The Personal Finance Podcast - Should You Pay Cash or Finance A Car? (This May Surprise You!)

Episode Date: May 13, 2024

In this episode of the Personal Finance Podcast, we are going to talk about should you pay cash or should you finance a car? How Andrew Can Help You:  Don't let another year pass by without making significant strides toward your dreams. "Master Your Money Goals" is your pathway to a future where your aspirations are not just wishes but realities. Enroll now and make this year count! Join The Master Money Newsletter where you will become smarter with your money in 5 minutes or less per week Here! Learn to invest by joining  Index Fund Pro! This is Andrew’s course teaching you how to invest!  Watch The Master Money Youtube Channel!  Ask Andrew a question on Instagram or TikTok.  Learn how to get out of Debt by joining our Free Course  Leave Feedback or Episode Requests here.  Thanks to Our Amazing Sponsors for supporting The Personal Finance Podcast. Shopify: Shopify makes it so easy to sell. Sign up for a one-dollar-per-month trial period at  shopify.com/pfp Monarch Money: Get an extended 30 day free trial at monarchmoney/pfp Thanks to Fundrise for Sponsoring the show! Invest in real estate going to fundrise.com/pfp Indeed: Start hiring NOW with a SEVENTY-FIVE DOLLAR SPONSORED JOB CREDIT to upgrade your job post at Indeed.com/personalfinance Thanks to Policy Genius for Sponsoring the show! Go to policygenius.com to get your free life insurance quote. Chime: Start your credit journey with Chime. Sign-up takes only two minutes and doesn’t affect your credit score. Get started at chime.com/ Delete Me: Use Promo Code PFP for 20% off!   Links Mentioned in This Episode:  How Much Should You Spend on a Car? (My Answer May Surprise You!) The Insane Lifetime Cost of Car Ownership! (These Numbers Blew Us Away) 11 Car Buying Mistakes you Need to Avoid! (Don't Make These Mistakes!) Why Leasing a Car Is Like Lighting Money On Fire How You Can Have a Free Car for Life (It's True!) Connect With Andrew on Social Media:  Instagram  TikTok Twitter  Master Money Website  Master Money Youtube Channel   Free Guides:   The Stairway to Wealth: The Order of Operations for your Money  How to Negotiate Your Salary  The 75 Day Money Challenge  Get out Of Debt Fast  Take the Money Personality Quiz Learn more about your ad choices. Visit megaphone.fm/adchoices

Amazon presents Laura versus Fruit Flies. Swarming your fruit and terrorizing your kitchen. These little freaks multiply at a rate that would make a rabbit say, yo. Chill. But Laura shopped on Amazon and saved on cleaning spray, countertop wipes, and fly traps. Hey, fruit flies, your baby boom ends here. Save the Everyday with Amazon. On this episode of the personal finance podcast, should you pay cash or should you finance a car?

Welcome to the personal finance podcast. I'm your host, Andrew founder of mastermoney.com. And today on the personal finance podcast, we're going to be talking through, is it better to pay cash or finance a car? If you guys have any questions, make sure to hit us up on Instagram, TikTok, Twitter, at Mastermoney Co. and follow us on Spotify, Apple Podcasts, or whatever podcast player, you love listening to this podcast on it. If you want to help out the show, consider leaving a five-star rating and review on Apple Podcasts, Spotify, or your favorite podcast player. Now, today, we're going to be diving into this major question on what is the best way to actually buy a car? Is it better to pay cash for a car or finance a car? And this is a really important question for a lot of people because buying a car,

is one of the bigger financial decisions that you are going to make over the course of your life. And the issue that comes into play is that cars are depreciating assets, meaning they go down in value over time. So if you're looking to build wealth, what you want to be doing is buying as little depreciating assets as you possibly can. And depreciating assets can kill your wealth building ability if you spend too much money on these depreciating assets. So we're going to go through the pros and cons of buying a car via cash and or financing a car. Because right now, average car payments for new, leased, and used vehicles have increased year over year every single year. And as you know, if you've ever looked at cars in the last

couple of years since COVID, car prices have astronomically increased, meaning they have just gone up drastically. And people are now getting used to paying these massive prices because a lot of times you don't have any other option, but to pay tens of thousands of dollars for, for a brand new car and or a slightly used car. In fact, right now, the average monthly car payment is at $738 on average in the U.S. right now. And Americans borrow an average of $40,000 for new vehicles and 26,685 for used vehicles. And overall, Americans owe $1.6 trillion in auto loan debt, according to the Federal Reserve of New York. This accounts for 9.2% of American consumer debt.

And on average, Americans are taking out $55 billion in new auto loans each month in the fourth quarter of 2003. And so this is something where really this is just rising every single year. And all auto loan delinquency rates are up 4.2%. And here's a big one here. Is the average auto loan term is 67.9 months for new cars and 67.7.5. point four months for used cars and 36 months for leased cars. So financing vehicles have gone up to a much longer time horizon than they should. And this is because people are trying to keep their monthly

payments lower. Now, before we kind of dive into this and I'm going to kind of talk through why car loans are bad for your overall financial health, I want you to understand one thing at the top of this show. Whenever you go and you buy a car, what I do not want you to ever do is focus. on the monthly payment. People who are not good with money are the ones that focus on the monthly payment. What you want to focus on when it comes to your money, and this goes for housing, this goes for transportation, this goes for any big purchase you have in life, is you want to focus on what is called total cost of ownership, meaning that you want to understand what this entire cost of this vehicle is going to be. Because when you look at it in that lens, it's going to change your

perspective on the actual total cost of this vehicle. And this is how you really understand. what you are paying on this vehicle. Because what a lot of people do is they will focus on a monthly payment. They will stretch those monthly payments out to, like we see here, the average is 67 months. In my opinion, that is way too long to have a car payment. We want you to reduce your car payment to four years or less so that you don't have car payments forever. Instead, you can have a time horizon where you do not have any car payments, especially

if you're driving those vehicles for 10 years or more. You can have years where you have no car payment. you take those extra dollars and you put them towards wealth-building activities or things you actually want to do, maybe you want to go on vacations, maybe you want to go spend those dollars on things you actually want to do. Go to more concerts, go to more sports games, put it towards your 401K, put it towards your Roth IRA. That's what money is there to do. It is there to allow you to do the things you want to do in life. And so if you are spending way too much of your income on a car payment, it is going to destroy your ability to have flexibility.

when it comes to your money. And the number one thing we want to have with our money is make sure that we have this flexibility. And so it's incredibly important to focus on that total cost of ownership. Now, what do I mean by total cost of ownership? This is a number of different things, but one of which is we're going to go down the list is when you buy a car and we'll talk through this. When you finance a car, there's a number of fees that come into play. That factors into your total cost of ownership. The maintenance of a vehicle. Now, let me tell you, my wife has a luxury vehicle right now. I'm getting rid of it as fast as I possibly can because we have to get a new vehicle. Over the course of the next year or so, that has more space because we are having another child. So we're going to have three kids. We have to upgrade our vehicle to a larger vehicle. And by upgrade, I don't mean upgrade in terms of getting another luxury vehicle. I mean just getting a larger vehicle. And so when we go through this process, one big thing is making sure that that vehicle has very low maintenance costs. I went through the production of having this luxury vehicle.

an oil change alone costs over $1,300 just to go get an oil change. Now, sure, you get them once a year, but they tack on all these additional fees when you go get that $1,300 oil change. And there's a secondary oil change that you have to get every two years that costs over $2,000. To get your tires change, it costs over $1,000 just to get four tires on that vehicle. To get new brake pads, it costs three times the amount of the Ford truck that I have sitting outside. And so this is where I really, really, really want you to.

understand what the maintenance costs are going to be prior to purchasing a vehicle. Really important to understand that. Things like Toyota's or Hondas or Fords or GMCs or Chevys. They're going to have lower maintenance costs than things like Mercedes or BMW or any of these other luxury vehicles that you see out there. And so you got to understand A, that that is a really important factor. Now also, part of total cost of ownership is how long is this vehicle going to last? Now, cars are typically having less issues than they used to because it can sink a car company. if they start to have a bunch of different limits. In the back in the day, there was not as much spread of information.

Now we can spread information very, very quickly. And if there's a bunch of lemons out there, people are going to know. There's a ton of different review sites out there. We talk about a lot of them on our social media accounts when we talk about cars. And so this is really, really important to understand that when you go through this process, you need to understand how long this vehicle is going to last. If you're like me, I want to drive these things for 200,000 plus miles. And so I want to make sure that this vehicle is going to last.

So at the top of my list is always those heavy, hitters, the Toyotas, the Hondas, the Chevys and certain models, the Fords. There's a bunch of different models out there, and it is very model-specific as well, but there are long-lasting vehicles out there that are really going to help you. Subaru's. All these different companies are going to really, really be something that lasts a longer period of time. So you've got to understand what that is as well. And when you go through total cost of ownership, you also need to understand that your insurance is going to change based on the type of vehicle that you have. You need to know what that insurance cost is going to be. You need to know what the fuel cost is going

to be. Whereas if you get an electric vehicle or an EV vehicle, you can look at that fuel cost dropping. It's going to be the cost of charging that vehicle either at your home or if you go to those charging stations, they do charge you. And so just making sure you understand what the cost differential is there, that's also part of total cost of ownership. You can go out and get a Tesla model free. You can get that $7,000 rebate or whatever they have right now, $7,500 rebate from the government. And then in addition, you can go out and pay way less than fuel costs. Well, that total cost of ownership of that vehicle could be much less than a vehicle that takes gas that is going to have higher insurance costs where you're also not going to get that $7,500 credit if you buy a new

vehicle. So you just got to think through these total cost of ownership pieces. And we're going to put together a total cost of ownership spreadsheet for you guys so that you can be able to actually run the numbers on this stuff when it's time for you to go look at cars. Now, these are just really important things to understand is you've got to factor in all of these numbers. And this is how you find that total cost of ownership. In addition, what are your financing terms? What is your interest rate? What are all those different things? Are all encompassing to figure out that total cost of ownership. And so this is really, really important to understand. And at the top of the show here, as we go through this total cost of ownership piece, what I'm going to do next is I'm going to talk

through why car loans are actually bad for your overall financial health. Some of you may know some of this stuff, but at the same time, we want to understand some of the negatives of car loans. And then we're going to talk about the differences between paying cash or financing a car. Now, here is a bunch of reasons why car loans are a bad deal, why cars are a bad deal in general, is number one is depreciation. Now, most people don't understand how costly depreciation truly, truly is. You are losing money every single month just by owning a vehicle. It goes down in value every time you drive it. Why? Because the mileage goes up. It also goes down in value every time you drive it because time goes on. And as time goes on, that vehicle gets older and older and older.

And the value is going to drop over time. And the more dollars that you put into depreciating assets, the less wealthy you will become overtime because they go down in value over time. Whereas, the more dollars you put into assets, real estate or stocks or whatever else you want to buy, your net worth is going to go up over time. So you want to get more dollars into those assets and less dollars into depreciating assets. But cars depreciate faster than a lot of other things. In fact, for cars, depreciation is really, really steep. You've always heard people say, hey, the moment you drive a brand new car off the lot,

it goes down in value over time. But if you didn't know, the average amount that a new car is going to lose over the course of the first couple of years is about 30%. And I've seen this a lot of times now where I am car shopping currently. And as I look through some of these, you can take one year off of some of these vehicles and you can save $10,000, $20,000. They have depreciated that much just by buying a slightly used car. And so it's really, really important to understand how this works because if you start to finance a car, it's going to be something that really, really can impact your bottom line,

especially if you buy a new car, you've got to realize that if you put no money down and you buy a brand new car and then you finance the rest of that vehicle, you're going to have to do one of two things. Either you're going to have to change your strategy and put at least 20% down, or number two, you're going to have to go out and you're going to have to buy gap insurance. And gap insurance is something where we looked up the average cost of gap insurance right now. And I looked it up in my state, the state of Florida, which it does vary by each state. But the average cost of gap insurance in Florida is $2,923 per year. That's a pretty high number to have to be paying instead of just putting that 20% down on your vehicle. Now, I've also heard people in

other states that have much lower gap insurance. So it's worth actually weighing out this cost to see if it's worth it. And what gap insurance does is if you've never heard of it before is when you buy a new vehicle off the lot and say, for example, you have it for a month or two. It depreciates that initial 15, 20, 25 percent, whatever type of vehicle you have, luxury vehicles depreciate faster when you drive it off the lot, whereas, you know, a Toyota or a Honda is going to depreciate less quickly. And so when you drive that off the lot and then you go out and you get in an accident and maybe it totals your car. Well, what, Gap insurance does is it covers the cost differential of what is left that insurance won't cover.

So usually people get in an accident and even if it's not their fault, somebody hits their car, well, that car is worth 20% less because you drove it off the lot. So they could be stuck with a bill on a brand new car that they bought, even if it's not their fault. So Gap insurance actually covers the rest because of that depreciation. So that's one consideration to have, I am more so pro putting 20% down just to cover that depreciation costs right off the top so that it can actually go towards the value of your car instead of going towards just an insurance company who's just going to take that money. And if it doesn't happen, then it just goes away. So really, really important to kind of think through that. The second reason,

though, that you really want to consider financing as a negative thing is if you have lengthy loans. So if you take a longer term loan when you finance, it is a negative impact on your overall financial health because now you're spending more dollars towards payments and less of those dollars are going towards things that you actually want them to do. Wealth building activities like putting them in your retirement account or putting it towards real estate or putting it towards a business you want to buy and or also they are not going towards things that you want to do like vacations or towards your kids activities or towards things you want to do in life.

So really important is if you stretch out those payments, 69 months is almost seven years. And the average is coming out to 67 to 69 months for a lot of these. Seven years of car payments to me is absolutely ludicrous. You cannot stretch those loans out that far and make it make sense. So a lot of times you really need to make sure unless you are really nailing all your retirement goals. If you're nailing all your retirement goals, more power to you. Make it rain on those car payments. I don't care what you do if you're making enough.

But if you're not making enough, you have seven years of car payments and you're just trying to get by, you really need to consider maybe paying cash for a lesser car until you get that income up to be able to afford the correct car. Now, next is credit risk. So you also run the risk of credit risk. if you are going to have these car payments for a long period of time. And if you're right on the edge and your car payments are right on the edge of how much income and expenses that you have and you're really just getting by your living paycheck to paycheck

and you start missing some of those car payments, your credit risk goes way, way up. So you got to make sure that you are taking care of that as well. Obviously, depreciating assets will kill your wealth. That's one big thing we've been talking about a lot. And so you can go out to the market and get 7, 8, 9, 10% returns. And if you go out and you start to buy a depreciating asset, and you get a high interest rate on that depreciating asset, it will absolutely destroy your wealth.

And people who do not have good credit scores are getting car loans. And the interest rate is between 10 to 15%. And if it's even higher, you really have a predatory lender there. But these really, really high interest rate loans are allowing compound interest to work against you. You could be paying those for such a long period of time. Please, for the love of God, do not take on high interest debt when it comes to vehicles. It's really important not to do that so that you can actually, ensure that you're going to build wealth over time and not let compound interest work against you.

The next one, though, as I want you to really think about this, if you are borrowing money for a vehicle that gets you from point A to point B, now I get utility. There are times where you're going to need a larger vehicle because your family has grown, for example. Maybe you have a five-seater car and you have three or four kids, so you can't fit in one car. And so you have to change the vehicle that you're purchasing. I understand that. And that is in a lot of situations, that's why people get larger cars. But if you're borrowing a car, meaning that you are paying a really high interest on a car just for looks to get from point A to point B, or you're borrowing a car just to get to working back, it's really important to think through that decision. First of all, one of my favorite quotes from

Morgan Housel is where he talks through in the psychology of money that people who see you in a fancy car, say, for example, you drive a Lamborghini and you want people to see you as really cool or really interesting or really wealthy because you drive that Lamborghini. What people actually do in the psychology behind this is they think about how cool they would look in that Lamborghini. Why? Because we all are just really self-centered. We all are just thinking about ourselves and we have no time to think somebody else is cool. Instead, we're just thinking about ourselves. And so we're thinking, hey, how cool would I look in that Lamborghini? How cool would I look in that G-Wagon? How cool would I look in that grand wagoneer if you're a mom or a dad. How cool would that be, huh? And these are things that you

really need to think through as you go about doing this. Do not borrow money for looks. Do not borrow money to get from point A to point B if you don't have to. And so it's really, really important to make sure that you kind of think through that process as we go through this. So there's just some of the negatives when it comes to borrowing money for a car that I want to talk through. And now we're going to do is talk through, should you finance or should you pay cash for a car. All right. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible.

And if you've ever been there, you know how stressful this can be. That's where Indeed comes in. When it comes to hiring, Indeed is all you need. Instead of struggling to get your job post noticed, Indeed's sponsor jobs help you stand out and hire faster. Your post jumps up to the top of the page, making sure it reaches the right candidates. And it makes a huge difference.

Sponsored jobs on Indeed get 45% more applications than non-sponsored ones. And there's no need to wait any longer. Speed up your hiring right now with Indeed. And listeners of this show will get a $75 sponsored job credit to get your jobs more visibility at Indeed.com slash personal finance. Just go to Indeed.com slash personal finance right now and support our show by saying you heard about Indeed on this podcast. Indeed.com slash personal finance.

Terms and conditions apply. Hiring, indeed, is all you need. So lately, I've been noticing how fast things are changing at home. The kids are growing like crazy, clothes don't fit anymore, and routines are changing. And it just hits you. Life is expanding. And when your life grows, your responsibility grows with it. That's something I've been thinking about more this spring, making sure the safety net we have in

place actually matches the life that we're building. And that's where PolicyGenius comes in. PolicyGenius is an insurance company. They're an online marketplace that helps you compare life insurance quotes from some of the top insurers in America, all in one place for free. And their licensed team works for you, not the insurance companies. So they help you find the right coverage for your situation without all the guesswork. And they walk you through everything. Answer your questions, handle the paperwork, and help you get the coverage that actually fits your life today and where it's going.

So protect your family with a policy that grows with your life. With policy genius, you can see if you can find 20-year life. insurance policies starting at just $276 a year for $1 million of coverage. Head to PolicyGenius.com to compare life insurance quotes from top companies and see how much you can save. That's policygenius.com. Local news is in decline across Canada, and this is bad news for all of us. With less local news, noise, rumors, and misinformation fill the void, and it gets harder to separate truth from fiction. That's why CBC News is putting more journalists in more places

across Canada. Reporting on the ground from where you live, telling the stories that matter to all of us. Because local news is big news. Choose news, not noise. CBC News. Okay, when I sell my business, I want the best tax and investment advice. I want to help my kids, and I want to give back to the community. Ooh, then it's the vacation of a lifetime. I wonder if my out of office has a forever setting. Private Wealth Advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center.

Find your advisor at IDPrivatewealth.com. So there are a number of different considerations here as we talk through paying cash or financing a car. But at the top of this, before we even start here, I truly believe that when you go out and purchase depreciating assets, that cash is going to be king in a lot of those situations. Now, when I say this, we're going to go through scenarios where, hey, oh, maybe I can get a higher interest rate if I invest those dollars instead. We'll talk through that in a second. Don't worry. But a lot of times when it comes to buying depreciating assets, cash is always going to be king when you buy those depreciating assets.

Why do I think that? There's a number of reasons why I think that. And no, I didn't learn this from Dave Ramsey. This isn't just something. And even though he believes that too, I think. But I think this is something where you really got to think through the advantages of paying cash for a car. Number one, the obvious answer, you avoid paying interest. And so interest when it comes to purchasing a car is not going to be a massive impact on the overall financial health,

whereas interest when you purchase a home is going to be a huge impact overall. On the total cost of ownership of a car, you're going to be paying a few thousand dollars, depending on the price of the car. Now, if the car price is, you know, 60,000 and above, it's going to be even more. But you're going to be paying a few thousand dollars over the life of that loan and interest. And so this is why car companies always want you to finance a car because they make more money on that vehicle when they have you finance those cars. What if every single vehicle they got out the door?

They made an extra $2,000, $4,000 each individual. Well, they're going to take that deal all day long, and they'd rather you finance that. So you avoid paying interest when you pay cash for a car. That's number one. That's really important. In high interest rate environments, meaning interest rate environments where the interest rate is above a 6% interest rate,

you should always be considering paying as much cash as possible when you can buy a car. Now, listen, I am not naive. I know most people cannot pay cash for a car. I get it. I understand it. Don't worry about it. There is nothing wrong with financing a car. We're going to talk about some of the rules around that.

But if you can, thinking through paying cash for a car is a better decision. And in really high interest rate environments, drive your car longer is option A. Option B is find a car that costs less so you don't have to take on a longer loan so that you're not paying these fancy brand new car prices. So that's number one. Number two is that if you pay cash for a car, it is significantly easier to stick to your budget because now you don't have any car payments. And so when you don't have car payments, there are some magical things that you can do with your money by avoiding having to pay the bank every single month.

And this is something where I think most Americans out there are just paying way too much on car payments. I see the income levels for most Americans and I see the average car payments for most Americans. And what's happening is a lot of Americans are becoming car poor if you do the math. And so you got to make sure that you are lowering the amount of auto loan debt that you have. And it's way easier to stick to your budget if you actually handle that. Another study came out that said the average new car in the United States is over $47,000. Meanwhile, the median individual income is only about $37,000. So there's a lot of people out there who are spending more than their annual income on a car purchase.

That, my friends, is a big old no-no. Do not spend more than your annual income on a car. If you do that, that means you're going to work an entire year just for a vehicle that is an appreciating asset that's going to go down in value over time. And you can't take any of those extra dollars and put them towards wealth building activities. And we wonder why people are stretching out these car payments. Affordability is very difficult right now. I get it. But at the same time, nobody ever should spend more than their annual income on a car.

Ever, ever, ever. make that rule, ingrain that rule in your brain. Please, we want to help you here. That is our entire goal is to teach you how to build wealth and to help you as much as possible. You will get yourself in financial trouble if you spend more than your annual income or even close to your annual income on a vehicle. So if you were in a low income situation, then you have to buy a used car. You have to be balling on a budget. You've got to ghost ride the whip down the street.

But we cannot be spending too much on a car. That is really, really important. It's personal finance 101, but at the same time, nobody follows that rule. And so I really want you to learn this stuff because I want you to build wealth. I want you to be able to have that financial freedom. Listen, the car is going to wear out. The car is going to get old real quick. You know what doesn't get old?

Having flexibility with your time. You know what doesn't get old? Being able to do what you want every single day. You know what doesn't get old? Being able to spend more time with your family and your kids. You know what doesn't get old is being able to do what you want to do. And the only way to do that is by building wealth, taking those extra dollars, put them towards investments so that you can retire.

And that, my friends, is what we're trying to do here today. So it's easier to stick to your budget as number two. The third reason why cash is great is because you own your car. The bank doesn't own your car. So if something happens to you or something happens to your vehicle and you total your car or somebody else totals your car and you have a whole insurance issue, well, you're not going to have to pay somebody else a large lump sum of money because that has to. happen. Instead, you own that vehicle, so all the responsibility falls on you, and then you have to

figure out your next transportation move. But the bank doesn't own the car. So you don't owe anybody anything if something happens. If you can't make a payment one month, oh, well, there are no payments. You have cash. So it's not an issue. You can still get from point A to point B no matter what happens in life because you own the car. And so that's just another really, really important thing to kind of think through is if you're toting line here, there's nothing wrong with going out there, as long as your family is small enough to survive this situation. There's nothing wrong with going out there and getting yourself a 2010 Honda Accord instead of going out there and buying a brand new Tesla and taking on payments.

There is absolutely nothing wrong with that. And so really, really think through these decisions as you go through this because you could own your car outright, have zero payments. And what could you do with that as extra dollars? You could ball out on all sorts of other stuff. So really, really love the idea of that. And now we want to think through this. Now, next let's talk about when a car loan may make sense for some people.

people. And this is going to be really, really important, I think, to think through for most of you, because there are scenarios where I think car loans are going to make more sense. Let's get into them next. All right. So when would car loans make sense? And there's going to be a couple of different ways to think through this. Number one is a car loan may make sense after you make sure that you take care of what the depreciation would be initially is if you can earn a higher interest rate somewhere else. Now, this is one of the biggest arguments I hear over and over again from people. When they talk through buying a car is that, well, I can earn 7, 8, 9% in the market and my car loan is a 2.9% APR interest rate. Sure. That is a great argument to have. And if that is you and you don't have

any other issues and you're very financially disciplined in terms of taking those extra dollars and putting them towards wealth building activities, more power to you. So say for example, you were going to pay cash for a $40,000 car. That's the average car payment or the average price of a car right now. Some people say 47. Some people say 40. we're going to say 40 right now. And let's say $40,000 is what you purchase a car for. Okay. So you could take cash and you could put it all into a depreciating asset, which goes down in value over time, or you could take on car payments at a 2.9% interest rate and instead take the rest of the money that you would have put towards that car. Maybe it's an extra 30 grand. So you put that 25% down. You put 10 grand

down. And then the other 30 grand is going to go towards investing. And so you put it into investments and you can earn an 8% rate of return to those investments. That's a very logical move. It's a very, very logical move to think through that process and do it that way. I have no issues with you doing that as long as you actually do it. Meaning as long as you actually take that $30,000 and immediately put it into income producing activities. Then there's nothing wrong with that at all.

Now is cash with a car still a better move? It could be, but there's nothing wrong with that logic and I have no issues there. Do I want you to have more debt? No, I absolutely do not want you to have more debt. But I also think if you know what you're doing and you can invest your dollars at a 7, 8, 9% rate of return, you buy the S&P 500 or you go buy some index funds or whatever you want to go out and do. And you know, historically on average, that's what the market has returned. But you know it's not guaranteed because nothing is guaranteed.

Then you go out and do that. Well, that's going to make a lot of sense to me. And so I have no issues with that as long as you cover that initial depreciation of that asset, that 20%, I have no issues with that. So it could make sense in that situation. Really low interest rate. I've had a car loan where I got a 0% interest rate. On one of my first cars, this is about 2015 or 2016. I got a car loan with a 0% interest rate. You bet your bottom dollar, your boy did not put much money down outside of what it was going to depreciate. You know what your boy did? He put it in the market because it's kind of like free money. And so that's a scenario

where I would definitely consider that. Okay. Another scenario where I would consider a car loan instead of paying cash is if you have other high interest debt, meaning that if you have other high interest debt that you need to take care of, maybe you have a credit card loan, maybe you have a personal loan, maybe you have student loans, and you want to go out and buy a $40,000 car because you need it for whatever reason. This is just an example. But you also have high interest debt. Number one is if you have high interest debt, you should not be buying a car at that point in time. Instead, all those dollars should be going towards that high interest debt, okay? But if you have zero vehicle and you need to get to work and back, maybe you need to make some money, those types of

things, then I'm okay with you financing that vehicle at a low interest rate to pay off high interest debt because high interest debt is going to destroy your wealth building ability. And if you're out there paying a 10, 15% interest rate, 20% interest rate, maybe you have a credit card and you're paying 25% interest. Well, that needs to be taken care of first. And so if you have that high interest debt, then I have no problem with you financing a car at a lower interest rate in order to make sure that you take care of that. Okay. So you have to have the financial discipline, again, to put all those dollars towards that high interest debt. In fact, you really shouldn't have a huge lump sum of cash if you have high interest debt and said that cash should have been

going right into that high interest debt. So that's another scenario. How do we classify high interest debt here? Anything above a 6% interest rate outside of your mortgage is considered high interest debt. Now, other people have argued, well, what if I want to build credit? There's a lot simpler ways to build credit than to go out and buy a car and make these monthly payments and have this interest rate based on that. So with that scenario, I would much rather you pay cash than buy a car to build credit. Go get a secured credit card or go get a credit card and put a couple hundred dollars on there a month and pay it off every single month. You can do it that way. And you can probably do it in a way that makes a lot of sense. But to do it with building credit history, that is just not an argument that I really want to hear.

Instead, I'd much rather you pay cash for a car than doing it to build credit history. Now, what if you have no other option? Meaning you have zero other option. You have to finance the car. You have no cash on hand. You have no car and you need to get to a job. That's another scenario where, hey, if you got to finance it, you've got to finance. it. Do not let these predatory lenders get you at a 10 to 15% interest rate. But if you have to finance it, then I understand, I want you to get the smallest amount of loan possible. Go get that 2002 Honda Accord. Those things are going to last forever anyway. Go get that 2004 Toyota

Corolla. Go get that 2010 Toyota CRV. But make sure you're spending as little as possible when it comes to these vehicles. There are vehicles out there where you can get an old Toyota or old Honda that are very reliable, that have zero accident history. that have been around just for 15, 16 years. And you can go get those things at, you know, 120, 130,000 miles for less than 10 grand. And so there's no reason to spend a massive amount of money. Get a reliable vehicle, a reliable brand,

Honda, Toyota are always at the top of the list and go out there and buy that car, then save up your money for the next car. Okay? I want you to buy a car that has the lowest possible cost, then save up the rest of your money for the rest of the way. Really, really important to do that. Really, really important because if you're just starting out,

those extra dollars need to go towards wealth-building activities, and then you can make a better financial decision when it comes to your car. So really make sure that you understand how to do this. Now, how do we select the right financing option if we're going to go financing? Well, first of all, see what the dealer is going to offer you. If you're going to these one-off dealers who are on the side of the road that aren't associated with a big dealership, you're going to get some interesting feedback when it comes to some of those. So be very weary of those.

You can go get a bank loan, and a lot of times you can go get bank loan financing and check out interest rates. But what I found is some of the lowest interest rates are credit unions. And credit unions have auto loan programs where you can either refinance your car. So if you have a high interest rate in your vehicle, maybe you bought one in the last one or two years, go to a credit union and see what they can do for you. Because a lot of times credit unions can help you out when it comes to your interest rates and they have better interest rates. Now, if you're buying a new car, the dealership is going to have some really low interest rates. A lot of times they have deals going on.

And you can negotiate that interest rate at the dealership, but they may have 2% APR or different deals like that that are really going to make a lot of sense for you. If they have a really low interest rate without a bunch of additional fees, then I would consider that one for sure. But if they don't, then go to a credit union, especially if you're going to buy used cars at some of these used car lots. A credit union is a great option to get pre-approved, go talk to them, go through the process, so that you can get that lower interest rate. I don't want to see people driving off with a 10% interest rate when you buy a car. Instead, I want you to kind of do a little homework up front and check out some of those

credit unions as you go through that process. Now, there are alternative financing methods, meaning there's some cool stuff you could do. So if you go look at vehicles, for example, and say it's a individual seller. So it's some guy or gal who is selling their used car to you and they put it on Facebook marketplace and you went to go see it. You could entertain the option of seller financing, meaning that you could say, hey, would you hold a note on this car for me at a low interest rate? And I'll buy this car from you and I'll make payments every single month and see if they're

willing to do that. That's another option that you can have or then there's not. no pull on your credit and there's no bank loan to have to worry about. Instead, they can hold the note on this vehicle. So that's another option to do that as well. For example, I am about to sell a depreciating asset that I have, which is a golf cart. And your boy lives in a community that there's a lot of golf cart driving around. But as I start to buy another car, which is a family vehicle, I can't justify having this depreciating asset. And so what I'm going to do is I'm going to sell a golf card. But one option I'm going to give people is, hey, you can make seller financing

payments to me at a 5, 6% interest rate. And so a lot of people aren't going to want to pay 10, 12, $13,000 for a golf card, but they are going to be willing to give payments out at an X% interest rate. And so that's one option I'm going to give people at seller financing. So it's a win-win situation for the buyer in the seller because they earn an interest rate. And you get to put lower money down so you could use it for something else if that's what you need to do. So there are some cool options out there when you go to financing a car. Now, how much car should you buy? We've had a number of episodes on this, but I'm going to give you just a couple of different

options here at the end of the show so that you know what some of our options are. I really like to either you put 20% down or you get gap insurance. One of those two things. So that's number one. If you're going to finance a car, I want you to be protected if you get in an accident when you drive that car off the lot. So it's usually 20% down or I want you to get gap insurance in that spot. Now, if you only have 15%, and it's a used vehicle,

Different story. So kind of look at how much this vehicle depreciates every single year based on the year where it is, where the mileage is, and at least put that amount down so that you can make sure you take care of that next three years of depreciation. Okay? Really important to think through that, okay? So make sure you look at that number. So up front, I want you to put something down.

I want you to either do that or get gap insurance. Next is the length of the loan. I don't want you to have a car loan longer than four years. And I know some people are trying to stretch those out because they want to buy a brand new wagon ear. They want to buy a brand new Tahoe or they want to buy a brand new sweet minivan. Well, if you're going to do that, you've got to have four years in that note. Why? Because I want you to have less time making payments. Less time making payments means more time building wealth. Less time making payments means more time on vacation. Less time making

payments means that you get to do what you want in life and have more flexibility. So I want you to make sure that you can handle four years of payments or less. Okay. So that's number two. Number three is the payments need to be 7% or less of your gross annual income per month. This is going to allow you to ensure that you're not spending too much on car payments. Now, if you want to work in a longer period of time, you love your job and you're going to work a really long time, you can bump that up a little bit to about 10%. But I really don't want it at 10%. 7% or less is where I want it, okay? Because that makes sure that you're not getting into a sticky situation.

when it comes to some of these car payments. And so that's where the down payment comes into play. And the down payment can also be your trade-in, by the way. It doesn't have to be just full-on cash. You can utilize your trade-in as part of that 20% so you don't have to utilize gap insurance. That will help you a lot when it comes to a lot of situations. Then you have making sure that your payments are four years or less

that you can have extra time to take your extra dollars and put them towards things that you value. I want you to make sure that it's 7% or less of your gross monthly income, and here's the last one, is I want you to try to drive that thing for 10 years or longer. Now, if you're buying a 2004 Honda Accord, maybe a little more difficult. But if you're buying a vehicle that has been released in the last three to five years, I want you to try to drive that thing for 10 years or longer. And so this is where we come into play 24, 7, 10, 24, 7, 10.

20% down or your trade in can be worth 20%. Four years or less on the loan, 7% or less of your gross income, and drive it for 10 years or longer. That, my friends, is how you do car buying and make sure you don't get in over your head. And that is how you build wealth while still owning cars. So if you're going to own it for 10 years or longer, maybe it's worth buying a vehicle that's two or three years used so that you can drive it longer, if you can afford it. Or maybe it's worth even considering, dare I say, a new vehicle. Most people shouldn't consider a new vehicle.

But if you are making sure, if you're hitting your investment goals, if you're nailing that stuff and you have no issues there, there's nothing wrong with a new vehicle if you want to go that route and you really value that stuff. If you really, really value it, there's nothing wrong with it. So this is how I want you to think through car buying. This is how I want you to think through should you pay cash or should you finance a car. Really important stuff and really important life decision. I do not want you to get in over your head because I really, really care about each and every single one of you all. And I want to make sure that you are making the right decision when it comes to financing your car. Listen, thank you guys so much

for listening this episode. I truly appreciate each and every single one of you. If you guys enjoy this episode. Make sure to share it with a family member, a friend, if you think they'll get value out of this. And don't forget to leave that five-star rating and review. And thank you for investing in yourself because that's exactly what you're doing when you listen to this podcast, as you are investing in yourself. I cannot thank you guys enough for listening to this episode. We will see you on the next episode. Rosen lasagna, medium power, 15 minutes. Sounds like Ojo time. Let's play. Feel the fun with Play-Ojo. The online casino with all the latest slot and live

What you win is yours to keep with no wagering requirements, instant payouts, and no minimum withdraws. Hey! I just won! Woohoo! Feel the fun! Play, oh Joe! Honey, forget about the lasagna! Let's celebrate! 19 plus Ontario only, please play responsibly. Concerned about your gambling or that of someone close to you, call 1866-531-2600 or visit Connexontera.ca.com.cansontario.ca.