By Dr. James M. Dahle, WCI Founder
I was involved in an interesting chat on Bogleheads a while back. There was a new attending who had a $12,000 car loan at 5% he was considering paying off. I told him this:
Quit buying cars on credit. Pay this one off ASAP and then keep putting the payments into a “car account.” When it comes time to buy your next one, you can use cash. There's no reason for anyone, much less a physician, to buy a car on credit.
Another poster responded:
I disagree with the “no reason for anyone. . . to buy a car on credit” advice. Rates are currently low enough that some people could get a car loan, pay a relatively small amount in interest for the car, but end up saving much more come mortgage time because they were smart enough to build credit history. Since the OP [original poster] has no student loans, he probably has no other installment accounts, so the car loan is probably benefiting his credit score.
In response, I came up with. . .
15 Reasons to Quit Buying Cars on Credit
#1 You Buy Too Expensive of a Car
Basic transportation is available very cheaply. You can get a 10-year-old economical commuter for less than $5K. The availability of credit encourages too much consumption.
#2 Interest Costs
Given that cash-equivalent investments are paying 1% or worse these days, even financing at 2% or 3% is costing you something, especially after-tax.
#3 Finance Charges
Cash buyers don't pay them.
#4 Smaller Selection of Cars to Buy From
Guess what? If you want to come buy my car I'm not going to finance it nor wait while you dink around with a credit union. You better have cold hard cash. So that leaves you to go deal with those who are willing to either finance it or mess around with whoever you're going to finance it through. That's fewer cars to choose from.
#5 Higher Price
On the same reasoning as above, you can get a great deal from me if you wave twenty $100 bills in front of my nose. If you have to go down to Low Book Sales down the street, you're going to pay more.
#6 Credit Scores Are Stupid
A good credit score is so easy to get without doing dumb financial things that it is no reason to take on debt. How about buying your gas on a credit card and paying it off at the end of each month? That'll give you a credit score you can get the best mortgage rates with after a year or two. Not enough credit lines? Get two cards and alternate them. Too many of us worry about our credit scores anyway. I hope to never need mine again.
#7 Cash Flow Constrained
So you decide to borrow the money to buy your car so you can leave your cash invested. Guess what? You still have to service the debt. You've got to come up with a few hundred bucks a month. If your income drops or another opportunity comes up or whatever, that cash flow isn't available. It's best to have low fixed expenses and high variable expenses. Buying things on credit reverses that.
#8 Living on Credit Mindset
Cash, not credit for ANY mode of transportation.
If you finance your car, why not your TV, and your furniture, and your house, and your vacation and your kid's college and borrow from your 401(k), etc., etc., etc.
#9 Screw-Ups
One missed payment not only hurts your credit score but also tacks on additional fees. It might not even be your fault. Maybe your employer sent the paychecks out a day late.
#10 The Satisfaction of Living Without Debt
You don't get to call in and scream “I'm debt-free!” on the Dave Ramsey Show. Seriously though, talk to someone who has paid off their mortgage and ask if they'd take out another mortgage on the home at a very low rate. Most won't because it is so satisfying to live without debt in this world.
#11 Insurance Costs
If you own it you can go liability only. The bank wants you to fully insure it. And a more expensive car has higher insurance too. That cheap beater you could have paid cash for is dirt cheap to insure.
#12 Registration Fees
More expensive cars (the kind you go into debt for) cost more to register each year.
#13 Sales Tax
Same drill. Paying cash encourages you to buy less. Less car, less tax.
#14 Cars Depreciate
It's one thing to buy a house that you expect to keep up with inflation on credit. The longer you wait to buy a car (while you save the money) the cheaper that car gets. In fact, the terms on auto loans are getting so long these days (5-8 years is not uncommon) that many buyers actually find themselves upside down on their loan.
#15 Leverage Goes Both Ways
Many argue that they prefer to keep low-interest loans and invest and hopefully earn on the spread. It's great when it works for you. But it works both ways. Here's what Warren Buffett says about it:
By being so cautious in respect to leverage, we penalize our returns by a minor amount. Having loads of liquidity, though, lets us sleep well. Moreover, during the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offense while others scramble for survival. That’s what allowed us to invest $15.6 billion in 25 days of panic following the Lehman bankruptcy in 2008.
Now I'm not a Dave Ramsey-esque extreme anti-debter. I do understand that forgoing 401(k) contributions to pay off your 0.9% student loans might not be that wise. But far too many people who plan on investing the money they would have used to pay down loans or buy a car never get around to it. It's a behavioral finance thing, and it's an easy trap to fall into.
If those 15 reasons aren't enough to convince you, feel free to buy your cars on credit. There are dumber financial things that most Americans do every day. But for a physician, who likely makes $10K-$30K a month, to have to take out a loan for a car, is what I call a negative status symbol. It tells me he has no idea how to manage money. He should be able to save up for an average used car in the same amount of time it takes to shop around to buy one.
What do you think? When is it okay to buy a car on credit and when is it folly? Comment below!
‘because I simply love the new smell of leather’ according to a young public doctor at a seminar on tax reduction last week ( new and purchased on credit) :/
Depreciation/assets/liabilities had to be explained to him/her.
Of note, the accountant suggested buying new car on credit if you are in private practice so that you use other peoples money, put more into your business and can claim interest /depreciation etc to reduce tax. Note: this is Australia.
I totally agree with you. I just sold my used car (2002 Dodge Neon) yesterday for $200 more than what I paid for it 2 years ago. Buying used is the way to go.
Agree completely with your assessment on cars. Just re-located to Nebraska – and they really sock it to you for car registration/yearly ‘sales’ tax, esp for the newer/more expensive models. But your comment on home mortgages caught my eye. You wouldn’t take out a mortgage for a new home? I just sold my old house, and bought a new one (not closed yet), about twice the house for 2x the money. My CPA strongly encouraged me to get a loan on 80% (avoids personal equity insurance requirement), as rates are under 3% here. He’s expecting interest rates to bump up considerably in 2 – 5 years, feels using ‘other peoples money’ is smart. I have the funds, liquid, to simply pay off the house – so I could go either way. Your comments appreciated. Great blog, btw.
I’m not sure which comment you’re referring to about houses. I think houses are a bit of a different story because even docs have trouble paying cash for a house. Plus, they generally at least keep up with inflation (rather than depreciating). When you consider the low interest rates available, and their tax-deductibility, I’d put a house in an entirely different category. But I still wouldn’t use it as an ATM by pulling cash out by refinancing, whether the goal was to spend it or even to invest it. I have a 15 year mortgage on mine, and hope to have it paid off in 10, even at its very low interest rate.
For my commuter car, I bought a small toyota brand new with 0% financing for 5 years 4 years ago. The total cost of the car was 18k with taxes and fees all inclusive. Car today is worth 14k to a second party if I wanted to sell it. Also, it has all the safety features. Sure if I paid cash I would have saved $500 bucks, but I feel I made more in interest.
I think the new cars are better because of all the safety featues. Also, making 30k/month I feel I should have a car that is reasonably safe.
Reasonable car, reasonable cost, though buying it ‘up front/cash’ looks do-able with your income. Can you use interest on the loan as a deduction? I’d say yes. But big difference in your choice, and buying a BMW.
AFA paying off your mortgage early – I wonder if that’s best use of assets. If you can have a tax-deductible mortgage at, say 3%, does it make sense to carry that, and invest your funds elsewhere? That’s the argument my CPA is making, but that’s assuming I can do that, and not lose the principle in the process. Full disclosure – I’ve never been in debt. except for a short period when I had a mortgage for first house, which I paid off quickly. And yes – I love not owing anyone anything, but that doesn’t necessarily mean that’s the smartest way to go. As I age, I’m getting smarter/better at this – but man, it’s sure taking a long time!
My only problem with the take the cash out at a low interest and invest elsewhere argument is that your CPA is assuming a guaranteed investment yielding more than the loan you’re paying (Is he guaranteeing it?). If you are using the mortgage interest tax deduction to factor in your investment, then you have to worry about that still being available to you in the future and also the liquidity of your investment if the deduction is removed and you need to pay the loan.
The only reason I’ve ever considered (haven’t ever done it) financing a car was at the 0% initial rate and paying off before interest was charged, but I hadn’t considered the financing charges (and other things you listed), so thank you for this list.
Full disclosure, I’m still in school, have only a lot of student loan debt, and have yet to buy a house or expensive car in my life.
Joe-
A couple of comments. First, it’s pretty unusual that an $18K car is still worth $14K after 4 years. That tells me one of a few things is going on. Perhaps you got a fantastic deal. This is quite possible given the market issues going on in the auto industry 4 years ago. Or that particular model holds its value very, very well. I’m assuming a camry or something, so that’s also possible. Or more likely, you’re overestimating its value as a trade-in. A typical depreciation rate is that a car loses half its value in the first 3 years or 40-50K miles.
I hear the safety argument a lot. But it’s pretty hard to argue that a 3 year old car is tons safer than a brand new one. There just aren’t that many safety innovations every year. My 2002 has airbags, antilock brakes etc. That’s probably a good argument not to drive a 30 year old car though. But this post isn’t so much on whether to get a new car or a used car, it’s about paying cash for whatever you decide to get. On an income of $30K a month, that shouldn’t be an issue, even for a BMW.
I think getting a car with ESC (standard as of 2011 models due to government requirements) is a big deal; the IIHS or Government safety organizations say that it is the biggest safety innovation since air bags, I believe. Aside from that, I think a used mid-sized car that is a few years old with low miles is a great deal for most people. (Camry, Sonata, Fusion)
The ESC on my Sequoia drives me nuts and makes it hard to spin donuts in parking lots. There’s always a new safety innovation coming out. If you must have the latest and greatest, you’ll need to buy relatively new cars. That’s fine. Spend your money how you like. But make sure you can afford it. Paying cash is the best way to ensure you’re buying something you can afford.
The math argument is a separate issue, and one that is quite arguable. Mathematically, you probably will be better off most of the time taking on very low interest debt such as a 0% financing car deal or a low interest rate mortgage and investing the difference for the long term. But that depends on several things. First, you have to actually invest the money. Far too many people just turn around and spend it on something else. So mathematically it might be right, but behaviorally it can be quite wrong. The second issue is that you’re assuming things work out as you plan. Investments don’t always go up. It really sucks to invest on borrowed money, and then lose money on the investment too. And if you stick with guaranteed investments these days, especially after-tax, there isn’t much arbitrage there, even with a 0% car loan or a 3% mortgage. Third, if you finance, you still have to pay finance charges, even with a 0% interest rate. It isn’t actually free money. Fourth, people forget about servicing the loan. If you buy something with cash, you’re done paying for it. It is no longer a fixed monthly expense. In a few months or a few years, if you lose your job or you decide to cut back or you get disabled or whatever, you don’t have the debt hanging over you. Keeping your fixed expenses low is a great safety valve in case of personal or national economic badness. Last, don’t forget about the opportunity cost of the money you’re using to service the loan. Sure, you could take that $18K you would have spent on the car and invest it. But then you’ll be paying $500 a month (or whatever) for a few years. If you’d paid cash, you could invest the $500 a month. It isn’t quite as good as having the money up front, but you shouldn’t forget about it either.
George- Interest on a car isn’t deductible, even if you commute in it. The only way to make it deductible is to have the car owned by the business and used only for business. Commuting expenses are not deductible. I suppose you could take out a home equity loan and buy a car with it. That would be deductible. I don’t think you’re doing anything wrong avoiding debt, even if you miss out on some minor arbitrage opportunities occasionally. Ask someone who owns their home free and clear if they’d take out a mortgage on it. At least 9 times out of 10 you’ll hear a “No way!”
I bought my 2006 Acura TL six years ago just after I finished fellowship with cash I had saved up through residency. Still drive the car and love it and plan to drive it for at least another 3-4 years. Only thing different I would do different is to buy a 2-3 year old used car next time instead of a new car, of course with cash.
No need to buy a 10 year old commuter when a 2-3 year old corolla/accord/camry can be had for so cheap. With proper dealing techniques, even a new car can be had for atleast 18-20% off MSRP {not compact cars). I am of the thought that if u like a luxury cars and have enough saved up to pay cash for most of it, then go for it. Just as one wouldn’t be happy eating bread and carrots every day just because “they fulfill basic nutritional needs {not really, but its an analogy}” and are cheap; many aren’t satisfied by just having simple transportation. Survival in this nation is easy. Basic house, car, food and entertainment is available to anyone who is willing to work. But we all want to do more than just survive – right?
If you are willing to make all your life’s decisions based on logic, then nobody should buy a house on a mortgage either. It’s true most of the time house prices go up while cars always go down, but as we saw with the recent housing bubble that this is not always the case. A two bedroom apartment will serve just fine for a family – if all they need is a roof over their heads. Then why do most of us want atleast a 4 bedroom house with a 2 car garage and backyard? Why do so many have pets which cost so much but are really only a luxury? The truth is that there is nothing essentially wrong with any of the above mentioned things but only with the fact that how each person/culture/nation describes as a need or necessity is very very different. Although I agree with WhiteCI that buying new cars is not a wise choice for some {if not all} people, then neither are 4 bedroom/2 car garage homes, new clothes, pets, bottled water, non essential objects etc. Just remember you CANT have everything {unless you are a billionaire}. As ‘regular’ people, we need to choose our luxuries. Most assume they can have it all.
I’m of the belief that, if you’re saving 20% of gross income on retirement and are ok with doing that for a few decades, do whatever the hell you want with the rest. Just as long as you’re not teetering, and can meet your obligations with some amount of ease each month.
Is there any place for a 2 yr low cost loan with pretax money on a used, slow to no depreciation car with pre-tax money when you I have short mileage to work situation and later (2yr)selling it and avoiding those taxed dollars? I realize there is opportunity cost of money lost.
I’m not sure I understand why you can make payments with pre-tax money but not pay the whole bill with pre-tax money. I also think it can get pretty squishy paying for your car with pre-tax money, even if leased, but I suppose if you use it 100% for business you can justify it.
I agree with using cash to buy your vehicle, but what about writing off depreciation on new vehicles? Used vehicle depreciation is minimal at best compared to new vehicles.
This makes sense for physicians who are independent contractors as they are able to establish a home office as their primary workplace. They can then claim actual expenses (standard deduction may subject you to AMT) on the vehicle as they drive from home to hospital.
SUVs and trucks over 6,000lbs but less than 14,000lbs are able to depreciate $25,000 if the vehicle is used 100% for business. Depending on the cost of the vehicle, this could exceed car payments for the first couple years if one chooses to finance.
Though the IRS has yet to update Section 179 for 2013, there still exists an ability to FULLY depreciate the value of trucks with bed lengths over 6′ (given 100% business use). This provides some hope for those who need a $60k F-250 King Ranch in order to pull the boat they shouldn’t be buying 😉 This deduction also applies to cargo and multi-passenger van but who wants to drive one of those?
Anyways, just a thought. For more info, check this website out.
http://www.section179.org/section_179_vehicle_deductions.html
P.S. I love this website! Keep up the good work sir!
I like being fairly aggressive with my taxes but it might be tough to defend that truck as a business expense in an audit, especially when the auditor takes a look at the boat in the driveway and no other vehicle to pull it. 🙂
I would get very familiar with the home office rules and the vehicle depreciation rules before justifying buying a new car just because of them.
WCI, so I know the best way to save would be to keep a decent car for a long time. I know that. But what if I decided I want a new car every 3-4 years knowing this is spending lots of money. I can afford financing the car. Would it be better to lease every 3-4 years, or finance the car (sell it every 3-4 years and use the trade-in as downpayment)? I’ve been looking at the numbers and it seems to all depend on the residual value of the car after 3-4 years.
That’s a good question. Leasing isn’t nearly as bad a deal if the alternative is buying a brand new car every 42 months. The lease payment likely adds up to about the same as the depreciation on a new one. Leasing might be a slightly better option if you can get your practice to pay for it.
A factor you might be neglecting – student loan interest. I think it would be silly for me to save up cash for my car.
Just refi’d $160k of student loans with Sofi at roughly 3.6% interest. Got an auto loan for an small, no-frill commuter at 2.3%. No that big of a spread, but still – saving up cash to avoid paying 2.3% when that cash would otherwise go towards reducing my 3.6% loans seems like a bad idea.
How about buying a $5K car with cash from your next paycheck? Then, when you’ve paid off the student loans, saving up for your next car? 5 years from now you can have a sweet car and no loans. Meanwhile, keep living like a resident so you can have financial freedom later.
[email protected]
I don’t see a lot making the obvious counter argument. By taking ADVANTAGE of FINANCING, you get the same product good (Transportation) while being able to invest that amount. If your investment does better than the financing costs of the same period of time. This isn’t a conceptual philosophy, its simple math.
Lets look at 2 scenarios in both scenarios you start with 20k to buy a car
Scenario A
$20,000k cash spent on a car
versus
Scenario B
6 year lease at 1% on a 20k car
except you put 20 K in a CD that yields 1.6 APY (the most conservative investment imaginable in this situation)
Scenario A
in 6 years you spent 20K on your car
Scenario B
Lets say you finance the 20 K @ 1% APR and pay 286 a month with 0 money down
Then take 20k and put it in a CD with 1.6% APY
in 6 years your 20K will be come 22K
and your loan would have cost you $630 dollars
You made 1.37K
Alternatively, you could’ve bought 20k stock of apple and financed your car paying 286 month..
how much would your apple investment return? Lets assume average return of 15% a year over 6 years.
Your 20k would be worth 46K and some change. In that scenario, you would’ve LOST 26K by spending 20K cash on a car a depreciating asset.
As a simple rule of thumb, spend as little cash as possible on depreciating assets, and spend as much cash as possible on appreciating assets.
If what I wrote doesn’t make sense, don’t lean on your own understanding on investments, hire a professional. Just like we recommend our patients don’t google their health, pay the cheap cost of an expert to maximize the return on the money you work so hard to make. The opportunity to purchase necessary items like a car with financing, gives you the opportunity to invest money while deferring the payment of the item. In the long run you end up with more money for less work.
Yes, if you maximally leverage everything in your life the math would suggest you will come out ahead. But in real life, we don’t invest the difference. We spend it. It’s the behavior aspect. I get the math, no problem. But I also pay cash. If leveraging a $20K car is the difference between you reaching your financial goals and you not reaching your financial goals, I would suggest you shouldn’t be driving a $20K car.
I also disagree that buying individual stocks is a good idea. Let me know when you find an investment that will average 15% a year going forward.
Despite paying cash for my first car n the 70s, I never realized there intrinsic costs.
Insurance, sales tax’s, excise taxes, maintenance, etc., it adds up like a homes costs.
-100k w/my retirements accumulation because of all the autos i’ve had, YES, I’ve had over 100 autos in 45yrs of it as my hobby.
My hats off to you JDahle!
Why buying a car on credit probably isn’t a great idea. 1. You buy too expensive of a car, 2. Interest costs, 3. Finance charge, 4. Higher price, 5. Cash flow constrained, 6. Screw ups, 7. Registration fees, 8. Sales tax, 9 Car depreciate. Hence this is a helpful blog.
It’s amazing how many people on the Facebook group espouse views that are contrary to these 15 items. This article makes so much sense! Every high school graduate in America should know this information by heart.
The problem is that docs make enough money to make lots of mistakes and still be okay. But that doesn’t change the fact that it is a mistake.
I only buy cars when I have enough cash. But I still use credit card to pay which will be paid in full and get 2%+ rewards. I never pay credit card interests.
Good luck getting a dealership to take a card. I’ve had a hard time doing that, especially for a brand new one.
Our last 2 car purchases the dealership agreed to take $5k on a credit card while the rest was paid in cash. They would not allow more than $5k.
That’s similar to my experience. It costs money to take credit cards, usually north of 2% and closer to 3%.
Unless you get 0% interest. We drove a 2003 Kia spectra into the ground. With a family now and many hours drive to in-laws we wanted a mini van. With a few whistles. Tv in the back for the kids. We hope to have it into the teenage years and be soccer parents on one vehicle. By buying new we know it’s history and have the full warranty. We purchased a Pacifica and got a higher trim model for the price of a lower trim Honda or Toyota. Add the fact that because it was new we were able to get 0% interest for five years! Actually, all new cars with lower interest rates than used (if we went credit)! We have a new van that has good reviews cheaper than a Honda or Toyota and pay installments with zero interest. Saved us a lot of money. I would urge looking for deals like this too!
Congratulations! You get to make payments for 60 months. Just think, if you do this with everything you buy you can be reminded for 5 years once a month about everything you’ve purchased in the prior half decade. 🙂
As you say in your posts, you have to decide what you want to pay for. With a new family with long drives, we wanted a minivan (and it’s useful). We drive the sedan city. It is an investment. We plan on having the van 15 years or more if possible. So we did due diligence. The only minivans we wanted for safety and longevity were Toyota Sienna or Honda Oddyssey. Safety with kids is very important. Because at the time we had 5 hr drives to Grandma’s several times a year, we decided we wanted to splurge for a rear entertainment system. Again, it’s about priorities and we thought this was worth it. A USED Honda with minimal (or minimal enough in my opinion) that just fit our basic needs ran $30K+. For $35 I was able to get what was equivalent to 2 trims ABOVE the used Honda and it was new, How well will it hold its value compared to a Toyota or Honda? I don’t know. but I don’t care. This was our first (and probably last) new vehicle ever. And we always drive our cars into the ground. As stated, this replaced a 2003 Kia Spectra. Our other vehicle is a 2006 Honda Civic. We don’t buy for status, we buy for utility. If we financed a used car, we would have had to pay interest (and over 3%…) By buying new, paying over 2% is ridiculous. but 0% is FREE money. Because this is an unknown, and it is new, we splurged to extend the warranty. Again, its about choices, we felt that was a good investment. After taxes, title, warranty, etc, total package came in over 40K. Pay that upfront? Or pay a couple hundred each month being able to save and invest the rest? That’s a no brainer in my opinion.
Whenever there is 0% interest, I’d argue go that rout (as long as you responsibly make payments and have all paid off by the end). You’re making money on others’ money. If you set up auto pay its taken care of, and you just add said payment into the budget. I don’t know what you have against making payments if you don’t lose money. If you can’t get 0% interest, then yes, I agree, always pay up front.
But there is another factor (we haven’t had to deal with lately) where paying up front also hurts… Inflation. If you pay 0% interest, then by the end you are paying the same amount that is worth less than initially, saving more money. If you pay it up front, you are paying when the dollar is worth more. Again, lately this is a non-factor with stagnant inflation rates, but it’s something to consider. If it does NOT hurt to pay later, then that is better than paying earlier because you keep your money when the buying power is greatest.
First, neither the car nor a warranty is an investment. It’s a consumption item. In no realistic circumstance is it going to pay dividends or appreciate in value. That’s okay, we buy lots of thing that aren’t investments every day, but it’s important to understand the difference.
Second, I’m not arguing you shouldn’t buy a new car. I like buying new cars.
Third, I’m not arguing you shouldn’t buy a nice car. I like nice cars.
I’m simply arguing you shouldn’t buy a car you cannot afford (meaning you have cash to pay for it) and that if you have the cash to pay for it that you should actually use the cash to pay for it.
Far from a “no-brainer” this “payment mentality” leads to behavioral change that impedes wealth building.
” There are dumber financial things that most Americans do every day. But for a physician, who likely makes $10-30K a month, to have to take out a loan for a car, is what I call a negative status symbol. It tells me he has no idea how to manage money.” Hmmm…I think when a person starts providing “black and white” advice they are inevitably going to end up making an incorrect statement. It is inherently incorrect to state that a person “has no idea how to manage money” simply because they finance cars. I am a physician 7 years out of residency, a prior career as a stockbroker, and self manage my finances. My “stats” are as follows…I make about 300k salary, 125k with a side-gig, and about 50k with rental property. My pre-tax savings rate is 29% and that is lower than what I want it to be because I am paying a student loan off at $5,000/mos with a remaining balance of $22k. I’m so close!! My net worth was $100k 7 years ago, it is now $1.8MM. I max out my 403b, 457b, 401k, Traditional IRA, and SEP IRA. I always buy new cars, finance them, and keep them for 10-15 years. It is an incorrect to assume that all people buy more expensive cars just because they finance them. My previous Civic I bought new for 13k, financed it over 3 years, and sold it for $1500 16 years later. My new “top of the line” Civic SI cost me $21,300, I financed it over 3 years, and took out a loan for $18,000 on the car. Guys…sweat the financial decisions that make a difference like maximizing qualified accounts, receiving employer matches, etc..etc…etc.. You can do the math just as well as I can but my car financing cost me $532 in interest over 3 years which is $14.77 per month! So, since I decided to add an additional $14.77 of interest expense to my budget means that I have “no idea how to manage money”? The statement is incorrect at best and offensive at worst. Now, I love WCI…don’t get me wrong…I love the advice and I’ve learned some more complicated financial strategies on this website and I will continue to be a fan but you have to DO THE MATH! It took me 30 seconds to realize that my car was costing me $14.77 in interest. I make way too much money to worry about a $15 monthly expense. Instead I spent my valuable time arguing with my employer when they told me that I couldn’t do catch up contributions to my 403b/457b because their system “didn’t support that”. That time was well spent because it excluded an additional $12k from my income which results in an immediate annual tax savings of $2400. That’s $200/mos savings in taxes not to mention the thousands of dollars in additional tax deferred growth that I would not have received otherwise. Moral of the story…using “all or nothing” statements like people who finance cars have “no idea how to manage money” guarantees that you will be wrong many times over. DO THE MATH guys and don’t sweat the details!! But please…please…please….stop buying 90K Escalades and financing them over 7 years…come on now….that’s just wrong!! 🙂
So….was it the fact that you financed your cars that made you so wealthy? I doubt it. It probably has something to do with that income and savings rate, don’t you think? The amount of extra you made by financing a $13K car over 3 years and investing the difference was trivial in comparison.
How much extra cash did you make arbitraging your low interest rate $18k loan over 3 years? Can you even figure it out based on the return you received on the initial $18k and decreasing that $18k by the car payment every month during those 3 years?
How much more did you pay in car insurance during those 3 years because the loan company demanded you have a certain minimum insurance with a lower deductible since the car isn’t yours yet.
Compare that to your $1.8 million and your salary.
Sure, maybe you made a few hundred bucks in the deal over three years. Meh.
Like anything in life, I would say “it depends “. My husband and I just purchased the Kia electric vehicle, financing it. By the way, we buy cars every 13 years. I financed it because I don’t want to tie up my hard earned money in a car -a depreciating asset.. We financed it at 3%, I want to use the extra money to invest elsewhere – that is, income property. So I feel that using OPM is smart, given the low interest rates.
How much is this Kia? Did you have the cash for it at the moment and then invested it elsewhere? Where exactly did you invest it? What was the return? How much more did you have to pay for car insurance for the lower deductible?
How much extra money did you make on the transaction over the life of the loan.
I’m sure you are aware, but the return isn’t the cost of the car multiplied by the percent return over the life of the loan. It is the price of the car decreased by the monthly payment every month times the investment return. If you put that in a spread shit month by month, you may find the extra return on investments minus interest at the end of the loan less than the extra you are paying in insurance premiums for the low deductible.
Funny how many people think it’s smart to borrow to buy stuff. And also funny how many people never build much wealth despite high incomes. While correlation is not causation, I’ve never met someone who considered such strategies key to their achieving financial independence.