Should You Pay Cash or Finance for a Car?

This episode explores the financial considerations of buying a car, specifically debating whether to pay in cash or finance the purchase.

1. Prioritize eliminating high-interest debt as part of a structured financial plan before considering major purchases.
2. Weigh the benefits of paying in cash against the potential gains from investing funds that would have been used for the purchase.
3. Understand the nuances of financing offers and how they can be utilized strategically to benefit financially.
4. The decision to pay cash or finance a car should align with one's broader financial goals and current financial health.
5. Continuously evaluate financial priorities and adjust strategies accordingly to maximize long-term financial stability.

1. Financial Planning Overview

Hosts discuss the 'financial order of operations' and its relevance to car buying decisions. They emphasize prioritizing debt reduction before making significant purchases.
Brian Preston: "We focus on eliminating high-interest debt first as part of our financial order of operations."

2. Considerations for Financing

The discussion shifts to when it might make sense to finance a car purchase and how to use financing strategically. Bo Hanson: "Sometimes financing offers can be used to our advantage if managed correctly."

3. Paying Cash for Cars

Analyzing the benefits and drawbacks of paying cash for a car, considering the opportunity cost of liquidating investments. Brian Preston: "Paying cash for cars is often ideal, but it's crucial to understand the financial implications."

1. Review your debt: Start by assessing and addressing high-interest debts.
2. Evaluate financial readiness: Ensure you're financially prepared for a purchase like a car.
3. Consider financing offers: Be strategic about financing to potentially leverage better deals.
4. Analyze long-term impacts: Consider how purchasing decisions affect long-term financial goals.
5. Prioritize investments over expenses: Ensure your investments outweigh your monthly debts, especially luxury ones.

"​​How would you guys decide whether to finance or buy a car in cash? We’re 37 years old and on step 8, and we have $100k in a taxable brokerage. A used car would take a nice chunk out of that at today’s prices."

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Brian Preston, Bo Hanson

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Abby
Caleb B's question is up next. He said, should the 25% savings goal be strictly retirement? Can cash savings and debt reduction be included in that, depending on what step of the foo you are on? I thought that this was interesting. Well, I think, Caleb, perhaps you're misunderstanding the foo a little bit.

Bo
And this is what I mean by that. Our goal is for you to save 25% of your gross income. Well, the way that you do that is by working through the financial order of operations. Brian, we hold the thing up. For those of you who don't know.

The financial order of operations, it's nine tried and true steps of what to do with your next dollar. Well, if you happen to be on step three and you have high interest credit card debt, I'm going to argue that you got to knock out that high interest credit card debt. So 100% of the free cash flow that you have should be knocking out that high interest debt. Well, then you go on to step four, emergency reserves, and you begin building that up and then you go to step five and then to step six. And so 25% is actually something in terms of like, investing and building for the future that happens along the path of the financial order of operations, not something that you start the beginning and then start the financial order of operations.

Chris
Yeah, it is one of those things though, like employer match. If you got a 50%, you know, $0.50 on the dollar, dollar for dollar, which is 100% rate of return, that's why you are going to probably do your employer match. So if they offer you like 6%, do 6%, that 6% plus your employer 6%, that 12% will count towards the 25%, assuming your household incomes below 200,000. But then when you get to high interest debt, because you're knocking out credit cards or student loans, whatever your high, or, you know, nowadays when I hear about 15% car loans, car loans could even be high interest or debt. That part is not going to count towards the 25% because it's really exactly what Bo said.

It's working through the financial order of operations. The foo, it's when you get back to step five that now you can pick up that 12% you started with employer match and get into your roth IRA health savings account if you're using that for saving for the future. And then of course, going back to that employer 401k when you get to step six. Love it. Fantastic.

Abby
Caleb B. Thank you for your question. It's tumblr day, so if you would like a tumblr, just email Matt m. A t toney guy.com dot I'm gonna. Throw one other side on there only.

Bo
Cause I saw it in the question he asked about debt reduction. Can debt reduction count towards my savings? Oh, yeah. I see people do this all the time and they're like, hey, I'm paying off my mortgage and I know how much my principal's being paid off. And so I'm gonna.

You don't get to count that. We want that 25% to be money that you are saving and adding to your army of dollar bills, not money. Once you've got into the savings standpoint, that's just helping you dig out of a hole. And debt being the hole. I do not think that you can count saving and retiring debt specifically like mortgage debt, as part of your 25%.

Chris
I completely agree because I think what this prioritizes is there's get wealthy behaviors and there's stay wealthy behaviors. And I've seen people who, because there's a mental trap you can fall into is that you pay off the high interest debt, the credit cards you pay off, you know, if they had a high student loan or a high car loan, you're like, this feels so good paying off this debt. And then people jump into that mortgage when they're under 45 years of age and that wealth multiplier is at its peak time and earning potential. Yeah, that's why I love that. We do not.

I know it's tempting, but that is. That is not mutant math. That is definitely not mutant math. That is debt crusader math. And that's more of stay wealthy before you've even gotten to get wealthy.

And that's not always. It doesn't mean that people who are doing stay wealthy early don't get wealthy, but it just is not optimized. For sure. Love it. That's a good distinction.

Abby
Like, it just means you're not at 20. What? I will give the tumbler away again. I don't even remember what I was saying. You know what?

You still get your tumblr distinction. You started saying that was a good distinction. It just means if you're paying off debt with that amount, you're just not at 25% yet. I think that's a good mindset to have. It means you still are working towards that goal.

Okay, Caleb, you can get a tumblr if you would like. Just email matt m a t toneyguy.com dot Jay's question is up next. It says, how would you guys decide on whether to finance or buy a car in cash? We're 37. We're on step eight of the foo, and we have 100k in a taxable brokerage.

A used car would take a nice chunk out of that at today's prices. So how do you think about this? And it's interesting, like, he's on step eight, so he has some options here, right? Yeah. Let me go.

Chris
Let me go ahead and clarify this. Okay. The ideal way to buy a car. Cash. I don't know where we got lumped into that.

We don't like paying cash for cars. I mean, it's the reality of when we do our surveys on our millionaires and even the way we live our own life, we pay cash for cars. The only exception is we know the financial mutant hack that sometimes with financing, when you talk, when you're at a dealership, they'll offer you a few percent off the car if you keep the car financed for, like, three months. And if you're really a dork, like I am with trying to get a good deal, I've taken that deal, but it's not. It was more of a tool than it was the need to use the financing.

And if you're at step eight, I would love. That's one of the things, is when you get to step eight, is that you are in those abundance goals. If you want a nicer car, that's great. But you gotta, as we always share. When we do 23, eight people often overlook.

There's two distinct things besides putting 20% down financing over three years and making sure it doesn't exceed 8%. There's two other caveats that people sometimes overlook. First, your monthly investments have to exceed your car payment. And the second one is, if it's luxury or a nice brand, you've got to pay it off same as cash. And that's only reason I have that same as cash for the first few months, is so you can play those financial mutant games, reindeer games that I play, because I don't want to be a hypocrite with my rules, and I want to give you the freedom to do what I do with my money, but it's still the same as cash.

And I think people lose that distinction sometimes. Jay, the only thing I would throw out here, that it was a little nuanced inside your question is, you said, I've got a taxable brokerage account with $100,000 in it. So when you're talking about paying cash, you're not actually. You are talking about paying cash, but what you're actually saying, if I'm hearing you correctly, is, hey, I could liquidate some of my portfolio, and I could use some of my portfolio to then pay off the car in cash. That's different than what we often talk about paying a car in cash.

Bo
What we often talk about is, am I in a financial situation? Am I so far into step eight that in addition to my emergency reserves, I can build up cash, or I have built up cash to where without having to liquidate my portfolio, without having to sell assets? I can then go for the car because I would say whether or not at age 37, you could pay cash for the car, should pay cash for the car. Finance is going to very much depend on where you are in your financial journey. How far along the path towards your number are you?

Meaning if you were to go pull out 50,000 of your $100,000 taxable brokerage account, and that was going to set you pretty far back, and it's going to take you a long time to rebuild, back up that $50,000, maybe that's not the best bet. However, let's say that. Oh, okay, well, if I just, you know, saved for a few more months, I could save up another $50,000, or I could get to $50,000 and pay cash. Well, then you're in a different situation. So I don't think.

I think you have to be careful. A lot of us think, okay, just because I've got the portfolio assets there, that means that I have the means that I can go make some large purchase or buy some large thing. You have to recognize there is a significant cost with taking those dollars out of the equation. You want to make sure you're at the place in your journey where it does make sense to do that. Because at 37, your wealth multiplier is still super, super strong.

I mean, I want to say it's still, like, well into the high teens, double digit ish area, maybe. And if you want to know, you can go check out moneyguide.com resources. Look at the wealth multiplier. I don't know that I love jay liquidating the brokerage account of 100,000 to go buy a new car. Well, and that brings me back to the key.

Chris
What is 23 eight? And why is because there's a, there's reasonable car to get you from point a to point b, and then there's luxury car. If all of a sudden buying the luxury car. Cause you're in step eight drags you all the way back to step four, maybe it's not time for the luxury car yet. As you said it, I liked what you said.

Maybe you're not deep enough into step eight of the financial goals. And that's why we always say it's Corolla, not land cruiser, because we're trying to get people to get reliable transportation. That's what 23 eight is for. So you can get to your job and start the wealth building journey. It's not going to be your hack to luxury cars sooner and better to impress your friends who probably don't really care.

Love it. Fantastic. All right, Jay, thank you for the question. If you would like a money guy, tumblr, it's tumblr day, so we'd love to send you one. Just email mattoneyguy.com dot to cash in on that.

By the way, I feel like enough time has gone. We got to say it again. Moneyguy.com booktour we just saw, because, lord help us, we need people. Buy some tickets, guys. I mean, these are limited quantities of tickets for people that just.

Even some vip tickets out there. So. Moneyguy.com book tour. So what you're saying is we're going on. We're going on a tour, we're gonna do a live thing, and you're gonna give a speech, and we're gonna do q and a that's coming your way here.

And I don't know if y'all know it. I have a book that's coming out on May 28, so. Okay. That we can keep it going now. I'm sorry.

This is. FYI, this is our marketing guy. Well, I don't know. Or Brian just. I'd like to get there and it not just be my mom out in the audience.

So it's, um. I'm gonna read you some of these comments after we're done here. That will make me feel better. Cause this is the guy, you know, I wasn't. I was popular adjacent in high school.

I'm not exactly the coolest kid in town. So that's why it would be nice to sell us some tickets so that I can continue to be popular adjacent. I'm so excited. It's gonna be good. And Chris Pratt, if you're out there and you buy tickets because you remember that time I went to the restroom three times to walk past your table, that will also probably help us sell some tickets.

Bo
Chris, if you want to come up on stage, we'll bring you part of the show. All right. Okay, we've got another question, financial question. Are you ready for it? Yes, ma'am.

Abby
This one's from Josh. It says, we are on step six or seven and are trying to save for a down payment on a house. We also have 90k in student debt. Does it make sense to turn down retirement contributions? This is a tough one, I know, but I also think it's relatable for some people, because sometimes there you are in that situation, you're trying to think through it.

So what can you say to them? All right, this is what I'm gonna say. I'm gonna take off the analytical hat, and I'm gonna put on the behavioral hat. Right now, personal finance is personal. What that means is that the right answer for me might not be the same right answer for you, and the right answer for you might not be the same right answer for me.

Bo
I think what you have to do, Josh, is you have to figure out, all right, what are our goals? What are our priorities? What are the things that matter the most to us? For a lot of folks, one of the things that matters the most is, hey, I don't want to work forever one day. I want to have the ability to step away from the workforce, and I want to be able to retire and do what I want when I want on my own terms.

Well, if that's a pretty high goal, then the things that you decide you do need to, like, work towards that goal. Other folks say, hey, you know, I really have this goal. I want to own a home. And by the way, I'd like to own that home before I get to retirement so that I can establish roots and I can start a family and I can have a place in my own. Well, that's a goal.

And if in your life, it makes more sense for you to prioritize that goal over some other goals that you have, that's not a bad thing. You just have to go into it with eyes wide open about the sacrifices you're making in order to do that. And then I'm just going to tie into sort of the third thing you said. If one of your goals is to be debt free, you have to figure out, how important is the debt free goal to me, and on what timeline is it so important that I'm debt free as soon as possible, or do I just want to have a path and a plan to be debt free? At some point along my financial journey, and depending on where that goal falls in the hierarchy, will determine how aggressively you're going to pursue that, how aggressively you're going to construct your strategy around debt repayment.

So you have to think about all the dollars at your disposable, all of the dollars at your disposal in terms of what will be the best use of this dollar towards the most important goal that I have. And you have to work down your goal list and up your resource list until you get those two to match. Yeah, I would, I would add a little bit to this and the fact that, look, I get it. $90,000 is student loan debt. Probably feels like that's a lot of debt.

Chris
But first let me get a few things to do, a little homework, some assignments. I want you to go to moneyguy.com resources, download the wealth multiplier so you can see exactly what every dollar has the potential to become for you because you're still. Did Josh give us his age? He did not saving for first time. Home, but I'm assuming under 45.

Bo
Sure. And the reason I bring that up is that we've tried to, when we talk about, and by the way, it's in millionaire mission too. You go to moneyguy.com millionairemission. You can see the book that's coming out where we talk about. I have a chapter on it's step three where it's talking about high interest debt is that you have to understand that.

Chris
What's the logic on what my money can do? It's an incremental decision of every dollar that I invest has the potential to become this. And the younger you are, the more potential it has because you can be more aggressive, you have more time on your side. But as you get older and you probably start diversifying that incremental decision, you have to pay attention to the interest rate you're paying. So that's why we tried to give you some details using historic facts.

Now, I realize we just came through an inflationary period. It has changed some of these things, but there are still some good rules of thumb to consider. If you're in your twenties, student loan debt that's under 6%. That's not, that's not high interest debt. If you're in your thirties, though, that number drops down to 5%.

If you're in your forties, it's 4%. Because I do want you to have that student loan debt paid off. That's why I said the 45 and under. Yes, your money can earn more because you can take more risk. You can keep it invested for a longer period of time for those that are 45 and over.

Now you're hopefully you've done the get wealthy behaviors. So it's now more about the stay wealthy behaviors. And we need to de risk by paying off debt as fast as possible. But just don't get in a hurry. Cause debt crusaders.

Look, I'm all about paying off some debt, but there's a time and place after you get wealthy, especially on the low interest. And I try to walk people through because that. That valuable resource of time, that ingredient that really gives your money that extra horsepower that you. You can't get more of it. No matter how much you try, there's no way to get more time.

And I'm just trying to make sure you balance that desire to get out of debt, but also maximize and get as wealthy and let you have as many options as possible as soon as possible. That's great. Fantastic. Josh, thank you for the question. Thank you for being here.

Abby
We'd love to send you a money guy tumblr as a thank you. Just email Matt m a t ty.com and we'll work on getting that sent out to you. You know, one of the questions we just got. What? Hey, is Reba gonna be in the book tour?

Chris
Oh, yeah. Hey, if it helps, someone's gotta hurt the cats. She will be there. Go buy your tickets right now. Rebi will be there, too.

Bo
You'll also be there. You don't even have to come to see me and Bo. You can just come see Heather cat herder. Reb, that ticket will be just as good if you go to moneyguy.com book tour. You can buy tickets to.

Chris
And by the way, she'll be there at the vip seating, too. Maybe just have reb sign. I'm okay with that. Big stage. Listen, someone's got to throw you.

Big team, little me. That's right. Big team little me. Someone's got to do the Q and A, right? That's it.

Abby
We got to have some people. Now, if there's any creepsters out there, you should know, her husband's big. He might be back there, too. He'll beat you up. Oh, that's amazing.

Bo
And so true. All right, John the bear. Love him. Okay, Nick's question is up next. He said, howdy.

Abby
Given the net worth skew for young people and the lagging nature of the metrics, are there other ways to utilize net worth or analyze your financial health? So, especially when you're young, he said, thanks for everything y'all do. I thought that this was interesting. Cause when you're just starting out, it is true. Like, you don't have the time on your side.

So how can somebody like Nick know if they're on track? Let me give you a compliment before you give the answer, okay? You know, when I first came out of school in the nineties. I tell you guys, a book, and it's still up there. It's just not on the podium anymore.

Chris
The lean to or whatever you call a book highlighter. But millionaire, millionaire next door changed my life because it really showed me what millionaires do with their money. And remember, there's a formula inside there to let you know if you're an average accumulator of wealth, a prodigious accumulator of wealth, or if you're an under accumulator of wealth and it's really talking about net worth. And that equation is your age times your income divided by ten. That's right.

So the problem is, and this is one of the things I've talked to Sarah and I know, I've seen it on blog posts, is that it is known in the research that unfortunately for 20 and 30 somethings, you just don't have enough time on your side that your net worth. When you do that formula, you're going to be disappointed because you just haven't been working long enough. Your income's going up so fast that it just doesn't work. And. And I thought this was a tragic problem with this great formula.

And then walks in CFA Bohansen, with his brilliant nerdiness, he came up with a hack that actually, and we've incorporated this in a lot of our content on how to turn the millionaire next door formula to where it does work for 30 and 40 year olds. And I mean 20 and 30 year olds. How does that work? Yeah. If you are someone who's under 40, I would encourage you do this.

Bo
Take your age, multiply it times your income and divide by ten plus the number of years you have until you're 40. So if you're a 30 year old, your denominator, the bottom number, what you would divide by, would be ten plus 1040 years old -30 years is ten plus ten. You would divide by 20. If you do that, it's gonna give you a more realistic picture of where you should be if you wanna be an average accumulator of wealth. Now, if you're someone who's young and your income has, like, moved a ton over the past couple years, there's nothing wrong with smoothing it out.

Maybe take your average income over the last three years times your age today, divided by ten plus the number of years until 40. And that's gonna give you a great metric. But I do wanna tell you, Nick, one thing that I would really have you focus on early on. We have all these metrics and all these things to focus on. You know, the most important thing for a young person, the single best indicator of are you where you're supposed to be.

It's one thing and one thing only, in my opinion, your savings rate, are you saving 25% of your gross income? Because, and we have a great deliverable. If you want to go to moneyguide.com resources in your twenties, if you can save 25% starting in that decade, there's a very high probability you're going to get to write your own ticket later in life. You're going to get to be able to decide, what do I want to do? When do I want to do it, how do I want to do it, where do I want to do it?

Saving 25% is going to equip you to be able to do that. So rather than focusing on all the formulas and metrics and this much time salary, focus on that one. Now, we know that you guys are financial mutants. You love this. And that's why we do have some content coming up.

We're actually going to walk through milestones. We're going to walk through millionaire milestones that you ought to know about that will specifically speak to am I on track? What should be my next goal? What's the next mountain I should overcome? And we're going to do that for you all the way from like the very young person to the very, very seasoned person.

And we're going to share with you some of the milestones that we hit. Those are great and those are wonderful. The single biggest thing that will impact your future wealth building at a young age is going to be your savings rate. How can I focus on that? And how can I get as many dollars working for me as early as possible?

And if I can do that, time will do the rest. Well, I've seen, and it's been on our YouTube channel, in the comments section here in the last week and a half, there was a whole group of people talking about one of the biggest things that they wanted to thank us for was their net worth statement. The habit of doing it every year because somebody had said, I found these guys and they named the year and like I had $5,000. And then one person chimed in, now they're at 500,000. So guys, just do the exercise.

Chris
If you go to, there's two options here. If you go to moneyguy.com resources, there's a free net worth template that you can download. If you really want to turbo charge or accelerate your success, you can go to moneyguy.com or you can go learn dot moneyguy.com and we actually have a net worth tool that has an entire dashboard. But don't skip that step. One of my regrets I don't mind sharing with my regrets.

I'm very transparent with you guys. I didn't start tracking my net worth until 2006. There's a lot of life. I graduated in the mid nineties, I daydream. And we have an associate here, Eric, who, you know, engineer mindset.

He's actually got it from like when he graduated college, and I'm just jealous of that. So there's not a bad time to start this exercise. I promise your future self will be very thankful of just doing the exercise of tracking your net worth at least annually. I think when people first start this, you're probably going to do it much more frequently than that. And I always say it's like raising a child.

It makes sense when you're trying to teach them to be potty trained and feed themselves. Yes, you're going to be doing that often, but after they kind of start taking care of themselves, you need to do periodic check ins to make sure your net worth is doing everything you want it to do. But it's a great exercise in wealth building. Love it. The money Guy show is hosted by Brian Preston.

D
Abound Wealth Management is a registered investment advisory firm regulated by the securities and Exchange Commission in accordance and compliance with the securities laws and regulations. Abound wealth management does not render or offer to render personalized investment or tax advice through the money guy show. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.