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chronopc
Active Member
True. The problem with "over the lifetime" is that you often don't know when you'll need to cash out, or when the dips vs. peaks will be. A lot of people who lost most of their retirement would have been okay if they could have held of cashing in for another 5-6 years, but for a lot the crash happened precisely when they needed/wanted to retire.
While I do invest, I also try and keep debt to a minimum, as that also gives me peace of mind in the NOW.
Also keep in mind that this is disposable income, not discretionary. So even though you may have a bunch of money post-tax, much of that people are using in this calculation is going to home payments, student loans, insurance, etc. I could not actually pay off my car in the timeframe I selected, because about half of my disposable income isn't discretionary.
If you chose to pay cash in the first place, that money would not be available to cash out. That is actually another advantage to financing. You have access to the money in case of an emergency.
Look at the following likely scenario:
Someone buys a 50k car every 5 years. If you finance 100% for 60 months, you will on average have a balance of 25k.
Since a blended stock/bond index fund has historically returned 7% after inflation, one would come out ahead roughly 5% if they finance at 2%.
Do the math on 25k compounded annually at 5% after inflation over 40 years.
I posted originally because the author I responded to made it sound like it was obviously the smartest thing to always pay cash. I can understand someone saying that it makes the most sense for them for security or some other reasons. It is only when they suggest it is the smartest option for everyone that I began to disagree.
This is just for fun. I'm using "discretionary" income mainly (not counting mortgage and other costs that are basically required to live). I'm including money used to eat out and kids activities as "discretionary". Number was a lot lower than I expected.
Realistically, I'm financing and not giving up vacations (completely) or kids activities and stuff, but it was an interesting thought process as to how important this car is to my budget.
Realistically, I'm financing and not giving up vacations (completely) or kids activities and stuff, but it was an interesting thought process as to how important this car is to my budget.
SageBrush
REJECT Fascism
Congrats -- you are setting up another straw-man, but better dressed this time.
E.g.,
Businesses buy depreciating assets all the time ... as part of a strategy to make money.
People may finance cars to drive to work, but people buy Teslas because they want the car for reasons unrelated to going to work*.
Trust me -- I could not care less how you pay for your car choice. I was only explaining to you why some people avoid your financing behavior.
*Livery services as one example of an exception where the Tesla is bought as part of a business.
omgwtfbyobbq
Active Member
Don't forget about capital gains tax on your investment earnings. At the moment, it's pretty nice. Not quite as rosy as 5% of a 25k investment compounded yearly (~$10k over 5 years), but still good at ~$6.6k over 5 years. With that said, as interest rates return to their long-run average of 3+%, the gains drop to ~$3k over 5 years, which is still something.
To be fair, with money invested in the market, you run the risk of encountering a negative sequence of returns near the end of the loan that could drop your investment to nada. Because of that, you'll need to keep some extra cash (maybe $10k?) in a CD or high yield savings account to avoid getting your nth car repossessed after the market falls on it's face near the end of your loan. Because you can invest that $10k in the market if you pay off the car at the outset, the difference between those after tax (AT) earnings and the AT earnings on your CD take a big chunk out of the ~$3k in gains, likely to the point where you're only netting a few hundred bucks every 5 years.
Like I said before, because the Fed is keeping interest rates down, you can still see some gains at the moment, probably about $4k over 5 years after you include some money set aside to protect against a negative sequence of returns at a bad time, but I wouldn't use that approach in perpetuity.
Keep in mind many folks are much older than you *may* be. Additionally, the sacrifices that had to be made to get there in terms of work-life balance, health (physical and mental) and philosophy are not for everyone. I would argue that the average person in that bracket has done things that many would chose not to.
SageBrush
REJECT Fascism
Of course you can!
There are a few loops to jump through first though ..
Be in the top 1% in the entrance exam;
Spend ~ 8 years at the University
Spend another 3-8 years in training
Oh ... and one more small thing: if you don't want to be saddled with debt from the University years, learn to live very frugally and work part time. In my case that meant living on $300 - $500 a month and working 20 hours a week in addition to the studies. And of course do not expect to own *any* car until you have finished your studies.
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Unless one begins with wealthy parents @SageBrush is right. Some few people may have other routes, but almost everyone I know who has that much financial resource has done it with a couple decades of study, followed by several years becoming established. Frugality becomes a necessary reality during this process.
It helps tremendously to have been born in the right circumstances and have some lucky breaks along the way. Parents who take the time and energy to educate and inspire while you're young. Family finances that mean you aren't expected to devote most of your spare time to the family business. An accent, skin color, and social reference points that allow you to make positive impressions on the higher education and business world. Any number of factors play a part. You're absolutely right that hard work makes a difference, but it's hardly determinative.
We'll be in the ~2 month category thanks to my job income but that's the product of a lot of privilege on my part in addition to some serious good fortune. Have I worked for it? Sure. Do I know a lot of people who worked a lot harder with a lot more education who make a small fraction as much? Absolutely.
thebigbobowski
Member
Yeah, um, I doubt most people buying a Model 3 will be following this rule. If they made that much money already, they'd probably own a Model S by now. I'm considered middle class and I'd be driving a POS if I followed that rule. No offense to those that do (I work with several), but screw it, I'm going to enjoy my life while I can.
T34ME
Active Member
To add to @SageBrush excellent list and @jbcarioca final point, ALWAYS LIVE BELOW YOUR MEANS if you want to live well ever after!
Yes @GeekGirls you are correct, having the right color skin, the right gender, and lucky genes is not necessarily definitive but it is often, too often, determinative.
Canuck
Well-Known Member
I wanted nice things when I was younger and didn't have any money at all. So I studied, then worked hard, saved, invested, and drove cheap but reliable cars. In my view, money that I could have used to buy "nice things" at that time was wasting my money since I wanted the money I earned to earn me more money. Today, that money still keeps paying me every month, and those investments are in fact the nicest things I've ever bought.
Is there any new car deal that doesn't offer some low APR or a cash back option if you don't want to finance. Nothing is free. The extra rate is hidden in the price of the car, hence the cash back option.
Not devil worshiping but growing up hungry without much food in the cupboards gives you a different view of things, or I should say it did for me at least. My theory was loans only for education or for property (mortgages). Everything else, cash or I didn't buy it. It sure worked good for me. I never quite understand people who finance depreciating assets, regardless of the reason. I don't care if you give me zero percent interest, I don't want to owe anyone anything, and I don't need anyone else's money to invest because I know nothing comes free or without a catch.
It's very possible. More than half of Americans live beyond their means and banks are more than willing to finance over long periods rarely checking your actual income unless you have something bad on your credit report. In fact, the government has to legislate amortization periods since if we left it up to private business they would never have you pay off the principal.
Now that's funny! If your concern is reliability, you can buy very cheap and reliable cars. I know. I owned them as I I saved my money to invest and I never broke down once driving to work. If reliability for your job is an issue, I wouldn't recommend a first generation Model 3.
This is a wise perspective psychologically. However, with interest rates as low as they currently are, you will probably lose out financially vs. investing. Esp. If you invest in Tesla-
That word you use "probably" is a huge one to me since I remember high interest rates and a bear market. But given that we are currently in the longest bull market in history, over 8 years now, and a very long period of extremely low interest rates, it's probably difficult for people to remember how easy it is to lose on investments, especially when you reference Tesla as a potentially good investment. I bought TSLA in 2013. Given its current PE ratio, I wouldn't touch it now. I know Tesla is all about the future, and not PE, but I'm seriously considering selling all of my stocks and holding cash because we are long overdue for a correction, if not a crash, and Trump's economic policy (if we can call it that) has me scared. So I don't look at "probably" like you do. I think "probably" a lot of over-extended people are going to be hurt really bad. To me, the question is only "when", not "if."
That's the simplistic answer since who would say otherwise? The more complex answer is that you should never borrow against a depreciating asset even if you can use that money to invest because no investments are guaranteed and if you need money from a vehicle loan to invest, you don't really understand investing, at least in my view.
That's my story exactly except that it was 7 years of university -- not a couple of decades -- but that was long enough to get real sick of Ramen noodles!
"hardly determinative" is too strong for me. I'd replace the word "hardly" with "not always". "Hardly" means "scarcely", "barely", or "only just slightly" and I don't agree with that when it comes to how much hard work plays into being financially successful.
I still like your post, and agree substantially with it, but I think those who work hard can overcome so much. But you are right to point out all those others factors at play, and the fact that hard work is not always determinative, which is why I'm a big proponent of affirmative action since we need to level the playing field.
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SageBrush
REJECT Fascism
Totally agree. I'm fairly young, and just above that bracket. I work in tech and could be in that bracket, but I'd much rather work a 40 or under week when possible. Totally respect those who chose not to, but I have made the conscious choice to earn less and work less. Hoping the added r and r each week and lower stress translates into additional healthy working years down the road.
Liked your post until this point, as this creates the side effect of inadvertently hurting those who might be qualified but are denied because of a quota. Qualifications and aptitude should be the foremost prerequisites for job ops.
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