Paying Cash for Your Car
One of the first rules I learned in money management is to limit debt to "good debt." In my opinion the only good debt is 1) a reasonable mortgage on your house/condo (less than 90% with no fancy interest only options), 2) debt for your education 3) loans for serious health matters and 4) loans on your first two cars. That's right. By your third car you should be paying cash. How is that possible? It is all about the term of the loan and the expected time you plan to use your car. You should always plan on using your car for twice the term of your loan. If you have a three year loan you should plan to use your car for six years. Four year loan requires an eight year use of the car. Five years -- plan on driving that car for 10 years. Then what? Once you pay off the loan continue to make payments to yourself (set up a special saving account for this). When you are ready to buy your next car, the funds will be available for a larger downpayment. Do this twice and you should be able to pay cash for your third car.
That is it. It really isn't rocket science. If anyone wants to see the math I will post that later. Of course sticking to this rule means bucking the materialistic trend and tuning out all the new car advertising. But, is it really that much of a hardship to drive a six year old car? Think about it. Would you rather be driving the new ride each year or being financially independent?
How about car leases you ask? Well I am a CPA and CFA and find most car leases difficult to understand. I can't be bothered to take the time to figure them out but I know that the lenders are looking to get paid. There has to be fees and interest embedded in them somewhere. In my opinion it is easier to stay away from leases unless you really understand them. Prior to signing a lease ask yourself the simple question, "are you prepared to take a quiz on the terms of the lease?"
2 comments:
I definitely agree with buying a car for cash as soon as you can. What car should I buy? Here is my tip: Look at the same model car you are planning to purchase 3-5 years ago on kbb.com. So If you are going to purchase a Honda Accord 2007 look at what a Honda Accord 2004 is being appraised at. Compare the cars in the class you are looking at to see which car holds its value the best. Don't make a determination just on this alone, but this should help in the buying process. I would also look to see if you upgrade the car's class, ex. Accord LX to an EX for $2000. What is the ROI 3-5 years ago for the upgrade. You might find out that the LX and EX are being appraised in 2004 for $15,000 and $16,000 respectively. Is the $2,000 upgrade worth the $1,000 return in 3 years? It might be, or you can use that money somewhere else that has a positive investment....Hope this helps a little....Rich Bernstein
Great comments Rich. Thanks!
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