A frequent topic seen on this site and many other sites, blogs, and forums are the merits of using very low-interest financing for various things. The attraction is obvious. Not only do you not have to have the cash up front, but even if you do, surely you can do better investing than 0%, and if you borrow at 0% and earn at anything better than 0%, then you come out ahead. Leverage works. That's a mathematical fact. What isn't a fact, however, is that borrowing at 0% (or similar) is a good idea for you.
I'm certainly not guilt-free in this respect. Not only did I drag my mortgage out for a couple of years longer than we needed to (and came out ahead doing so) but we also pay our taxes using a credit card (for a mere 0.13% arbitrage, some float, and convenience) and have used 0% credit card deals to fund a Roth IRA in the past. But we don't really do it anymore. There are a number of reasons for that, and I think outlining them will promote a great discussion in the comments section to this common question.
You Spend More With Credit
First, let's hit the elephant in the room. The fact of the matter is that the vast majority of people who take advantage of financing offers, including financing at below-inflation rates, are people who don't have the money to buy whatever it is they're financing with cash. The financing allows them to buy more or buy earlier than they otherwise would. This is the main reason these offers exist.
These companies, whether they're auto dealers, mortgage companies, or banks aren't losing money on these deals in aggregate. So this leaves you, deciding whether to use your $20K in the bank for your new car or finance it at 0%, sitting there asking yourself if you are spending money you wouldn't otherwise spend without this deal. The answer most of the time for most people is going to be yes. Any time you convince yourself that you can resist behavioral finance pressures that others cannot, a healthy dose of humility should probably be injected into the thought process. Remember that mortgage we hadn't paid off while we were meanwhile buying a wakeboat with cash? In reality, we were buying that wakeboat on credit. The credit extended by the mortgage company. We weren't investing the difference and earning better than 1.6% (the after-tax rate on our mortgage). We were spending it. Maybe you're resistant to that tendency and maybe drug company advertising doesn't cause you to prescribe the advertised drugs more often, but it's unlikely according to all objective data on the subject.
0% Isn't 0%
Next, it's important to realize that 0% isn't 0%. A typical “0% financing” deal on a new car is really only a 0% financing deal for the best of the best. You know, 800+ credit scores etc. Maybe that's you and maybe it isn't, but it's critical to realize that the vast majority of people who go in there to get that 0% deal come out with 1%, 2%, or even 5% financing, not 0% financing. And by then they're emotionally attached to the car and are going to buy it even without the 0% deal. In fact, the financing desk is the last stop in that dealership after everything else is done. It's hard to walk away after investing several hours into that new car you can already envision in your driveway.
It's more fun to surf behind when it's paid for, and now that the mortgage is gone, it really is paid for.
In addition, most of the time (and perhaps not every time, but most of the time) that 0% deal is offered at the expense of something else. Typically with a car it's that the overall price is higher, i.e. you get a bigger discount with cash than with financing, but it could be something else you could wring out of the dealer like free oil changes for a year or something. There are no free lunches.
It Doesn't Usually Move The Needle
These little “arbitrage opportunities” are generally just that, “little.” So you borrow $5K at 0% and invest it for a year at 5%. You made $250. That's maybe 1-2 hours of pay as a doctor. Better than a kick in the teeth? Sure. But how much time and effort did you spend researching that, lining it up, and servicing it for a year? Subtract that from $250 and there's probably not much left. Same thing if you borrow $20K for a car at 2% and then earn 4% after-tax on that for a few years. Maybe you get $1000 after-tax out of the five-year arrangement. They all seem like wise hacks until you actually quantify them. Then they look like clipping coupons.
It's like my tax bill arbitrage. So say I pay $50K as an estimated tax payment. I pay a 1.87% fee and then get 2% back on the credit card. 0.13% of $50K is $65. Even when you multiply it by 4 for the entire year, it's only an hour's worth of gross pay for a typical emergency doc. Even the 6 weeks of float (and the saved stamp) doesn't add much more benefit. If it wasn't more convenient to pay by credit card than by mail, I probably wouldn't bother. It's just not going to make any sort of measurable difference in our financial situation.
It Distracts You From What Matters
I think the biggest problem with using cheap financing for the typical reader of this site is that it is distracting. You're using your limited time and energy on something that doesn't make a big difference instead of elsewhere. If you're spending your time hunting down 0% credit cards or $100 brokerage transfer deals, maybe you'd be better off starting a side business, streamlining your practice, negotiating your contract, rebalancing your portfolio, carefully examining your asset allocation etc. And that's just the financial possibilities.
Minimizing the amount of time you spend on finances is a worthy goal in and of itself. Go spend that time on your partner, your kids, your hobbies, your volunteer service, or your practice. I've had a few critics (rightfully) point out the reason we're in such a great financial position is that we started WCI, LLC. That's exactly my point. We didn't spend all that time juggling credit card travel offers but started a business instead that has treated us (and millions of readers) much better.
It's A Poor Man's (Woman's) Game
One of the best parts of being wealthy is not having to wring out every single little dollar from your life that you can. You can afford to “waste” money (perhaps better stated as “use money to lubricate your life.”) You don't take out a new HELOC every time your home appreciates $100K because you don't have to in order to reach your financial goals. You don't have to use a 0% credit card to fund your Roth IRA before the deadline. You don't have to talk to the finance desk at the dealership, so you don't.
That sort of stuff helps me to feel rich, since there have definitely been times in my life when I did have to do that sort of stuff. Even if you find that you have to do stuff like this now, look forward to a time when, because of the wise financial decisions you've made in the past, you no longer have to do so. Being debt-free is just as much a status symbol as having a wakeboat in the driveway, and it's one we've chosen to have.
What do you think? Do you use 0-2% financing for purchases when available? Why or why not? Comment below!
I think I bought a computer from Best Buy with 0% interest back in college. There was a catch, of course. If I had missed one of 24 montly payments, I’d owe a big pile of interest.
I never missed a payment — probably paid it off early — but the threat alone of owing hundreds more was enough to make me second guess the interest-free loan. I haven’t taken another since, have paid cash for cards since finishing residency, and even bought our current home with cash.
Aloha!
-PoF
This is always my fear with those “deals” (that there is a giant catch no one is telling me about).
Also, I completely agree with WCI that this is usually a game to make you feel like you can afford something you can’t. It’s kind of simple. If you can’t pay with cash you are borrowing money and can’t really afford it. As someone who makes payments on a few things, I cannot say I always think this is bad. We do have to live a little… But I completely agree that zero percent interest deals usually aren’t what they are cracked up to be.
And when it comes to credit cards, I think the hassle to find the deals and do the work seems painful. I may be completely wrong, but that has always been my concern. Hence why I’ve never chased after it.
Isn’t it interesting that those who are better off financially (FI etc) are usually in your camp on this question? I rarely meet people who “borrow their way to wealth” for some reason.
Just depends on how automated these things are in your life.
Yesterday, I financed a 4k$ computer at 0% APR, but all payments are charged automatically to my Apple Card.
This will be paid off with my M1 Pay account every month which will automatically withdraw from the associated brokerage of the balance is below a threshold.
As such, any payments I delay at 0% interest trivially stay invested. The heuristic is that you make duration*brokerage interest*.5 on that deferment (assuming regular payments and not lump sum).
So for me, with the credit card cash back, that was 7.4% off of a 4000$ purchase (~300$) just for pressing a different button on checkout.
I like your comment “Any time you convince yourself that you can resist behavioral finance pressures that others cannot, a healthy dose of humility should probably be injected into the thought process.”
I would humbly disagree, slightly. For small purchases, yes, 0% interest is really a drop in the bucket. But we recently bought a car with 0% financing for 5.25 years. That’s right, 5.25 YEARS. That is a large sum of money over a long period of time that is essentially free “loan.” If you are going to buy a car, why wouldn’t you take this deal? I may have involved an additional 5 minutes to sign the loan papers and another 5 minutes to set up the automatic loan payments….and then you are done. Seems like a no-brainer…don’t pay cash for a car if someone is willing to loan you money to pay for it instead…and for free.
I’m not saying that your math doesn’t work out better for the disciplined person, however, we’re not all so very disciplined. In addition, debt is as much psychological as it is mathematical. For me, debt is something that weighs heavily on my shoulders. It feels unnatural and clutters up my financial picture. I kind of wish I could get over that, but then not really. I may miss out on some small gains like interest-rate arbitrage but it also helps prevent me from making larger losses like over-extending and it keeps me happier to be debt-free.
Why wouldn’t I? Because I’d be embarrassed if someone found out that I thought arbitraging a $30K car was going to make a significant difference in my financial life. I also like keeping fixed costs in my budget to a minimum. You may feel differently without being wrong. But it’s good to be able to see both sides.
Let’s say you’re hiking out in the wilderness somewhere. Would you be embarrassed if you saw a $50 bill on the ground and bent down to pick it up. I mean it’s not going to affect your financial life.
He wasn’t suggesting that it would make a significant difference, just that it would be a positive one, even after considering the time spent
This is correct. Behavioral Economics dictates cash is cash, no matter the size or impact.
When you look at the variables: behavioral aspects of spending more on a car because the payments are low, requiring a better rate of return than the depreciation of the consumer item, the “fine print” of 0% financing, and the relatively little gain from the arbitrage…it ends up being a wash IMO.
Usually if you follow your “interest free” loan with another question like “if I pay the car cash in full, can I get a discount?” You will soon realize that interest free is not interest free anymore.
So I recently had a similar situation when we purchased my wife’s suburban. We were given the option of 0% financing for 72 months or 2.85% for 72 months with something like $7500 or $10000 off invoice (I can’t remember the exact deal) So I ran the math and did the interest option as it saved me something like $6000. So, I guess my point is 0% sounded like a good deal but paying the interest was actually a better deal in that situation. My eventual plan was to leverage the difference and invest in the market. Turns out the idea of having a loan when I could pay it off made me uncomfortable so I didn’t invest and paid off the loan within the year
Please tell me where you got that deal I have a credit rating of 814
When you get your mind around paying cash for everything you cease to worry about your credit score. Early on I bought some furniture on a 12 month 0 interest deal. The next iPhone that I buy will be from the Apple store instead of Verizon because I dislike that extra $40 or so tacked on to the cellphone bill each month.
I purchased my last iPhone straight-up for $400 from the Apple Store. Because I purchased it outright, my cell phone bill from AT&T remained at $40/month and hasn’t changed in years. Keeping fixed cost low is a key for reaching financial independence.
Mostly agree although points 1 and 4 are somewhat contradictory. Overall, with interest rates as low as they are today there is little reason to think this sort of arbitrage is worth the time unless it is more convenient than paying cash.
First and last points, sorry.
Excellent points! The only borrowing we do anymore is using our (one-and-only) credit card because of reward cash back. We’ve never carried a balance from one month to the next. Technically this is borrowing at 0% for a short period of time. And it’s as much as I’m comfortable with.
Far too many people start out with this line of thinking though, then miss a payment. Or some unexpected event happens to throw them off track. It’s not something I’d recommend for everyone.
One thing that isn’t mentioned here is the mortgage interest tax deduction that can reduce your taxable income and which right now prevents me from paying off my 2.75% mortgage with the savings in my money market account. Of course that may not make as much sense with the new tax laws.
Approximately 30% of those who pay federal taxes itemize their deductions, and can take advantage of the mortgage interest tax deduction. Like you, I itemized my deductions. Unlike you, I did not care for my 2.875% mortgage and paid it off as fast as possible. It sure is nice not paying the mortgage company and instead investing it monthly. (It was even nicer because we had a health crisis occur 6 months later, and the former payment now paid our portion of the bill to save my wife’s life. But that is another story…)
Obviously everyone’s situation will be a bit different. I’ve always maxed out my 401k and have been fortunate enough to still be able to put adequate savings into liquid assets to cover most “emergencies”. I agree with most of the article however in that there is no “free lunch” in zero financing. I do hope your wife is doing better and wish you both the best.
It’s down from 30% to 10% in 2018. Still, many of those are docs.
So….you’re rather earn money at 1.5% than pay off 2.75% debt?
I’ve never understood this point. The mortgage interest tax deduction (assuming someone qualifies and itemizes which doesn’t apply to a majority of mortgage holders) means paying $1.00 in mortgage interest to receive about $.25 – $.40 in tax savings. The only reasons I wouldn’t fully pay off a mortgage with cash in the bank is opportunity costs or cashflow concerns.
When you search youtube for videos describing how to get the best car deal, you get a various mixture of good and bad advise. When you search youtube for videos describing how to be a better car salesman, you find a flood of information on how car dealers will manipulate you into paying more. 0% financing deals are typically worse deals. There are so many moving parts that it is hard to keep track of them all. The car salesman is much better at this than you are, so good in fact, that you will thank him for the worse deal without realizing it.
I had my check book out to buy my latest car with cash…then they offered me 0 percent and I took it. This is really the only debt we are currently carrying and while I don’t like the monthly payments it also does not really effect me.
Still I will be avoiding future debt going forward.
It is amazing to me how many of my fellow physicians buy brand new cars using “0% financing” and then brag about what a great deal they got. I would forward this to them if I thought there were any chance of changing their irrational and uninformed thinking, but nay it wouldn’t help. It is great to have this out there though for someone who is on the fence or just starting out in their financial life.
Certain new cars are best bought new. Subaru’s, Wrangler’s, and Toyota’s depreciate so slowly that the operating cost is actually VERY similar to used versions.
Most cars are about 10-15% cheaper to operate when bought used though. The extra technology, reliability, and safety of new cars are definitely factors to account for, however. High-paid workers have more of a reason to go for reliability since their opportunity cost fixing cars is much higher.
I was shocked when I discovered this as well. Was all set to buy a used Highlander for my wife. Not only was it impossible to get the options we wanted, but 3 years used only saved about 3k on a $48k car. My inner cheapskate was bummed to succumb to buying a new car, but it does prove that the Toyotas hold their value well.
0% financing (especially for cars) is another way of saying they got money from you in a different way. It means there was “money on the table” that they ended up with. It’s silly to think that the financing company is willing to take a hit on your behalf. This is a popular business practice for a reason, and it’s not because they are such nice guys. Shell game would be a good analogy. Hese’a good explanation: https://goo.gl/JGwAmW
I have to comment that the statement “Typically with a car it’s that the overall price is higher, i.e. you get a bigger discount with cash than with financing” is not generally not true. I used to think this as well, that perhaps the dealer likes getting that instant money.
But I have a close friend in the car business and he could care less about cash these days, and he’s a small dealer. The big multi-brand dealers really don’t care about cash deals. They typically get a “bonus” or kickback if you’d prefer, from the bank or financing institution to get customers signed up for financing so they can be offered all sorts of other “deals” over the years and get the all-valuable information.
Definitely varies. But if everyone was paying off their car 2 weeks later, then they’d go back to offering a cash discount.
It may not always be true. In my sample size of 1 I went to purchase a car a few years back with preapproved1.5% financing. I negotiated a cost. When I presented the preapproved 1.5% financing info they asked if they could try to beat it. They came back with a 0% offer, but the cost of the car was slightly more. I did the math and I came out ahead going with the 0% deal but it really was right between the two. So she think of it as .75% financing.
This is a complicated question and there are two sides to this. First: yes, the dealer gets a handsome kickback from the financing agency if they close the deal with financing.
But the dealer also knows that a cash buyer is more likely to qualify for financing. I’ve bought a lot of new cars and I’ve seen plenty of sales fail (= wasted time for the dealership) because the buyer didn’t qualify. And, generally, those who finance cars look at the monthly payment rather than the overall cost of the car while those who pay cash look at the total transaction price.
You’ll do better going to the dealer and negotiating a cash price, keeping in /your/ mind that the financing kickback can let you go even further below invoice than you otherwise might, than by going in negotiating with financing in mind up front.
These are good points and there are lots of individual circumstances that could tilt the argument either way. I realize the post is about more consumer-product focused financing deals and not mortgages, but for me keeping my paltry 3.25% mortgage is still paying off handsomely.
If you had a $100K mortgage and a $5M portfolio would you feel the same?
If the 100k mortgage was still at a 3.25% – possibly. Your question is a good one though, at what point is it best to just get rid of the mortgage. I mean, a $5M portfolio would take such a small % hit by paying off that 100k that I’d strongly consider it. But the ratio of my 150k mortgage now to my net worth is much higher than that hypothetical example, so the percentage hit I’d take by paying it off now is much larger. Last year alone the 150k that I have invested because I didn’t pay off the mortgage made $31,500 in the market (21%)
It’s easy to take my view and keep the mortgage when the market has been rewarding me handsomely for this choice over the past 7 + years. This decision has padded my net worth by a ton. But your point is well taken, there comes a time when it’ll be best to just pull the chocks and pay the darn thing.
What you’re alluding to regarding keeping the mortgage while the market is rising could be likened to market timing. And it’s hard to know until after the fact if the market will reward you for putting the extra money there, vs paying off a house. Only hindsight is 20/20 and you don’t want to find yourself swinging back and forth between a mortgage and the market as a preferable investment cause that’s not a recipe for success.
I think when it comes to mortgages (not other consumer debt, which I avoid) you really have to come up with a payoff scheme that you feel comfortable with, knowing that at some point your comfort level of net worth/available cash compared to your remaining mortgage balance may reach a point where you feel it makes sense to accelerate the payoff and just be done with it.
I was right there with you until you said that being debt free is as much a “status symbol” as a wakeboat in the driveway. Caring about “status” is what gets people financing wakeboats in the first place.
Debt is debt even if it is at 0%. I also get the comment about why I could retire early and they can’t. It’s always beause I was a surgeon and made more than them. They are usually shocked to find I made less than they did as I was in a depressed part of the country and took 12 weeks of vacation each year. It’s not what you make, it’s what you keep that makes you wealthy. I kept more than most. So did you.
Dr. Cory S. Fawcett
Prescription for Financial Success
I would finance a truck at 0%, write down the value of the purchase on my schedule C, and invest the entire $20K. Now I have reduced my tax burden for this year, have a deduction for depreciation. Win, win. That is big savings. I would do this everytime.
Long as you’re following the rules for business vehicles….
What do you guys tell the dealer/salesman (assuming you buy from one) when he asks what you do for a living? Anybody remember the Cosby show episode where he buys a car?
I’m not a doctor, but my profession is about as lucrative as a typical MD. When the salesman asks, I tell him. Honestly as soon as he runs my credit score he’ll know anyway.
The typical car buyer needs a car and doesn’t have the financial wherewithal to dictate the terms of the deal. In those transactions the buyer is at the mercy of the dealer. An affluent purchaser who is paying cash for a second, third, or fourth car has far more power in the transaction than the salesman (who isn’t making much money) or the dealer (who makes a lot more money if he meets a monthly sales target than he’d lose off of a transaction). The dealer knows that a financially savvy buyer can go down the street or to the next town to get the deal he knows is possible.
The key is, you need to be willing to exercise that power because the dealer will try to call your bluff. I’ve walked out of a dealership over a $100 additional charge, and literally had the salesman running out after me as I started to drive away.
I know, harder to enjoy now that we know his real nature.
https://m.youtube.com/watch?v=bKMlx5p6n8k
I agree with you. Deals like this aren’t worth my time. If it bugs me so much later on in life, I’ll just work an additional week before I retire to make up the difference.
Last year I had to replace my HVAC and water heater for my condo. An expense that I knew was coming since the closed system had been slowly leaking freon for a few years. Being a responsible condo owner, I have a fund for these sort of expenses.
However, I did decide get an 18-month zero interest loan. I do not owe any other debt. What surprised me the most about zero interest loans is how misleading the required minimum monthly payment. I wrote about it on my blog, https://www.alexandritegroup.com/misuse-interest-free-financing/
Thank you for this post.
I’ve been a personal finance hobbyist for the 21 years since college. I’ve seen both sides of the personal finance blog-o-sphere and watched many bloggers make a lot of money recommending 0% credit cards, bank account gimmicks, etc…
My advice for those chasing these deals has always been: If you’re poor you aren’t going to benefit from gimmicks and if you’re rich you shouldn’t care about them. As you state eloquently, your time and mental energy is better spent elsewhere.
I’ve watched bloggers jump between 10+ savings accounts in a year, getting $100 or so each time. Have they really come out ahead given the time involved to research and open accounts? Are they factoring in the added complexity of ensuring they have all their 1099-INTs at tax time? And, since inevitably they’ll miss at least one, the time required to deal with the resulting IRS queries?
And your take on the 0% financing is spot on. It takes a lot of hubris to truly believe that one is immune to the siren song of “free stuff” (i.e. buy now, pay later!). And when you’re getting 6-year 0% financing on that new car you’ll find it so much easier to go in for the $2000 leather package than if you were writing the check up front.
Take the 0% when it doesn’t change the price. I got LASIK done and the payment plan is 2 year 0%. Price didn’t change between cash and 0%. I don’t carry credit card debt, student loans, or car loans – just one mortgage.
That is exiting!
Seven figure net worth. High six figure annual income. Paid three figures for my family’s current car.
“Financing” consisted of remembering to go to the ATM two days in a row before picking it up from the dealer, because the price was a bit above my card’s daily cash withdrawal limit.
It’s a 20 year old Volvo wagon that has its share squeaks and squawks, but has never left me stranded. It just might outlive us all. It’s even in good cosmetic shape and could hardly be called a “beater.”
THAT is how it’s done, folks. I’m in perfect agreement with Dr. Dahle on this point: wasting your time by screwing around with 0% financing deals at the new car dealership isn’t going to make a heap of difference. Focusing on the important things will.
In my example, that meant investing some time into learning how to diagnose cars, so I’ll always be comfortable buying the right old used car. Not only am I guaranteed to get “0% interest” on the cost of the hypothetical new car that I didn’t end up buying (or, to be precise, on the difference between the five figure new car and the three figure used car), I also get to avoid thousands of dollars of depreciation per year, which the guy financing the new car at 0% interest has to eat.
A two car family that buys cars new and replaces them at 5 years of age (not atypical behavior for the middle classes and above) will be giving up literally millions of dollars of net worth over their adult driving careers by eating that depreciation instead of buying zero-depreciation cars and investing the difference in a typical retirement account.
THAT’s what pushes the needle. I’ve been driving decent cheap old cars since approximately 2002; I haven’t changed my own oil in nearly a decade and I don’t own a set of jack-stands. I have a basic set of hand tools and — most importantly — the confidence and skills which allow me to buy reliable cheap cars which serve my family well. Someone with half my boldness and half my (not very extensive) car knowledge could easily implement a “lite” version of my plan, buying much newer, nicer cars which depreciate $1,000 to $2,000 per year over their time in service, and still come out a million dollars ahead.
Analytic thinking, practical skills and the self-confidence to take a decision which — once the research and analysis is complete — you are convinced is a good one even if it doesn’t appear popular… those are what make the difference. Not diddling around with marketing gimmicks that are really just put out there to entrap you.
I think you’re giving really extreme examples on both ends
Most of us will never pay 1000 dollars for a car. We just won’t. We could save millions more living in a trailer park, too. People need to draw the line somewhere, and that’s usually somewhere above a “20 year old car that squeaks and squauks” and requires self learning to be a mechanic to avoid your car exploding on the highway.
And don’t act like buying 4 or 5 Honda CR-Vs in our earning years will cost us “millions” of dollars.
Yes, I really meant millions.
Assume an adult driving career is 55 years (age 18-72). Assume buying habits which result in $8,000 of car depreciation per couple each year (this is aside from running costs like gas and insurance and any finance costs), which works out to an average new car per adult traded in every five years. That works out to $667 per month.
Plug $667 per month, 55 years and an assumed real investment return rate of 6% per year in a retirement calculator and you get $2.5 million.
That’s it. Fairly normal sounding middle class assumptions get you well into 7 figured without breaking a sweat.
Most people aren’t as bold as I am, mainly due to misconceptions about how much skill it takes to select and maintain an old car that won’t blow up on the highway. And I don’t think I’ll be able to convince a lot of people that my strategy is fairly easy and safe (15+ years and zero car fires to date). But the ‘lite’ version of my strategy is ridiculously easy and safe (buy 3-5 year old used cars and keep them long enough to achieve depreciation of $1,000 to $2,000 per person per year) yet still fairly looked down upon among the striving classes. But these attitude shifts are what can enable even middle class folks to retire millionaires — not shopping around for 0% interest deals — and despite writers such ECO and MMM making this point for years, people are still strangely resistant.
For ECO read WCI. Thanks, autocorrect!
Again, you are using extreme examples.
Your calculations assume trading a car in every 5 years, but financially responsible people tend to hold cars closer to 10 years. Leasing cars would be cheaper than that frequency of new car purchases
You’re also Comparing it to an absurdly unnecessarily low benchmark of buying a car for under 1000 dollars.
Does it cost more money to buy cars? Of course! Not 2.5 million in a lifetime though, at least not to someone who plans to keep each car for a decade.
Plus couldn’t I say the same about cumulative costs of going on vacation? Taking the family out to eat? Not taking on extra shifts? Becoming an internist rather than an orthopod? At some point, you need to just realize that as long as you’re meeting your savings goals, your discretionary expenses are not going to impact your life.
Agree with this. As long as you keep your total yearly spending low and your savings rate high, you can do anything you want with your money, including buy new cars. I have purchased 3 new cars over the last 15 years, trading up every 5 years. This would generally be considered a poor personal finance decision. However, our total yearly spending is around $60,000 and we save around 50% of our gross income. Focus on what’s most important (yearly spending and savings rate) and you can buy whatever you want, including new cars and nice vacations.
Yes, on an MD salary you can get away with a whole lot, including regular new car purchases. You can’t get away with everything, but you can get away with a whole lot. A healthy six figure income can provide for tons of extra spending and consumption while still providing enough savings to accumulate millions and retire in the greatest of comfort.
And while most people won’t adopt my driving habits, which I admit, I think we’re losing sight of the point of this discussion, which is this:
Shopping for zero percent financing deals and other such gimmicks pale to insignificance when compared to spending time and effort designing your lifestyle and money assumptions analytically and thoughtfully, from the ground up. It is far more important to understand what your habits entail and what are their consequences, and how that fits into your income and savings picture, than it is to chase down a few random discounts or offers.
Most regular readers here wouldn’t do this, but there are almost certainly millions of middle and upper-middle class Americans who would think it is a perfectly sound lifestyle choice to depreciate $4,000 of automobile per adult per year for 50+ years of adulthood. And they have no idea what the probable effects of their choices are on their (or their families’) long-term financial prospects. They’d spend more time hunting down rebates and financing deals than performing a bottom-up analysis, realizing the huge effect that these things have, and then figuring out how to make the serious changes that have long-term big-money effects.
So the real executive summary is this: Spend time on what’s important. Chasing down zero-percent financing deals and other such gimmicks isn’t important.
Will your opinion change when we have self driving cars? This is the one piece of Tech when it rolls out would convince me to fork over larger than normal sums for transportation. Until then my 06′ Prius will be my ride of choice.
RE mortgage, our thoughts/practice is
1. Mortgage provides inflation protection
2. Primary residence mortgage will be held for asset protection purposes(low homestead limits).
Rentals – either pay in cash or pay off mortgages asap and transfer to LLC, if residential mortgages was in our name(still positive, though not as juicy as leveraged returns)
“1. Mortgage provides inflation protection”
this is true only if the house is appreciating. Leverage on a depreciating home speeds the depreciation.
No, that’s not true. The house provides protection against inflation of the price of housing. A fixed mortgage provides protection against general inflation. If inflation spikes, you can pay off the loan with cheaper dollars.
Your comment about a fixed mortgage is true, but that’s tangential to my point. My point is that sometimes the cost of homeownership _deflates._ In some regions, it deflates. If you could prophesize that your home would depreciate in value, how would you pay for it? Leverage down?
I hope it depreciates as long as my property taxes depreciate with it. I’m not planning on going anywhere any time soon.
“Primary residence mortgage will be held for asset protection purposes(low homestead limits).” I don’t understand- you mean no use paying off mortgage since your state only lets you protect eg $50K or $100K of your home price? I felt if there was no limit on homestead protection owning our home free and clear and not losing it in a lawsuit would beat owing on it and maybe losing it since the lawsuit makes me too poor to pay my mortgage.
our state has low limits around 50 k that is protected…
by keeping a 30 yr fixed mortgage, we aim to keep our equity low.
The idea is that if you don’t have any home equity you can’t lose it. So from an asset protection POV, holding a mortgage and putting that money into a protected vehicle like retirement accounts can make sense in some states. Obviously if you have a mortgage you have to be able to make payments or you could lose the home, but that’s not the main concern from an asset protection POV.
There is nothing really axiomatic about spending more on credit. I’ll grant you that it is extremely common, but I don’t think that it’s at all rare for a significant minority of people to be relatively immune to it. I understand what all the behavioral studies say about this stuff, but it’s not like even you believe all such studies all the time.
For example, I think similar studies show that people tend to buy high and sell low (like now when the market tanks). Do you do this? Or do you somehow stay the course and stick to your plan in a way that is not representative of most people. Why do you think it is so easy for you to be exceptional in this regard, but inconceivable to you that some one could be similarly exceptional in another way.
You’ve never caught yourself performance chasing? I have.
So you deviated from the asset allocation in your written investment plan?
Nope. Put it in my investing plan, waited the requisite three months, then bought REITs in January 2007. Lost 78% on them that first year or so. At any rate, my plan allows for a little wiggle room and it is certainly possible to performance chase even within the confines of a fairly strict plan. Gotta be constantly on guard against it.
OK. So did you keep the REITs in your plan or did you change back after the loss?
If your plan allows wiggle room to performance chase (still don’t), then I’m not sure that counts. You’re staying within predefined parameters. I guess if those predefined parameters include performance chasing, then the problem is the plan more than a lack of discipline.
So, I guess I’m just confused by what you’re trying to describe.
But fine, we’ll set you aside. I suppose you’ve never met a single person who has managed to stick to their plan and not “performance chase”
Kept them and they’ve done great since.
I think a plan helps you to minimize performance chasing, but I think it probably happens to lots of us. Here’s an example:
Let’s say I have $40K this month to invest. Let’s say all of my asset classes are within parameters dictated by the plan. The money is going into a 401(k) where I hold International Small and US TSM. Do you rebalance the entire portfolio, buying and selling all over the place in your other half dozen accounts? Do you put it all in IS? Do you put it all in TSM? Do you split the difference even though you’d have to pay two commissions? In complex portfolio management, there are lots of ways to performance chase in small ways.
Here’s another one. Let’s say you’ve decided you’re going to buy a car, mostly using money in your taxable account. You could do it this month or next month, either is fine really. Stocks have been on a tear lately and you think they’ll keep going up so you decide to wait until next month to sell them to buy the car. That’s performance chasing. Have you somehow violated your written plan? Probably not.
How about another. Let’s say your written plan says you’re going to add international small value to your portfolio when Vanguard comes up with a fund in that asset class. Well, Vanguard adds the fund, but Greece just went bankrupt, international small value is down 15% on the year, and the news is full of terrible things. Do you sell other asset classes to buy now, add it next month when you get paid, or wait a few months to let it all play out before adding the asset class? Performance chasing.
My point is performance chasing is often subtle and done with a small percentage of the portfolio. The fact that it works out well some of the time (i.e. momentum) also makes it a tricky thing.
Thanks for the response.
Example 1: In this case, it doesn’t really matter which of those you do. I’m not even sure which the performance chasing one would be. I assume you would probably just pick the least costly approach that requires the fewest trades. I don’t see any performance chasing here.
Example 2: Buying a car by selling a stock that triggers a taxable capital gain is probably not a good way to finance it. If you knew you needed a car in the next year or so, you should have saved the money in a vehicle that was less risky. However, let’s say that you did it. There is still no performance chasing. If you truly believe that either “this month or next month is fine”, then it shouldn’t matter which you choose. What would the correct approach be? Should you have flipped a coin? If you chose this month, thinking that the stock were as high as they were going to go in the near future, someone could accuse you of market timing that way. The bottom line is that if you’re indifferent to whether you buy this month or next month, it doesn’t matter when you sell the stock to buy the car. Either is fine, because you can’t time the market. It doesn’t matter whether the month you picked is because you literally flipped a coin or because you had a dumb idea in your head.
Example 3: You plan should address when you purchase these things. Like the above cases, if the plan was to buy it within a few months of introduction, it doesn’t matter when you do it or why as long as it is within the parameters. If it is unspecified, then you might want to try to specify next time.
The problem with examples like these is that it’s not clear what the “correct answer” is. Is it buying now because it is low? Is it buying later because you think it will go lower. For any course of action you choose, we can come up with some market timing reason that you may have done it.
If we take your own personal REIT example, I say that not an example of performance chasing. You put them in your plan, they tanked, but you kept them in. If you were doing what the behavioral studies suggest, you’d have sold when they were tanking out of fear of losing more. How on Earth were you able to resist that urge, when the studies clearly suggest that most people would have done that?
Also, you never really answered my question. Do you not know anyone who has made a financial plan and just stuck with it?
Haven’t read all the comments yet, but for us paranoid folk we also would have to get another credit check and give our Social Security numbers to the dealer. Just not worth the possible couple hundred dollars or thousand dollars we might make