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Your idea makes sense—although your numbers are quite a bit off—yet the freedom and peace of mind that come with "owing no man anything" is absolutely priceless.
That is exactly what my Grandmother drilled into us... she always said debt is servitude...
Didn't really know what that meant as a child.
On the other hand I do have debt... first mortgages... I'm sure she wouldn't approve but I have been able rationalize it so all is good... a little debt on something that produces income and tends to appreciate works for me.
$25,000 making 8% a year, is a $2,000 ROI. $2,000 x 5 years = $10,000 ROI potential.
5 year auto loans with 2.5% interest, is $625 a year. $625 x 5 years = 5 years = $3,125 in interest.
$10,000-$3,125 = $6,875 of earning potential if you invested that $25K.
So it's dumb to have $25K tied up in a car. Smart people don't pay cash for cars. They lease or finance when interest rates are low.
People who have $25K+ in liquid assets saved for a really long time, make a lot of money, or had a large windfall. Or a combo of the three.
Your math is already off on the 25k. You need to compound the interest over the 5 years example which you haven't done. You're missing anywhere from 1600 to 2300 bucks give or take a few overall depending on monthly quarterly biannually or annual compounded interest at your 8%. And you're discounting that at the 5 year mark I can just keep the car I have for another 5 years. So now that compounded interest over 10 years is even more. Plenty of cars today can last 10 years without anything more than some basic maintenance. Cars are at best depreciating assets. That's why I don't buy them often (for personal use.)
But you are right in one instance. I have leased vehicles before. When I had my business. It was far more advantageous for me to have a set budget for the vehicles and no maintenance. But I was able to deduct the leases as expenses along with the fuel costs etc. It was all expense and deductible. And for the most part the truck service charges I either padded in the bid or charged for service calls pretty much took care of about 90% of the monthly expense. So in that instance yes I took advantage of that. In two years the trucks went away and I saw the fleet guy at Ford or Chevy or Dodge. Basically whoever had the best deal got the business.
Last edited by Electrician4you; 07-04-2014 at 06:08 PM..
You see this all the time. People bragging that they never finance and instead pay cash. So my question to them is what is your secret? Where do you find $25,000 sitting around to pluck down on a car?
If you can pay for a car with 4 years of payments after the sale- you can certainly just save the same amount of money before you buy it.
I paid 20k for my last (used) car in 2010, my previous car was purchased in 2000. Before that, I had last bought a vehicle in 1992.
Driving your car long after the last payment is made and the title is delivered to your home, gives you a real opportunity to make sure that you have the money for the next vehicle.
$25,000 making 8% a year, is a $2,000 ROI. $2,000 x 5 years = $10,000 ROI potential.
5 year auto loans with 2.5% interest, is $625 a year. $625 x 5 years = 5 years = $3,125 in interest.
$10,000-$3,125 = $6,875 of earning potential if you invested that $25K.
So it's dumb to have $25K tied up in a car. Smart people don't pay cash for cars. They lease or finance when interest rates are low.
People who have $25K+ in liquid assets saved for a really long time, make a lot of money, or had a large windfall. Or a combo of the three.
You spent a lot of time on this. Too bad it isn't accurate.
For starters, making 8% a year is hardly a guarantee, and considering current interest rates, is a highly inflated number to use. 4-5% would be far more accurate, and even that is probably being generous.
Then, you completely neglect to consider where you are after 5 years. On one hand, you own a vehicle free and clear and can sell it for probably 50-60% of what you paid. With leasing, you start over with nothing.
Paying ANY interest to ANYONE is extra money leaving your pocket and making someone else rich. It doesn't matter what the rate is, you are paying someone else. Now, if you can do better with your money than the interest rate you are paying, then it makes sense. But that is certainly not the case for everyone, nor should it be expected that it is.
You see this all the time. People bragging that they never finance and instead pay cash. So my question to them is what is your secret? Where do you find $25,000 sitting around to pluck down on a car?
Fiscal conservatism, saving and investing large amounts of money, and paying cash for used cars. I prefer to invest money toward appreciating assets, not depreciating vehicle assets. I am not cheap and will purchase the vehicle that fits my needs the best.
Well I "won" my new car in late 2012 (2012 Honda Civic LX). All I had to do is file on my tax, so a $20,100 car cost me $1,700. A great little car, but that was it - little car. I want something bigger, so I sold it a couple of weeks ago for $15,500, which was 100% profit and that is setting in the bank. I was able to get that much out of it because it only had 7,000 miles on it. I don't "brag" about it though. Heck that is a lot of money to me as I only make around $24K a year which is good for around here, but it is not a lot of money to most people.
Now not sure how much of that I want to pay down on a new car. Not sure if I want to put all of it down or 1/2 down, save the rest and finance the rest, etc. I am thinking of getting either a 2015 Subaru Legacy Premium or 2014 Toyota Corolla LE Plus. I was also considering a 2014 Ford Fusion SE or a 2014 Ford Fiesta Titanium, because I get like a $2K discount through work. If I get a cheaper car, I will pay less down of course and save the rest.
Excellent question. And the answer is the perfect reason as to why you can't get ahead by leasing a car... You build no equity doing so.
Being smart when buying cars goes a long way too. We bought a Mitsubishi Eclipse Spyder awhile back for my sister in law to drive while she was staying with us for 6 months. It wasn't a huge cash expense, but we found a car that was listed for several thousand below market value. Went and looked at it, it was in great shape, the owner just didn't know what they could get for it, I guess. Sold that car 6 months after we bought it for $2k more than we paid ($1500 after taxes.) Mathematically, we made 20% on that deal and the only thing we did to the car was one oil change.
Avoid buying new. The depreciation hit from the first 4 years or so almost always assures that you will lose money. By contrast, I've never had a single car that I didn't make money off of or didn't break even. I buy them about 4 years old and I find cars that are what I want and are a good value. I keep them for at least 4 years unless I've bought something just to turn around and sell for profit.
Eventually, you build up equity in your vehicles and you can afford to trade up. Avoid financing whenever possible, that's just counting against you. A good way to do this is to charge it if you can... Open a new credit card that has 0% financing for a year or more, and charge the car. If you really want to maximize your money, use a card that pays you points or cash back. We bought our MDX on a credit card... Got 2.2% cash back toward travel expenses and 0% APR for another year or so. It all adds up.
I liked what this post said until poster said to put the car on your credit card. (even if its 0%)
a) dealers wont do this because if they are selling you the car for cheap, they will lose money once that 3% that the CC companies charge.
b) thinking cars as building equity is just..ugh. cars are NOT investments. They are money losers. to think otherwise is just downright well... let me sell you a protection package for that new used car.
I liked what this post said until poster said to put the car on your credit card. (even if its 0%)
a) dealers wont do this because if they are selling you the car for cheap, they will lose money once that 3% that the CC companies charge.
b) thinking cars as building equity is just..ugh. cars are NOT investments. They are money losers. to think otherwise is just downright well... let me sell you a protection package for that new used car.
Well,
A. I did just charge $20k on a card for our 2009 MDX and the dealer had no problem with it (they take credit card payments for service, parts, etc, a whole car is not any different.) By charging it, I got 2.2% cash back, or $440.
B. Cars are generally depreciating assets. You are misunderstanding my post. My first car was $7k. My next car was $11k. I took the proceeds from the first car and rolled them into buying the second. Today, I have multiple cars and they were purchased with money from cars I'd previously owned. My equity in cars has continually increased.
As another poster has also said, I've never sold a car for less than what I originally paid either. That will probably come to an end if I ever sell my 911, because I bought it when it was just a few years old. Now it's 10 years old. But who knows, I may decide to hold onto it long term. The values of old Porsches just seem to keep going up.
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