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« Free Money Finance Interview with David Lorenzo, Author of Career Intensity, Part 1 | Main | Facts on Millionaires »

April 05, 2006


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This has been my father's number one peice of advice for me growing up - never take on debt to buy a car!

I think also, a person can get a cheaper car (maybe doesn't look as sporty) but is more economical. Some of the entry level cars are about 12-14k. And of course ,if a car payment was put in savings each month after paying the car of (and keeping the car for a few more years) the cash would be there. I wish I would have thought of it before I bought my car!

This brings up two thoughts in my mind:

1) When people spend 1 dollar out of 5 on private transportation, it makes me wonder why initiatives to fund public transportation are so controversial. When it is done right, as in Europe, it is a big cost saver for the public at-large.

2) I believe the trick to paying cash for a car is to get on the right treadmill. Most people are on the debt-payment pattern, but people who pay cash in effect make virtual car payments into an investment account. While the first plan involves paying a little over 100% for a car, due to interest payments to the bank, the second plan is like paying less than 100% because you collected interest. It requires discipline and buying some modest cars at first, but given the choice I would much rather collect interest than pay it.

When I was very young, about 18 or so this elderly man told me exactly how to purchase a car. He told me to use my "savings" but not buy the car out-right. Huh? I said.

He explained . . .

One should always "save money." As much money as one can possibly save while you are young. Then NEVER touch the principal, but USE the principal to create "income" to purchase what you need.

For instance, a young person works hard over 5 years to save $32,000 (that's $500 a month @ 4.0% annually, compounded monthly). They want to purchase a car that if financed over 4 years would cost them $250 a month.

Take the principal ($32,000) put it in an investment that earns 10% annually (or more) and you have $266 in interest.

The INTEREST on your principal (your savings) pays for your car. At the end of 4 years, you have a fully paid for car + your principal + any additional savings (since you are now in the habit of saving) you've accumulated.

He called it "letting your money work FOR you, instead of working for the money."

It's funny how we're so quick to think in terms of debt (paying out) to get what we want, instead of working our resources to make payment come "in" to get what we want.

I, like you, also pay cash for my cars but it was not by choice.

During 2000 I owned a 1998 Lexus ES 300. I had a whopping $420 monthly payment, $250 monthly insurance payment and two years left to payoff the balance.

Then the unthinkable happened, the transmission "broke" right after the manufacturers warranty expired. My mechanic informed me that a new transmission would cost anywhere from $5,000 - 6,000, and that's without labor. At this time I only owed $9,000 on the car!

I sold the car for $7,000 and paid the lender the $2,000 difference. Since then I haven't financed any cars. Since the payoff on the loan cleaned me out, I brought a 1989 Volvo for $1,500 in 2001 and worked my way up to a 1995 Taurus in 2004 for $2,500 and a 2001 Taurus in 2005 for $5,500. All three cars combined did not cost me as much as the 1997 Lexus.

Also remember, paying with cash allows you to "choose" your insurance coverage. When you finance, the lender will, in most cases, require full coverage insurance (collision, comprehensive, theft, etc.). Now I have basic liability on both cars costing a fraction of the "full coverage" price.

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