the total interest.

Write a rationale sentence for cutting personal and fun to make room for the car.

Challenge

Find option B's net cost per month over the 4 years. How many times bigger is it than option A's $264?

Sam's recommendation says to reconsider a car when total car costs are below about 15% of take-home pay. With costs of $783.38 a month, what take-home pay would that require?

Which single change would lower option B's 4-year net cost the most: (a) a 6.9% rate (saves $450.24), (b) $150 lower insurance each month, or (c) gas staying $20 lower each month? Show the 4-year savings for (b) and (c).

Check your understanding

Quiz

Sam's loan has 48 payments of $248.38 on $10 000. What is the total interest?

What is the car's value after 2 years at 15% depreciation per year? (Price $12 000.)

Which part of the car's monthly cost is the largest?

To afford the car, Sam's budget must free up $519.38 a month. Which modification is balanced?

Which lesson from a past situation fits Sam's decision?

What makes Sam's recommendation strong?

Why does Sam never have negative equity in option B?

For parents and teachers

Big idea: This lesson pulls the whole strand together: learning from past situations (F1.1), depreciation graphs (F1.2), the cost of borrowing with rates, terms and down payments (F1.3), and modifying a budget with a rationale (F1.4). It also builds A1 (problem solving, reasoning, communicating) and A2 (connecting math to real life).

Common difficulties:

Comparing only loan payments and forgetting insurance, gas and maintenance.
Forgetting resale value when finding a net cost.
Recommendations without conditions. Ask, "What would make you choose differently?"

How to help: Car insurance quotes for young drivers in Ontario vary a lot. If your teen is close to driving age, getting a real example quote together is eye-opening. All amounts in this lesson are examples; encourage your teen to research real local prices for the activity.