I love cars. For as long as I can remember I have had a fascination with them. As a kid, growing up poor, I viewed cars as a luxury item reserved for the well off. Cars hold a special place in my heart and as a result I have been irrational about some of my decisions in the past.
For instance in 2005, when I bought my first car, a 1999 Ford F-150, Extended Cab XLT, sport edition. I loved that truck and still do today, in fact I love F-150s and it is my favorite daily driver. However, I made a terrible financial decision in buying that truck.
In 2005, I paid $14K in cash to avoid having a car payment. As a result of my credit card habits, I had learned to become fearful of debt. That fear led to my decision to avoid a car payment at all costs. The irony is two years later, I sold that truck for $5K. So in essence I lost $9K in 2 years. That’s an expensive decision.
At the time, used car loan rates were around 4%. If I had used a 20% down payment, then financed the balance, I could have afforded the resulting car payment of approximately $206 per month. I had less than 2 years prior to my graduation and was expecting a substantial increase in my income after school. That payment would have been extremely do-able and would not have caused an issue. With this taken into account, there was $8K that could have been invested in the market or used to pay down my credit card debt at the time.
Again, bad decision in my opinion.
One of my favorite YouTube personalities is Doug Demuro. I am frequent watcher of his videos and I am fan of his car enthusiasm. After watching the below video, I am even more of fan and wish that I had this information available to me in 2005 for reference.
Doug does a great job of breaking this topic down and why he believes you shouldn’t pay cash for cars (which are depreciating assets). Paying cash works for those who are debt adverse. However if you’re like me (and Doug), then you realize car loan interest rates are extremely low and you’re better financing versus paying large cash sums for a depreciating asset.
At the end of the day, interest rates should help dictate your decision. Remember if you sink a bunch of money in a car, there is no way to guarantee that you’ll break even when it comes time to sell that car.
As always if you have questions or concerns regarding creating an emergency fund, investing, real estate, insurance, or planning for the future, don’t be afraid to speak with qualified financial advisor. Smart Asset has a great tool to find an advisor in your area or feel free to email me (contact@surgifi.com) to help you on your path to financial independence.
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