Episode #40 – Is It Wise To Pay Cash For Cars?


Well, hi everyone, welcome to another wealthy and wise Wednesday, glad you could join me today, hope your week is going great in today’s episode and video, what I thought I would do is talk about the best way to buy cars and I am going to be jumping on to my screen and showing you my screen here as we go along because I have got this neat load of calculator that I think would give us a lot of better feel for how this works. So what basically the premises and I am going to talk about how paying cash for cars can be an extremely expensive opportunity cost long term.

[00:01:10] So you are probably told ever since you are a kid, you know never finance always pay cash if you are listening to the gurus so to speak on the radio. They are always going to tell you to pay cash as if cash has no value. What I want to point out is cash has a tremendous value and capital, cash, we like to call it capital because that is what really gives you an opportunity in life is if you have capital, you have cash. You have heard the term cash is king but when is cash, king? Well, cash is king when everybody else is fleeing and running from a market where you can jump in and take advantage but there is a really interesting dilemma here when it comes to paying for the car.

[00:02:00] now let’s just put a couple things out there. The first of, I can’t really address this in detail, what I am going to do is going to this in much more details in my course that is coming out here in the next couple of weeks but that is going to, we are going to really dissect this and help you understand even more in details but the whole premise is this, a car is a depreciating asset. I mean I always use this analogy that if I had this great investment for the year that was going to cost a $100 today, I guarantee you in 5 years it is going to be worth $50, you know how much do you want to invest. That is what a car is, it is an automatic asset that is going to be depreciating over the next several years but we are always told to pay cash so we can save, save, save pay cash. Save, save, save pay cash. How many times do we do this in our lifetime and that is what I kind of want to show you on this calculator is what that really costing you in terms of future value or future wealth because it is very expensive when we pay cash.

[00:03:13] so the other concept that we have talked about before is we finance everything we buy even when we pay cash. We are either paying somebody interest for the use of their money or we are giving up interest when we pay cash and use our money. So obviously the banking system that we teach kind of, is the best of both world, we finance it ourselves so that when we are paying interest, we are ultimately getting that back into our pockets and so we are using our money and just like the bank would in lending and paying back. So let’s jump on to this calculator here really quick and let see if I can show you a couple things as to what the real cost of paying cash for cars is.

[00:04:04] Alright, so we are on the calculator and this calculator kind of need, we have developed quite a few calculators over the years and this one is the cost of paying cash and again these calculators are going to be part of the course and you will be able to get on them and use them anytime you want. But let’s just go through a quick little scenario here, let’s say we have got somebody who has been a good saver and they have $75,000. They also in addition to that saves $10,000 a year and because they are very wise saver, when they get increases in their salaries at work or when they get bonuses or if they own their own businesses as their businesses grows, they tend to put in more on that money that is increasing rather than spend it in their lifestyle. So we are just kind of saying we increase our savings by 3% each year. We are going to give a whooping rate of return here, something that is probably not attainable consistently over time but let’s just say you get an 8% rate of return on that money. We are going to go out for 30 years and what we are going to do is purchase some cars.

[00:05:22] We are first going to save because that is what we have got to do so we are going to save, save then we got cash to pay for the car. So we are going to save for the next 5 years so we are going to say in 5 years, we are going to buy our first car then from that point on, what we are going to do is we are going to buy car every, let’s just say every 5 years. Now what is really interesting is when we buy cars, we are thinking of it in terms of one car but how many families have two or three cars right? Which means they are probably replacing old car maybe every two or three years. We are just going to use one car in this example and the new one being bought every year. I am going to use 30000 as the price of the car, we are going to assume we buy something new but if you looked around lately, $30,000 is not buying you, you know the best most luxurious car out there, there are [00:06:18] entry-level value anymore. Well, we would just call it moderate level value, so we are going to pay $30,000 and every 5 years those cars increase in price, so we are just going to say they increase in 3% just to make it easy and I don’t know if you are in the sales tax state or not. There are only a few states in the country that aren’t, so let’s just put in 5% for sales tax, that might be a little low like in the state of California and then of course for Washington and let’s see is it Washington and I can’t remember the other state don’t have a sales tax. Oh it is Oregon, no Washington does, Oregon doesn’t.

[00:07:06] and let’s just say it cost you a $15000 a year for this insurance to insure the car and every time you bought a new car, that insurance has also gone up by 3%. So what does this look like, what is this telling us? Over here, our results so hard to say, you see that three times fast. So the future value of your money if you didn’t buy any cars will be 2.4 million dollars so that taking $75000 that you have today adding 10,000 a year plus and then each year increasing that 10,000 by 3% and then getting an 8% rate return. Again we know those are probably some out their number as far as rate of return. But nevertheless you will get the picture here. So you can have 2.4 million dollars had you bought no cars. Now again we kind of live in the society where you are going to need a car here and there but let’s see what this does to our wealth. So the [00:08:09] of cost of those cars is $343,000 in other words this is just a pure cost of the cars but the actual account value has dropped from 2.4 million down to 1.4 million.

[00:08:26] So basically, those cars ended up costing us $944,000. Now the reason why that is, is because every time we take cash out of our account to go pay for account, what is happening is we are losing the opportunity for that money to earn in this case 8% for us forever. So if I take $30,000 to put it in a vehicle and that $30,000 can never make money for me again. And what that total up to is $944,000 true cost of this cars.

[00:09:05] now let’s go look at it in details so we can see exactly how this flows. So we are saving and saving and our original 75000 by year five is 177,000 we take out $30,000 for the car and you can see that our last feature value is 33,900 just in that year and as we go along so our year in the cash value after the car purchasing is 143 and then it grows again to 246 and then we take out 34,000 for the next car and now we are down to 241 and you can see how that goes. So again without touching this account, we’d have over 2.4 million dollars because of the cost of the cars were down to 1.459 million. Those true cost of cars cost us 944,000 dollars. So you can see that cash does have a value, paying cash for car may not make the most sense when we start thinking about the opportunity that, that money is going to cost us long term and each car I pay for $30,000 let’s say, I know in five or six years is probably going to be worth 15 and so ultimately every time I buy car, I just get further and further behind the wealth that I could have had.

[00:10:44] So again, there are ways to combat that and one of the ways to combat that is to create your own banking system to where you are financing the car, you are ripping the world and you are containing that wealth that normally would be lost and bringing it back into your control. So there you have a quick little calculator on the cost of paying cash for cars. So next time somebody says to savings pay cash, you are going to know better, you are going to know you better figure out a better way or this is going to really make a din in your wealth long term.

[00:11:21] again we are going to go over this in more details, we are going to have a several different other examples, we are going to show what will happen if you make 6%, 12%, going to show you what happens and how to pay yourself back and if you can even build your wealth further as we go through the course but I kind of want to give you a little taste of this calculator and this calculator is going to be available for those who have our course. Well that is it for this video, this podcast, this episode, hope you enjoyed it, hope it is worthwhile, hope it really opened up your eyes, as always if you have any questions or thoughts coming, [00:11:59] remarks whatever, send them to questions@wisemoneytools.com. I am happy to answer them just as quickly as I can and until next week, you have a great week, be productive and be helpful, serve somebody, do some good stuffs out there in the world and will talk to you later. Take care.

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