The Personal Finance Podcast - Why Leasing a Car Is Like Lighting Money On Fire

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Starting point is 00:00:56 Find your advisor at IG Private Wealth.com. On this episode of the personal finance podcast, we're going to talk about why leasing a car is like setting money on fire. To the podcast, I'm your host, Andrew founder of mastermoney.com. And today on the personal finance podcast, we're going to talk about buy-verse lease and why leasing a car is like lighting money on fire. If you have any questions, hit me up on TikTok or Instagram at Master Money Co. And follow us on Spotify, Apple Podcasts, whatever podcast player you listen to. If you want to help out the show, leave a five-star rating and review on Apple Podcasts or Spotify. And don't forget to check us out on YouTube as well. We have a bunch of great YouTube videos that we are releasing. The one we just released was how to figure out with the average net worth by ages and where you stack up. So definitely check that video out.

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Starting point is 00:02:46 So I want to make sure that you don't miss that as well. Index Fund Pro, we're so excited about that course for you guys. So just be ready for that to be released here shortly as well. And the people who are on the email list will get access to Index Fund Pro early. So here we go. Today we're going to be talking about how to buy cars. And we've had a couple of episodes in the past on some optimal ways to buy cars. But I'm getting this question a ton right now.

Starting point is 00:03:11 Should you lease a car or should you buy a car? And before we jump into this episode, the first thing I want to talk about here is that we are in a really wacky time. We are in a time at the time recording this where used cars are appreciating. And whenever I talk about this topic, specifically on social media, on TikTok, on Instagram, we had a post about this that went semi-viral on TikTok, that people are saying cars aren't depreciating assets. They're going up in value. Now, you know I'm not one for predictions. But in this situation, I'm going to let you know that ever since the beginning of times,

Starting point is 00:03:43 cars have gone down in value because they depreciate over time. So understanding that this is not going to last, we are in a unique supply and demand problem. There is only so much supply and the demand has gone up because there's limited supply. It's the same thing with the housing market. There are not very many houses available. So prices are appreciating. The same thing goes with the vehicle market. Because of COVID, there has been supply problems so they can't get enough vehicles for the amount of demand that is in the area.

Starting point is 00:04:12 So the prices of used cars have gone up and a lot of times these used cars are the same price as new cars. This will not last. It is not an appreciating asset. Don't start investing in cars and thinking they're going to go up in value forever. They're not. Now for the other people who are going to come in and say, well, classic cars appreciate over time, sure, they appreciate over time. That's fine, but that's 0.005% of the actual entire fleet of cars that are in the country. So you've got to make sure that you understand that cars are a depreciating asset. And the key lesson here is, do not pursue financial principles that are short. term, you got to pursue financial principles that are absolutely timeless. You cannot fall back

Starting point is 00:04:52 on things that are just happening for a very short period of time. And that's with anything when it comes to finance. So today we're going to be talking about a number of things. The first one we're going to be talking about is why cars are bad investments. Then we're going to be talking about why leasing is a devil in disguise, where leasing sometimes can look like a good situation, but 99% of the time, it is not the best and optimal way to buy a car. Then we're going to talk about the costs of leasing. And I'm going to order from best to worst, the best ways to buy a car, all the way down to the worst way to buy a car so that you know which order you can do it. In addition, I'm going to give you some rules of thumb to utilize when you buy a car as well to help you out on that front. So without further ado, let's get into it.

Starting point is 00:05:33 All right. So why are cars bad investments in general? Like I said, if you had a classic car, you fixed it up. Maybe you got a 72 Chevel and you fixed that bad boy up. It's going to be worth more than when you bought it. And over time, if you hold on to those classic cars, they will go up in value over time. That's not what I'm talking about. What I'm talking about is the standard Honda Civic that you buy every single year.

Starting point is 00:05:54 Most cars, 99% of cars, depreciate over time. And that's number one. They are bad investments because they are depreciating assets. When you want to build wealth, you want to put the majority of your money in assets, not liabilities. A car is a liability. Why? Because it goes down in value over time. This is a basic principle in personal finance that you have.

Starting point is 00:06:15 absolutely have to understand in order to build wealth. You do not want to buy liabilities. You want to buy assets. So what's an asset? It could be things like buying a stock. It could be things like buying a rental property that cash flows. It gets all different sorts of assets that are out there. It could be buying a small business or a boring business.

Starting point is 00:06:31 Those are things where you can allocate your dollars into assets. What's not an asset are things like cars, boats, even your personal residence in certain situations. Those are what some people would qualify as liabilities. Now, for a lot of situations, your personal residence would be an asset. It just depends on where you fall in that line. But things like cars, boats, golf carts, motorhomes, RVs, all of those things are depreciating assets. And you want to avoid those at all cost unless you buy an asset that pays for those liabilities.

Starting point is 00:07:02 Now, how much do cars depreciate? So if you look at the average car, we're going to use an example of a $30,000 vehicle. A brand new car loses between 9 and 11% of its value, the most. moment you drive it off the lot. So if you have a $30,000 car, you are literally throwing $3,000 and lighting it on fire and throwing it out the window. After one year, this is where cars really take big hits. After one year, your car will probably be worth 20% less than you bought it for. And after five years, it will depreciate another 15 to 25% every single year until it hits the five year mark. And after five years, your car is going to lose about 60% of his initial value. That, my

Starting point is 00:07:40 friends, is not a good tradeoff and not a way to build wealth with their money. It's to lose 60% of its value over time. In fact, here's an exact example. If you had a $30,000 car, in one minute, it would be worth $27,000. In one year, it'd be worth $24,000. In two years, it'd be worth $20,000. In three years, it'd be worth $17,000. In four years, it'd be worth $14,000. And in five years, it'd be worth $12,000. Now, like I said, we're in unique times. Do not use the times that we are in right now to classify what's truly happening and what has historically happened because this is not going to last. Now, as we look at this, when you get to 10 years, this starts to bottom out a little bit where those cars kind of hold some of that bare minimum value over time.

Starting point is 00:08:25 And that is why if you're going to buy a car, a lot of times we like to buy them a year, two years, three years old, take that massive depreciation hit and you still have a semi-new car. That'd be one of the optimal ways. And we'll get to that order here in a second. So here's the top five vehicles with the lowest depreciation. The first one, is a Jeep Wrangler. So its five-year depreciation is only 27%. A Toyota Tacoma is only 29.5%. A Toyota Tundra is 37%.

Starting point is 00:08:49 A Nissan Frontier is 37%. And a Toyota four-runner is 38%. So Toyota runs that with three of the vehicles with the lowest depreciation rate. The vehicles with the highest depreciation rate, and this is going to be interesting. The number one is the Nissan Leaf. It loses 71% of its value in the first five years.

Starting point is 00:09:07 The second one is a Chevy Volt, which loses 71% of its value. within the first five years. Both of those vehicles, by the way, are electric vehicles, so keep that in mind. Number three is a luxury vehicle. A BMW 7 series loses 71% of its value in the first five years. A Mercedes S-class loses 69% of its value, and the Ford Fusion Energy loses 69% of its value. Now, with those electric vehicles, part of the reason for that is because the batteries on specific electric vehicles, it's a little bit different with a Tesla, but on some of those specific electric vehicles, the batteries go bad after five, six years.

Starting point is 00:09:42 So that is why you're going to have to replace an entire battery, which can cost anywhere from $5,000 to $8,000. So they depreciate very quickly because of that. Now, the second reason why cars are bad investments is because you have to pay to maintain a car. And maintenance of a car is a whole other thing because you have insurance involved. And people don't factor in, you have your monthly car payment, but then you also have insurance involved, which is a major cost to your pocket, just because you need to

Starting point is 00:10:07 drive a car. Then you have maintenance. So you have to get oil changes. You have to do things like fix the vehicle. So you have to get new brake pads every couple of years. You have to get new tires every couple of years. There's so many big expenses ingrained in vehicles that they really are bad investments. And number three, people usually buy too much car. So a lot of times people focus on the wrong thing, which is the monthly payment. And instead, what you should be focusing on is the optimal car for your specific financial situation. And people like to act wealthier than they are when it comes to buying cars. People like to show off.

Starting point is 00:10:39 They think a lot of people care about their vehicles when in fact, usually when people see a nice vehicle and they think it's really cool, they think about themselves in that vehicle and how cool it would be to own that vehicle instead of actually thinking of you driving that car. So you've got to think through some of this stuff in the psychology of how people operate when you're doing stuff like that. Now, there's nothing wrong with having nice cars and fancy vehicles. There's absolutely nothing wrong with that.

Starting point is 00:11:02 But you have to be able to afford it and you have to be making enough money to afford that. and that is where understanding and having a financial education is going to truly help you throughout this process. Now, you know I talk about this all the time, is I want you to spend your money on things that bring you value. So if cars are your thing, if that is your thing that you absolutely love, you think about cars all the time, you dream about cars at the time, well, if you want to allocate your dollars towards nice vehicles and instead cut back somewhere else, that's absolutely fine because

Starting point is 00:11:29 you're still staying within the parameters. As long as you're building wealth, your dollars are still going to your investments, you have an emergency fund in place and you are on track to do what you want to do in life with your money, then absolutely you can utilize that money to spend on cars. That's not what I'm saying. What I'm saying is for the average person who spends a lot of money in all other areas and in addition spends a lot of money in their car because they want a fancy vehicle to show off, maybe ghost ride the whip down the street, show it off to all their friends,

Starting point is 00:11:55 wave like the Queen of England out their window when their neighbors are outside so they can see your car. That's a problem. And that's where we want to make sure that we are not, letting our lifestyle creep up and not letting our lifestyle take over that part. People in their 30s, a lot of you in your 30s, this is when it starts to happen, where you're going to make a little more money, you think you can afford that car, that vehicle, because you make more money and the monthly payment isn't so bad. Well, we're going to talk about that here in a second, but first, I want to dive into why leasing is a devil in disguise.

Starting point is 00:12:24 So your boy does not like leasing whatsoever. I think leasing a car is one of the biggest scams out there. Now, here is the disguise that leasing can put on. Number one, you get a new car all the time. So leasing means that you can always drive around in a brand new, sweet ride. So for a lot of people, emotionally, this is a big perk for them. And if you love driving new cars all the time, this is a massive perk for people as well. The second one is there's usually less maintenance issues because you're driving a new car around all the time.

Starting point is 00:12:51 So you don't have as much regular maintenance issues on cars as a lot of other people would if you're driving an older car. And you turn in your car before all those problems start showing up, the bad brake. the shot transmission, all those other things. And if you're always busy, this means it's less stressful for you in your life. The third one is leases are tax deductible for businesses. Now, in a business situation, this might be one of the only reasons that I would really consider leasing a vehicle. And even so, I can tell you what really smart people that I know do.

Starting point is 00:13:20 For example, in my first job, I worked for maybe one of the smartest people I know. It was the CEO of the company. And in that job, what that CEO did was they would go out and they would still buy a vehicles. This is a multi-billion dollar company. And they would go out and they would still buy fleets for the business because the business needed fleets of vehicles to be able to operate. And they would buy the fleets. They would not lease these vehicles. They would buy the fleets. And then around 70,000 miles is when they figured out that these vehicles would start to have issues. And then they would sell those vehicles. This was done based on really, really detailed

Starting point is 00:13:53 spreadsheets and math to figure out what is the most optimal strategy. So in some business situations, I understand leasing might just be easier. If you want to focus more time on your business, don't want to focus on doing all of this stuff, I understand that. But at the same time, you've got to figure out, is it optimal for your business so that you know if you're making that wise decision?

Starting point is 00:14:10 But in a business situation, that may be the only reason, besides being really wealthy, that I would consider leasing. Another perk for people is you can afford a nicer car. So a lot of people who drive luxury cars, in fact, according to leaseguide.com, 75% of all luxury vehicles are leased.

Starting point is 00:14:29 So a lot of people who lease vehicles are the folks who want to show off because banks don't really like to loan out more than $30 for a car loan. So if you want a car that's more than that, a lot of people have to go out and they have to get a lease and then they can buy it on the backside. And their monthly payment is typically lower. So people who are in the middle class, a lot of them will be buying luxury vehicles on a lease

Starting point is 00:14:50 because they want their payments to be lower so they can afford the lifestyle as much as possible. And then the last perk to the lease, leasing allows you to get into a car with fewer upfront costs. You don't need a crazy down payment. And if you do, it's usually pretty low. Your monthly payments are lower. Your sales tax is a little lower. And so all those factors make people want to consider the lease.

Starting point is 00:15:11 But there's a catch to this. And I'm going to explain to you why leases are terrible for your money right after this. 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.

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Starting point is 00:18:34 But if a vehicle has more wear and tear, the dealership can charge you extra. So you got to figure out what normal wear and tear is by quizzing the dealership if you're going to go out and get a lease. Number two, when you buy a car, your payments will eventually end and you own a car. With a lease, you have to re-up, and you have to get another car with payments again. You own absolutely nothing with a lease at the end. This is where the power of buying a car comes into play, because you want your payments to end at some point. And the faster you can get those payments to end, the better off you're going to be with

Starting point is 00:19:05 that vehicle, because it's a depreciating asset, you don't want to continuously be paying payments for the rest of your life, because if you're doing that forever, you own nothing, and you're just always perpetually making car payments on a depreciating asset. You want long timeframes where you're taking that cash that you would be putting towards a car payment and putting it towards an investment. So if you own cars for 10 years, for example, the first three years, you're making payments on that car. The last seven years, you are taking those dollars and putting them towards investments instead.

Starting point is 00:19:31 Do you know how much more powerful that is than actually leasing a vehicle and reing up and the next three years, you've got to lease another vehicle? And then reing up again, the next three years, you've got to lease another vehicle. This is why if you want to achieve financial independence, you want to get that payment out of your life completely. Say, for example, that payment is $4, $600. that's over a million dollars over the course of an investing career. So you could own three vehicles for 10 years or you can own a million leases. And with those three vehicles over the course

Starting point is 00:19:57 of 10 years, you could turn those payments into a million dollars. That's one of the most major factors that you have to understand when it comes to leasing. Number three, they are expensive in the long run. So when you lease, you're basically paying for the use of the vehicle for the first two or three years of its life. As we saw, we just talked about this, cars depreciate the most in that first two to three years. When your lease is over, you either have to lease another car or purchase one. So the same thing comes into play where you're still going to have those monthly costs over time. The next one is you have higher insurance costs when you lease a car. So a lot of people get surprised when their insurance bill comes up after they start leasing a car

Starting point is 00:20:33 and it is much higher than when they owned a car. So most leasing companies require to get higher levels of insurance coverage on vehicles. And it's usually up to $300,000 in liability coverage. So this can make your insurance payments a lot higher than if you just purchased the car instead. Here's another one. And this is called risk and reward. This is where the risk comes into play because lease contracts amounts do not change even after an accident. So we are in an age where people are glued completely to their screen. And if you get in a car accident and your vehicle is totaled, you're still responsible to pay back the full lease contract amount. So imagine for an example, you got into a car accident. It was the other person's fault. It was a hit and run. They took off. The

Starting point is 00:21:12 car dealership does not care. You still have to pay back that lease. Even if you have two or three years left on that lease, you still have to pay that back. That is a very high risk to take. Specifically, you can really put you back because if you have to get another lease, now you're paying two leases at the same time just to get out of that contract. And if you want to get out of contracts, it becomes very, very expensive. They may get extremely expensive to get out of those contracts. So it's not like it's something that's very easy to get out of instead. Another issue with leases is there's limits on distances. For example, if you have you, have a lease agreement that's five years 60,000 miles. If you go over that 60,000 miles, which is

Starting point is 00:21:48 12,000 miles a year, and that five years is up, you pay a penalty for every single mile over 60,000 miles. So you have no flexibility when it comes to leasing. Now, if you just drive five miles a day back and forth, maybe that works for you. But if you go on a road trip or you want to do anything else, you really got to consider what you're doing. And it's just an extra stress that you have to have in the back of your head because you got to stay within that 60,000 mile parameter or 12,000 a year. Maybe it's for three years and it's 36,000 miles. That's another cond to leasing. The next cond of leasing is you have liability of payments. Sure, you have it if you still have car payments up front, but if you lose your job for a certain period of time, you are still liable to make those

Starting point is 00:22:25 lease payments. If you own your car outright, you're not liable to make those payments. So what you want to do is get a short period of time where you have car payments. Then once it's paid off, then you don't have that liability anymore to have to worry about if you lose a job. The next issue with leasing is you don't own the car, but you're still responsible for repairs. This is not like renting a property. When you rent a property, the landlord is responsible for the repairs. When you lease a car, any repairs that are not covered by the warranty, where there's some minor ones that are covered by the warranty, but if they're not covered by the warranty, they are your responsibility. And when you turn in the car, all that money that you spent

Starting point is 00:22:59 outside of the warranty, you don't benefit from any of that investment that you made in the car. It also means that if you like customizations of your car, maybe you like to put on some bigger tires on your truck or you want to change the leather seats or you want a nicer dash in there. You can't do that with a lease. You can't make customizations with a lease either. The next one, you can't claim the vehicle as an asset. So if you were trying to do your net worth calculation and if you add vehicles to your net worth calculation, which I do not, but some people do, and if you do that, you can't claim it as an asset. It's actually an asset for the dealership that has loaned out to you. The next one is opportunity cost because making those payments

Starting point is 00:23:34 for a long period of time, like we just talked about. If you keep having those payments, you are losing out on the opportunity cost to invest those dollars instead. Now, a lot of people get leases with the intention of buying the car after. And that's our next one, because it becomes more expensive

Starting point is 00:23:48 to buy after the lease. So the dealership knows that you may potentially not want to be making so many payments anymore. You want to get a hold of the car at a lower rate afterwards. So they are actually going to charge you more to buy that vehicle.

Starting point is 00:24:01 In addition, you may have additional closing costs and fees and stuff like that. that. So you already paid some costs when you lease the vehicle, then you got to pay costs if you want to buy the vehicle afterwards because they can make decent money on that vehicle, especially right now. I can't imagine what they charge you right now after a lease. But after a lease is up right now, then they're going to charge you a specific price based on what you agreed upon with your term. The next one is that leasing requires good credit. So you can buy a car and not have good credit. To lease a car, you have to have good credit. And if you're still working on your personal

Starting point is 00:24:30 finances, you just found the personal finance podcast. You just started watching Master Money on YouTube and you're trying to build your credit back up, then you can't lease a car. You have to have good credit to be able to lease a car. So now let's go into a case study of buying versus leasing. All right. So sometimes it's easier for people to see it with real numbers and a real life situation. So here's a case study that money under 30 did. So Money Under30.com did a case study.

Starting point is 00:24:58 And they did it with a 2014 Honda Accord sedan. So what they did was they looked for the best lease promotions out there to try to find the cheapest lease that you could find. And they found this 2014 Honda Accord Sedana. This was back then. Here's how the deal worked. You put $1,99 down and the lease payments were $199 a month. So first off, that $1,99 is now absolutely just thrown out the window. You just lost $2,000 just to lease the vehicle.

Starting point is 00:25:26 Then you paid $199 a month for 36 months. and you had 36,000 miles within those 36 months. So three years, you can drive 36,000 miles within those three years. The total cost for those three years came out to $9,163. Then, assume you found a similar lease after those three years, and so your total cost would come out to $18,326 for those six years, or $3,000 per year for six years. Now, the same vehicle had a target price of $20,840.

Starting point is 00:25:59 And according to that price, If you put $1,99 down and finance the car for 48 months at 2.5%, your monthly payment would come out to $412.88. So this is one place where people are enticed because with the lease, you only had to pay $199 a month. When you buy it, you have to pay $412 a month. But at the end of that four-year loan, the total cost to purchase the car is $21,817. So over those six years, your annual cost to buy the car be $3,600. So remember the lease was $3,000, and to buy the car is $3,600.

Starting point is 00:26:33 So so far it seems like leasing is cheaper by almost $600 per year. But here's the big thing you're forgetting, is after the loan is paid off, you own the car. You have an asset. And what they did in this study was they looked at a car that was six years old, the same exact vehicle that was six years old, and it was worth about $10,000 in the private market. So if you own this asset, now you have a $10,000 asset that you can either apply for a trade

Starting point is 00:26:57 in or your next purchase or you could just control. continue to own it. So what that does is it reduces the cost by $10,000 a year. You end up saving over $1,000 per year or $6,500 over the course of those six years because you own the car after you are done buying the vehicle. That is one of the biggest factors there. And if you keep driving that car, then all of a sudden your payments go down to zero for the next five years. And that is what I'm trying to explain here, is that owning the car, even though it's a depreciating asset, it's still an asset that has value that you can utilize over time. Now, sure, you're going to have regular maintenance and things that you're going to have to do later on,

Starting point is 00:27:33 but at the same time, you were definitely going to save money. And this is based on a vehicle with a low price tag. So if you have a luxury vehicle and you do the same thing with a luxury vehicle, or you do what we're about to talk about here and buy the most optimal ways, then what's going to happen here is you're going to be coming out way ahead. I mean, thousands and thousands and thousands of dollars per year. So that's just one quick example on a low-cost vehicle where the savings are about $6,000. over the course of six years, and that's $6,000 invested over time.

Starting point is 00:28:04 If you invested over 20 years with the rule of 72, will be worth $42,000 if you invested that over that time. So the opportunity cost is $42,000 that you're losing out on by leasing that vehicle. And that's not counting if you own the vehicle past those six years. So this is an amazingly impactful thing. Over the course of 10 years, if you hang on the vehicle, you are looking at potentially a six-figure differential in opportunity costs where your portfolio would have grown six figures

Starting point is 00:28:29 if you invested those dollars instead. So the question then becomes, when is it okay to lease? I think it's okay to lease if you don't want the headache and you're really wealthy. So if you are extremely wealthy, you have a good cash position, you are really, really wealthy.

Starting point is 00:28:43 You made your millions. Then it may be okay for you to lease, but why would you want to do the thing that's least optimal? When you could just buy the car, own it, have that thing valued a couple years later, sell it again. But if you don't want to deal with the headaches,

Starting point is 00:28:53 you don't want to deal with any of the maintenance that are under warranty, you don't want to deal with all those little things. you want the dealership to handle it all and you are really wealthy, then a leasing may be a good option. If you own a business, then leasing may be a good option. Those are the two options that I see that leasing can work. Other than that, if you are working to build wealth or if you are in the middle class or if you're just trying to figure out what you need to do next, leasing is not your most awful thing. Even though those monthly payments can be enticing. That's what most people

Starting point is 00:29:17 focus on and that is the hardest thing to get past is majority of people focus on the monthly payment instead of what is actually happening and what's most optimal. And focusing on what's most optimal is how you can get to that next level when you're building well. Now, let's talk about the best way to buy a car all the way down to the worst way to buy a car in order. All right, so I'm going to give you the most optimal way to buy a car all the way down to the worst way to buy a car. And we're going to go in order here. So the best way to buy a car, by far the best way to buy a car, is to buy an asset that pays for the car. So we have an entire episode on this. But what I mean by that is, let me give you an example. Say for a

Starting point is 00:29:56 example, you see a brand new car that you want to buy. And that brand new car is going to cost you $500 a month. But what you want to do is take that cash that you would utilize to buy the brand new car and put that as a down payment on something like a rental property. Then you want to make sure, and you run the numbers, that that rental property will at least cash flow $500 a month. I just did this recently with another depreciating asset. We put a pool in our house. It's still an asset. It increases the value of the home, all that kind of stuff. But instead, we bought an asset that cash flows enough to pay for the pool. And I actually financed the pool at a very low interest rate, but we financed the pool and had the asset paying for that pool every single month because I would

Starting point is 00:30:34 rather have that cash invested. And at the end of that loan term period, what happens is you still have that asset available to you. So that asset's going to continuously produce cash for you for the rest of your life or whatever other liabilities you want to buy. Whereas once you're done with the vehicle, then you're going to have to turn that vehicle in or sell it at a loss from what you bought. So if you buy an asset, with the intention of that asset paying for your liability, that is the number one way to buy any liability whatsoever. I don't care if you want to buy an RV, a boat, a car, whatever it is. That is the best way, the most optimal way, to buy liabilities because that asset is still there for you producing cash flow every single month when the loan terms are up. So the car is paid off, but you still have an asset there giving you $500 per month in cash flow.

Starting point is 00:31:19 That is an amazing thing that you can be able to do and set up. And I know people who do this for college, for their kids. They do it for all different sorts of things. So this is a very cool way to optimize and to hack your money. Number two, the second best way is to buy a used car cash, something like a Honda or a Toyota or something that lasts long, and drive it as long as you can. So it could be anywhere from like a $10,000 car

Starting point is 00:31:40 where it already took all the depreciation, and you can buy it for $10,000 bucks cash, and you drive it as long as you possibly can. And cars that have the least amount of maintenance are usually, you know, Toyota's, Honda's, those types of vehicles. And you can look it up online and see what, the entire list is.

Starting point is 00:31:53 The third way. And this is the way that I typically buy vehicles. We bought my wife's vehicle this way. We bought my truck this way. Both vehicles that we have, we bought them this way, is to buy a semi-used car and drive it for 10 years or more. So the optimal way to do that is to buy an asset and buy the semi-use car because what happens with a semi-use car, like a year or two,

Starting point is 00:32:13 like one, two or three years to use is that they take the depreciation hit already. They take the massive depreciation hit that they're going to take. And then all of a sudden you take it over, you still have a semi-new vehicle without any maintenance issues, and at the same time, you can drive that car for a very long period of time. So my intention is to drive our vehicles for at least 10 years, if not longer. That's typically what we do. And for me, I could care less.

Starting point is 00:32:35 I'll drive it until it dies. So that is the third optimal situation. But if you can do it with number one and number three, then you're really optimal there. Number four is if you want to buy a new car because you love new cars, you buy the new car and then drive it for 10 years or more. So you can see a theme here. The longer you drive the car, the more optimal it is.

Starting point is 00:32:50 But it's not as optimal as buying a slightly used car and allowing that depreciation to be gone and then driving it for 10 years. But if you need the new car, you can drive it for 10 years or more. Now we're getting into the really bad ways to buy a car. Number five is to buy new cars and trade them in frequently. So we don't really want to do that because if you're doing that, you're just trading in the asset at the greatest depreciation rate and then starting all over again. So you're doing that over and over and over again.

Starting point is 00:33:16 And your opportunity cost that you are losing every single year is massive when it comes to what you could do with investing those dollars instead. And then the last one is leasing cars. Leasing cars is the worst way. We just talked about why, but leasing cars is the worst way to buy a car in the majority of situations. Now, there are very small situations that I've talked to a couple of people on DMs that are looking at leasing cars and they have very specific situations where potentially it could be okay. And we've talked about that. But other than that, for 99.8% of people, leasing is not the way to go. And that is the worst way to buy a car. Now, there's two car buying rules that we'll talk about really quick before we wrap this episode up.

Starting point is 00:33:54 One is, if you want to become financially independent and you want to become financially independent as fast as possible, I would encourage you to follow what is called the 283 rule when you buy a car. What does that mean? That means you put 20% down. The payment of the vehicle is 8% of your net income every single month, and those payments run for three years. So let me say that again. 20% down, 8% of your income. And those payments, you have that loan for three years.

Starting point is 00:34:19 years or less. If you want to achieve financial independence, that is how you do it. It's buying cars within those standards. What does that mean? Well, all of a sudden, that means your payments have to be minimized in comparison to how much you can make. So you have to be making a good chunk of money. Now, there's another one that we have called the 10-20 rule. We talked about this in the other episode. With the 10-20 rule, the way that this works, and this is where a lot of people can fall into this rule, is that you put 10% down, and the value of the vehicle needs to be 20% of one year's income. So if you make $100,000 a year, the value of the vehicle should be $20,000. What that does is it allows you to stay in the parameters of still being able to build wealth,

Starting point is 00:35:01 still being able to save your 20 to 25% every single year. And in addition, if you drive the vehicle for longer, we want you to drive that vehicle for 10 years at least with this rule. If you drive the vehicle for longer, that's going to allow you to still get that wealth building ability, not lose out on so much opportunity costs, and not have your money depreciate so much. So between those two rules, those are two rules that we really like. We expand on those and I'll leave them down below. I talk about those on TikTok and Instagram as well. We have TikTok videos where we explain them really well in less than a minute. So I will link those up down below as well so that you can see how those work. But these are some of the most optimal ways to buy a car. Now,

Starting point is 00:35:35 to sum this up, if you're talking about buying or leasing, 99.9% of time, you should be buying a car and not leasing it. You should be driving that car for a long period of time and you should not be buying the car outside of your price range. So that is the key when it comes to cars, is making sure specifically with the buy versus lease debate. Specifically, is you want to stay away from leasing as much as you possibly can because dealerships wouldn't offer it unless they would make more money. Because why would they just let you loan the car and then take it back and then have

Starting point is 00:36:03 to figure out what to do with it? They are doing it because they are making more money over time by leasing cars. Specifically, if you're looking at luxury vehicles, definitely do your homework when you're doing that because 75% of luxury vehicles are actually leasing. I want to thank you guys so much for listening to this episode. I truly appreciate each and every single one of you. You guys have any questions. Make sure you hit me up.

Starting point is 00:36:22 And don't forget to check out the master money newsletter popping up. An index fund pro is coming as well. And thank you to every single person who has been leaving those five-star rating and reviews. I cannot thank you enough. I truly appreciate each and every one of you. Thank you so much. And we will see you on the next episode.

The Personal Finance Podcast - Why Leasing a Car Is Like Lighting Money On Fire

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